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How does impact investment work?

In impact investment, just like mainstream investment, financial capital is invested in a company with the expectation of financial return. However, at the same time, a commitment is made to specify and measure the social and/or environmental impact created through the investment. The impact investment market encompasses a diverse array of organisations and practices.

The term ‘impact investing’ has been in circulation since around 2007. It was once referred to as a new asset class, but is now thought of as a strategy that can be used in relation to multiple different types of capital. Advocates of impact investing consider it to be distinct from related activities like Responsible Investment (RI) and ESG Investing (which considers environmental, social and governance factors of the investment supply chain), on the basis that these forms of investment do not deliberately target certain forms of impact, nor measure them.

A landmark in the development of impact investing was the dedication of the UK’s 2014 presidency of the G8 to the development of social impact investing. This provided a platform for international engagement on the main principles and practices of this emerging field. Since then, a Global Steering Group has been set up, which works to establish National Advisory Boards (NAB) in countries across the world. There are now 16 NABs globally. Several sector bodies have been set up to help build the market, such as the Global Impact Investing Network (GIIN).

It continues to be a challenge to define exactly what counts as impact investing, and it is taking time for substantial data sets to be developed that give an accurate picture of the scale of impact investing globally. The GIIN’s 2018 Annual Impact Investor Survey provides a benchmark: it identifies over US$ 228 billion managed by 229 organisations.

Given its nature as a strategy across multiple forms of capital, there is no one way of doing impact investing. Just like conventional investing, different types of investments entail different relationships between investor and investee.

For example, some investors make debt-based investments to large numbers of companies and have relatively low levels of engagement with any individual borrower. In contrast, investors using a private equity model become very involved in the running of the company, often joining the Board and requiring regular reporting of progress across financial and impact key performance indicators (KPIs).

The recipients of impact investment can take almost any form, from charities through to for-profit businesses. Expected returns also vary across the impact investing market. Some investors choose to target market-rate returns alongside impact. Others target lower rates of return. These decisions reflect the kinds of impact being targeted, as well as the mission of the organisation holding the capital, and institutional requirements or responsibilities such as fiduciary duty.

Unsurprisingly, given this level of variation in what impact investment activity looks like, there is also considerable variation in the systems that investors and investees create to measure and manage impact. Work is ongoing, through initiatives such as the Impact Management Project, to consolidate approaches to capturing impact data and using it to inform decision-making

Nesta's work on impact investment

Nesta invests in high impact innovations run by outstanding entrepreneurs through our investment arm, Nesta Impact Investments. We also champion and support the wider impact investment movement through research and support for other funders.

Nesta has actively used investment as a tool to support innovation since it was first established in 1998. In the late 2000s, we saw the potential to innovate in the field of investment itself by playing a leading role in the impact investment movement.

While the idea that investment can be a force for good is not new in itself, the concept of building a deep understanding of the social and environmental implications of investment actions – and changing investment strategies based on this understanding – has the potential to transform society if applied widely.

Seeing the potential for this idea, in 2011 Nesta published Twenty Catalytic Investments to Grow the Social Investment Market. This research looked at how it could be delivered and evidenced. We provided grants to help some of the early market participants get off the ground, including Bridges Impact Foundation and invested in the funds and management companies of emerging impact investors including Big Issue Invest and Bethnal Green Ventures. At the same time, we started making our own direct impact investments through Nesta Impact Investments.

With the support of Big Society Capital and Omidyar Network, Nesta launched a £17.6 million investment fund with the core objective to fund the creation of new innovations addressing inequality in the fields of health and wellbeing, education and employability, and the social and environmental sustainability of communities.

To date, Nesta Impact Investments has invested in 13 companies and one social impact bond. Each of these investments aims to achieve a commercial rate of return alongside evidenced positive social impact. Nesta Impact Investments is managed by Nesta’s fund management arm, Nesta Investment Management, with funding from Big Society Capital, Omidyar Network and Nesta itself.

We continue to work with practitioners to develop and test evidence standards for impact investment, while also researching and commenting on major issues in the development of the market. For example, in 2017, our report Setting Our Sights: A strategy for maximising social impact set out to share insights and understanding about the impact of a diverse portfolio and explore how social impact can be embedded into commercial businesses.

Case studies

Oomph! Wellness Limited

Starting in 2016, Nesta Impact Investments made two separate investments in Oomph! Wellness Limited, a company with the impact objective to increase the number of older people enjoying a higher quality of life. Oomph! provides wellbeing leadership training for care providers, as well as excursion services for care home groups to get elderly residents out and about on regular and meaningful outings. Since investing in Oomph!, the company has launched a radical new excursion offering for older and vulnerable adults in care, a new minibus service, trained 1,588 staff, delivered 59,575 sessions per year, and is enjoying significant growth in its activity and exercise franchise. The investments are associated with a 14 per cent improvement in quality of life for beneficiaries as measured by clinical quality assessment tools.

Arbor Education

In 2014, Nesta Impact Investments invested in Arbor Education, a company with the impact objective to improve educational outcomes for children and young people. Arbor Education helps schools learn from their data by providing data analysis solutions to identify the trends in student performance and areas for improvement. Arbor Education uses the data to develop relevant workflow tools for teachers to act and improve outcomes. Following a seed-round of investment from Nesta, Arbor’s strong performance, and their development of high-quality products, resulted in a 70 per cent increase in the value of the initial investment.

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