Definition impact investing

The definition provided by the Global Impact Investing Network (GIIN) is the most widely accepted and commonly used definition of impact investing:

“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return".

Impact investments can be made in both emerging and developed markets and target a range of returns from below market-to-market rate, depending on investors' strategic goals.

Balancing risk, return & impact

Impact investments aim to address the world’s most pressing challenges at scale, balancing risk, return, and impact (3D) to provide meaningful solutions that benefit both people and the planet.

Double Materiality

In contrast to other forms of financing, impact investing incorporates a double materiality perspective:

Responsible and sustainable finance only consider single materiality: how environmental or social factors may affect -negatively or positively- the financial performance of an investment or portfolio.
Impact investing also incorporates a double materiality perspective. In addition to financial performance, it considers the effects that investments or portfolios have on society and/or the environment.

Impact investments aim to address environmental and social challenges. This objective can be aligned with internationally accepted goals such as the Sustainable Development Goals (SDGs) or global climate ambitions. Impact investments focus on investees that generate positive outcomes by contributing to solutions.

How does impact investing compare to other forms of financing?

The spectrum of capital provides a useful framework for comparing different investment approaches. It highlights how investors can select strategies based on their desired balance between financial return, risk and intentional social or environmental impact.

A broad range of risk/return strategies exists within environmental and social impact investing. These range from investments focused purely on maximum profit (finance-only) over concessionary investment (financial return can be traded off for social return) to philanthropy (impact-only).

Traditional finance focuses on competitive risk-adjusted financial returns.

Intention: may be aware of potential negative impacts but does not actively seek to mitigate them.

Responsible Investments will Avoid harm by mitigating or reducing negative outcomes for people and planet, mainly using exclusion lists: ESG risk approach.

Intention: seek to behave responsibly or comply with regulatory requirements.

Sustainable Investments/ESG investments will Benefit stakeholders by selecting investments in businesses that generate positive outcomes for people and the planet: ESG opportunity approach.

Intention: aim to favour investments in businesses that contribute positively to the world while supporting financial performance.

Impact Investments aim to Contribute to solutions by intentionally generating positive change for (underserved) people or the planet.

Intention: seek to address social or environmental challenges and generate financial returns.

Philanthropy: accepts partial or full loss of capital, and is not seen as an investment.

Intention: do good.

Further refining the definition of impact investing

Since 2021, the NAB has collaborated with the European Impact Investing Consortium (EIIC) to align definitions of impact investing and harmonise survey methodologies. We published a position paper that builds on widely recognised global standards and definitions, such as those developed by the Global Impact Investing Network (GIIN) and the Impact Management Project (IMP, now Impact Frontiers).

The investor strategies map

Each investor strategy leads to distinct results and outcomes: how can these strategies be effectively segmented? We examined two main dimensions:

The investor level, to assess how capital is allocated
The investee level, to assess where capital is allocated.

Investee/asset level – Where is capital allocated?  

To make informed decisions about where to direct capital for the greatest positive effect, it is essential to identify the strategies of the investees being supported. The widely adopted framework among impact investing practitioners is the ‘ABC of Impact’, developed by the Impact Management Project (IMP). This framework provides a clear understanding of the actions and intentions of investee organisations.

This classification also aligns with the spectrum of capital described above, and distinguishes between various types of assets/companies:   

A – Act to avoid harm: Organisations recognise that their activities (or assets) cause harm to people and the planet and take steps to avoid or minimise these negative outcomes.   
B – Benefit stakeholders: In addition to avoiding harm (A), these organisations generate improved well-being for people and/or enhance the condition of the natural environment.
C – Contribute to Solutions: Organisations actively address social and/or environmental challenges by delivering targeted and relevant solutions that improve people's well-being or the natural environment. Due to the additional impact these companies seek to generate, this is referred to as “investee additionality” which should be distinguished from “investor additionality”.

While categories A and B can generate positive outcomes or significantly reduce negative impacts, only category C reflects organisations that are intentionally focusing on solving social and environmental challenges.

Investor level – How is capital allocated?

Impact investing is defined by intentionality, measurement & management, financial return, and additionality.

Intentionality

Impact investments are made with a clear ex-ante intention to contribute to solving social and/or environmental challenges in addition to generating a financial return. This intention must be systematic, encompassing all investments within a fund, and embedded in the decision-making process at the time of each investment (ex-ante).

Impact measurement and management

Using collected impact data to understand what works and can be improved, enables more informed decision-making. To ensure ongoing positive contributions to social and environmental goals, investors should measure their impact. In addition, it is necessary to go beyond measurement by actively managing impact, using insights from data to refine approaches and improve outcomes. Establishing processes to manage impact ensures ongoing improvement, adaptation to challenges and the ability to seize opportunities to amplify overall impact.

Financial return

Impact investments are expected to generate a financial return on capital and, at a minimum, a return of the invested capital. They can range from below market returns (“impact first” investments, sometimes referred to as concessionary or catalytic capital) to risk-adjusted market rate returns (“finance first” investments).

Additionality

As outlined above, impact investing is about financing companies or projects whose primary mission (core business) is to provide solutions to social or environmental challenges and/or benefit neglected/ underserved target groups. Decisions on capital allocation are guided by the investors’ intentionality, their deliberate and proactive pursuit of social and/or environmental impact, alongside financial returns, with the aim of achieving positive outcomes for specific communities or the planet.

Adding the extra lens of additionality to intentionality can provide more clarity on the specific contribution investors make. Investor additionality exists when an intervention leads to outcomes that would not have occurred otherwise. Proving additionality is as widely recognised as challenging, but it can be assessed through evidence of an investor contribution. Two main forms of investor additionality can be distinguished:

Non-financial additionality: reflecting active investor engagement that improves the investee's impact performance  
Financial additionality: accepting disproportionate risk/return ratios or providing patient, flexible and/or concessionary capital or supporting undersupplied or underfunded projects. A notable example is the deployment of catalytic capital, which targets gaps left by mainstream finance or the public sector, to mobilise third-party capital, enabling impact for people and the planet that would not otherwise be achieved.

Conclusion

When an investor allocates capital with financial or non-financial additionality, it is considered impact-generating. When capital is allocated to companies or projects whose primary mission is to deliver solutions to social or environmental challenges, but without additionality, it is considered impact-aligned.

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