Brigette Lumpkins, CAIA, Client Portfolio Manager, Westfuller
All investments have impact. They may impact society, the economy, infrastructure, or the shape of an industry. Investors are increasingly focused on putting their financial assets to work for more than financial return.
Over the past two decades, impact investing has evolved from a niche concept to a movement, with over $1 trillion USD earmarked for investing with an intention for impact. This evolution represents a shift in the way some investors are thinking about the role of capital in addressing societal challenges while generating financial returns.
The Origins of Impact Investing
The term "impact investing" was formally coined in 2007 at a gathering hosted by the Rockefeller Foundation, but the practice has deeper roots in various forms of socially responsible investing that date back decades earlier. The early 2000s saw pioneering investors and foundations testing models that could generate both financial returns and their desired social or environmental outcomes.
These early efforts were often fragmented and lacked a cohesive framework. Many were extensions of philanthropic approaches, with foundations using program-related investments (PRIs) to advance their missions while preserving capital. The landscape was characterized by high-net-worth individuals and foundations experimenting with new investment approaches that could address social challenges in new ways. For foundations, the driver behind this evolution was a desire to unlock the full potential of their assets beyond the typical 5% earmarked for grant making.
From Margins to Mainstream
The 2008 global financial crisis proved to be a catalyst for impact investing. As traditional financial systems failed, investors began questioning whether markets could be harnessed more effectively to address social and environmental challenges. According to a report by the World Economic Forum, "The financial crisis prompted a reevaluation of the purpose of investment and accelerated interest in approaches that could deliver both financial returns and positive societal outcomes."
In 2009, the Global Impact Investing Network (GIIN) was established, marking a significant milestone in the field's development. The GIIN has played a pivotal role in building critical infrastructure for the impact investing industry by establishing a common language, developing measurement frameworks, and conducting research to demonstrate the viability of impact investments.
The GIIN's Annual Impact Investor Survey has become the industry's most comprehensive assessment of market growth and trends. Their 2023 report revealed that the impact investing market has grown to an estimated $1.164 trillion in assets under management, demonstrating the remarkable expansion of the field.
The Blended Value Proposition
Central to the evolution of impact investing is what Jed Emerson described as the "blended value proposition" – the idea that value consists of economic, social, and environmental components that are inherently interrelated. This concept challenged the traditional dichotomy between financial returns and social impact, suggesting instead that investments could optimize for both simultaneously.
This perspective has helped impact investing grow beyond its philanthropic origins. While philanthropy continues to play a crucial role in supporting the ecosystem – particularly in providing risk capital, funding infrastructure, and supporting innovation – impact investing has attracted assets from individuals and other institutions trying to harness the power and scale of financial markets.
From Niche to Necessary
The 2015 adoption of the United Nations Sustainable Development Goals (SDGs) provided a common framework for measuring impact that has accelerated institutional adoption of impact investing. The SDGs highlighted a $2.5 trillion annual funding gap for achieving global development objectives, emphasizing that philanthropy and government grant funding alone would be insufficient.
According to research published in the Stanford Social Innovation Review, "The SDGs created a common language and measurement framework that has enabled diverse stakeholders – from institutional investors to governments to corporations – to align their activities toward shared global objectives."
This convergence has helped impact investing move from a niche activity to an increasingly mainstream investment approach. Today, impact investors span a spectrum from foundations and family offices to pension funds, insurance companies, and large asset managers.
The Measurement Evolution
A critical development in the field has been the evolution of impact measurement and management practices. Early approaches often relied on anecdotal evidence or simple output metrics. Today, sophisticated frameworks like the Impact Management Project provide investors with tools to assess five dimensions of impact: what, who, how much, contribution, and risk.
The International Finance Corporation's Operating Principles for Impact Management, launched in 2019, established a market standard for managing investments aimed at achieving positive impact alongside financial returns. These principles have been adopted by over 150 signatories managing more than $450 billion in impact assets.
As measurement practices have matured, so has the ability to demonstrate that impact investments can deliver competitive financial returns. A 2020 study by the GIIN found that nearly 90% of impact investors reported that their investments were meeting or exceeding their financial expectations, helping dispel the persistent myth that impact investing necessarily requires financial sacrifice.
