Impact investing is about putting money to work to create positive change in the world, while also earning a financial return. Think of it as investing with a dual purpose. Instead of choosing between making money and doing good, impact investors aim to do both at the same time.

These investments intentionally target specific social or environmental problems. An impact investor might fund a company developing affordable clean energy solutions for rural communities, support a business that provides job training to underserved populations, or back a project focused on sustainable agriculture. The key is that the positive outcome is a core part of the investment's goal, not just a happy accident.

You might have heard terms like SRI or ESG. While they are related, they aren't the same as impact investing. It's helpful to understand the differences.

Socially Responsible Investing (SRI) is one of the oldest approaches. It typically uses negative screening, meaning investors avoid putting money into companies involved in industries they consider harmful, like tobacco, weapons, or gambling. It’s defined more by what it excludes.

ESG Investing is a more recent strategy. It involves evaluating companies based on their Environmental, Social, and Governance practices. An ESG investor looks at how a company manages its carbon footprint (E), treats its employees (S), and is run by its leadership (G). The main goal is often to identify well-managed companies that might be better long-term investments and pose fewer risks. While this often leads to better outcomes, creating a direct impact isn't the primary objective.

Impact investing takes a more proactive stance. Instead of just avoiding bad companies or rewarding well-behaved ones, it actively seeks out and funds organizations whose core business model is designed to solve a social or environmental problem.

The idea of using money to reflect one's values has been around for centuries. Religious groups, for instance, have long avoided investing in what they called “sin stocks.” This practice laid the groundwork for modern SRI in the 20th century, especially during social movements like the anti-apartheid campaign, where investors divested from companies doing business in South Africa.

The term “impact investing” itself is much newer. It was coined in 2007 at a gathering hosted by the Rockefeller Foundation. This marked a shift from simply avoiding harm to actively seeking to do good.

Today, impact investing is seen as a critical tool for tackling some of the world's biggest challenges, from climate change and resource scarcity to inequality and access to education. Philanthropy and government aid are essential, but they don't have enough capital to solve these problems alone. Impact investing helps bridge that gap by mobilizing the vast resources of private capital markets to drive sustainable change.

Ready to check your understanding?

Now that you've got the basics down, you can see that impact investing is a powerful way to think about the role of money in the world.