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The goal of an impact investment fund – a burgeoning segment in the United States and Europe – is to identify the social and environmental impacts that will be generated by the fund’s investments. Responsible investment products are changing the reality for investors who find themselves faced with very different investment strategies and impacts that are difficult to quantify or compare.

Today, many banks and asset management firms are offering investment products described as ‘impact investments’ because they invest in emerging markets or sectors likely to address current social and environmental issues. The motivation behind impact investing mirrors that of funds that invest in SMEs and are therefore ‘job creators’, or funds that allocate a portion of their return to non-profits, for example. Leaving aside the various arguments for and against, it is hard for investors to get their bearings in this segment, such is the variety of offerings, expected returns and associated risks. Some investors even wonder whether private equity funds placed in African SMEs and promoted as impact investments are in actual fact just a marketing strategy used to boost sales!

Reconsiling financial return and social impact

The G8 Social Impact Investment Task Force, composed of business leaders from the G7 countries (excluding Russia) and chaired by Sir Ronald Cohen, agreed to define ‘impact investing’ as a strategy to invest in any asset class whose primary ‘intention’ is to have a social and/or environmental impact.

By this definition, an investor who chooses an economic and financial strategy that happens to lead to job creation will not necessarily be an impact investor. On the other hand, if he invests in a strategy specifically aimed at solving an employment problem, then he could be described as an impact investor. Similarly, an investor who builds a clinic in Africa may well be addressing a social need, but it is his primary intention (financial and/or social) that determines whether or not his investment is an impact investment.

It is therefore the intention to have a social or environmental impact that defines the investment strategy, even if that intention carries with it a financial constraint, such as profitability. This means, however, that any such financial constraints should not entail strategic or economic decisions to the detriment of the impact intention. Some deem this definition as overly strict, but in our view it is fundamental to preventing impact investment funds from becoming a marketing offer rolled out in response to current challenges. It requires impact investing fund managers to be very clear in their intention and to measure the outcomes of that intention. Impact measurement tools need to be developed so that progress can be clearly identified and investors informed accordingly. It is a hot topic today because there is still no definitive methodology for measuring such impact (the Global Impact Investing Network identified more than 150 impact measurement practices). Yet, by its very nature, impact investing means informing investors about the strategy of the funds in which they are investing.

Changing priorities: a loaded decision

Microfinance is a good illustration of the dichotomy between funds only interested in financial return and funds that seek to assist and support the growth of microfinance businesses whose goal is to help the most disadvantaged populations access financial and banking services.

These new strategies fundamentally change the act of investing since the investment decision is not purely financial, and therefore creates three paradoxes.

Investor perspective

Investment funds whose case analyses lead them to favour a strategy based on social or environmental impact enter into strategic discussions with startups and company managers. This approach significantly broadens the scope of analysis and provides deeper insight into the motivations and goals of the startup team or company. It also allows for a very different relationship to be developed between the capital provider, the collaborators and the company managers. Rather than merely seeking a ‘financial’ return, the investor becomes a partner on whom the team can rely, a partner in search of a project or business that addresses a social and/or environmental need.


The intention is thus to solve a problem while still meeting the social and financial interests of all stakeholders (customers, employees, suppliers and investors). To this end, we have funded a number of projects instigated by social entrepreneurs wanting to address a range of major issues. In the days when the financial aspect took precedence, such projects would never have seen the light of day. But their financial position is no longer the main concern, and the investors who came to the table were all motived by ‘impact intention’. With impact their key goal, they allowed these projects to be pursued, resulting in the turnaround and subsequent expansion of the businesses in question.

The relationship to time

The relationship to time has changed, because although return on investment is important, it is no longer the be-all and endall. Without time pressure, teams have more latitude to develop tough projects, whether such projects present the challenges specific to VSEs or SMEs, or the challenges of social intention. The point is, the core challenge is both social and economic.

Lower-than-expected risk

In an expanding market, the ripple effect of projects with strong social impact can be substantial. Yet the entry price is lower than it would be for a traditional investment since the expected financial return is also lower.

An alternative rationale

This intention-based strategy changes the way we look at a project or business as an investor. It creates a different relationship with the teams in charge of developing the project or business, and the first constraint in our investment decision is therefore the underlying impact.

This comes as a shock to many investors who believe that the most important goal is to ‘make money’ in order to distribute any profits to a social cause. But the premise of impact investing is that you can invest in a company or project seeking to solve a social and/or environmental problem and generate both a return and an impact from that investment.

The microfinance example, particularly for venture capitalists but also for many social and environmental projects, shows that these days it is possible to reconcile impact and financial return.

However, this requires impact investors to consider the financial return as a constraint and not a goal! Intellectually it is revolutionising our investment strategy but it also gives us hope that we can help these projects and businesses tackle the social and environmental challenges they are currently facing.




  •  Impact investing is primarily aimed at investors for whom the intention to have an impact is the main priority and financial return is a result rather than a goal.


  •  Banque de Luxembourg has a variety of impact investment funds and can work with those clients wishing to use part of their portfolio to help fund solutions to today’s societal and environmental challenges.
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