The Rise of Alternative Assets in Impact Investing
A significant development in the impact investing landscape has been the growing importance of alternative assets. While public equity and fixed income instruments initially dominated impact portfolios, investors have increasingly turned to alternative assets – including private equity, venture capital, real assets, and private debt – to achieve more targeted and measurable impact outcomes.
Alternative investments offer unique advantages in the impact space. Their longer investment horizons align well with the timeframes needed to address complex social and environmental challenges. The direct ownership stakes they provide allow investors to actively influence company strategies and operations toward impact goals. Additionally, many social enterprises and impact-focused businesses are not publicly traded, making private market investments essential for accessing these opportunities.
Real assets like sustainable forestry, regenerative agriculture, and clean energy infrastructure have emerged as particularly powerful vehicles for impact. These investments create tangible environmental benefits while generating returns through resource management and operational improvements rather than financial engineering. According to a 2022 report by Phenix Capital, private market impact investments have shown stronger alignment with specific SDG outcomes compared to public market equivalents.
The illiquidity premium associated with many alternative investments can also benefit impact investors. Patient capital deployed in less efficient markets often finds opportunities to generate both financial outperformance and more direct impact. Community development financial institutions (CDFIs) and social impact bonds represent innovative structures within the alternative space that directly connect financial returns to measurable social outcomes.
The Future Landscape
As impact investing enters its third decade, several trends are shaping its continued evolution:
First, there is increasing recognition of the need for greater authenticity and impact integrity to prevent "impact washing" – claiming impact credentials without meaningful outcomes. The development of more rigorous standards and third-party verification mechanisms is helping address this challenge.
Second, there is growing attention to addressing systemic risks through impact investing. Climate change, biodiversity loss, and social inequality are increasingly understood as material financial risks, blurring the line between impact considerations and prudent financial management.
Third, there is enhanced focus on localization and community ownership within impact investing. Criticism that the field has been dominated by Global North investors and perspectives has led to efforts to build more inclusive capital markets that center the needs and leadership of communities most affected by social and environmental challenges.
Conclusion
The evolution of impact investing over the past two decades represents a significant shift in how we think about the purpose of capital. What began as a niche approach pioneered by foundations and values-aligned investors has grown into a substantial market that is influencing mainstream finance.
While challenges remain – including issues of measurement standardization, impact integrity, and ensuring genuine inclusion – impact investing has demonstrated that capital can indeed be deployed in ways that generate both financial returns and positive societal outcomes.
As traditional distinctions between impact investing and conventional investing continue to blur, the core insight that all investments have impact – whether intended or not – is becoming increasingly accepted. This recognition may ultimately be impact investing's most significant contribution: reminding us that financial decision-making is never value-neutral and encouraging all investors to consider the full scope of their impact.
About the Contributor
Brigette Lumpkins, CAIA, is a Client Portfolio Manager for Westfuller, an independent RIA that advises investors ranging from private clients to family foundations. A graduate of The Wharton School, she has worked for firms such as Lehman Brothers, Barclays Capital, and Goldman Sachs covering a range of private and institutional clients. Brigette has raised capital for fund managers across various strategies in asset classes including public equities, cryptocurrency, private equity, and venture capital. Brigette also holds degrees from Spelman College and the University of Michigan. She is passionately curious about personal development, holistic wellness, and values alignment.
Learn more about CAIA Association and how to become part of a professional network that is shaping the future of investing, by visiting https://caia.org/
References
- Global Impact Investing Network. (2023). Annual Impact Investor Survey. GIIN.
- Emerson, J. (2003). The Blended Value Proposition: Integrating Social and Financial Returns. California Management Review, 45(4), 35-51.
- World Economic Forum. (2013). From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors. World Economic Forum.
- Brest, P., & Born, K. (2013). When Can Impact Investing Create Real Impact? Stanford Social Innovation Review, 11(4), 22-31.
- International Finance Corporation. (2019). Operating Principles for Impact Management. IFC.
- United Nations. (2020). Financing for Sustainable Development Report 2020. United Nations.
- Phenix Capital Group. (2022). Impact Investment Market Map 2022. Phenix Capital.