As a “profit with purpose” private-equity firm, Leapfrog Investment made its first foray in the world of impact investment by funding AllLife, a South African firm that provides life insurance to people with AIDS. This $6.7 million impact investment will profit if people undertake regular blood tests to prove they are taking their life-saving anti-retroviral drugs. Leapfrog, which raised $204 mis one of the innovation stars of impact investment, which is held by many to be a new financial asset class.

Impact investment, which is part of a broader social investing concept, is not new. It is premised on the principle that a society’s neediest people can significantly benefit from social investing and financial innovation. The physical environment can benefit as well.

People have been practicing impact investing for many years. The only difference now is that funds are invested to a greater degree with a goal of producing a measureable impact as well as a profit.

Impact investing grew out of a history that includes microfinance, ethical screening of portfolios, employee ownership investing, and community development finance. Some people include microfinance and community finance as part of today’s package. Ethical screening is not considered part of impact investing because such filtering out is limited in its intent. By excluding out “sin stocks” such as those of tobacco firms, arms companies, casinos, and big polluters it only seeks to avoid the bad. On the other hand, impact investing pulls in investments that make a positive impact. However, according to the Monitor Institute, nearly $7 trillion of assets are still screened in some way each year.

Community development finance, microfinance, and “clean” technology investments, are three of the main forms of impact investment. Community investment received a boost when the US Treasury recently announced $325 million in bonds that will support further community development financing.

Microfinance has grown at even higher rates. The total volume of micro loans increased from $705 million in 2005 to $47 billion in 2011. Cleantech investment also soared during these years. In the first quarter of 2013, cleantech investment reached more than $21 billion.

As compared to traditional funding, impact investing combines innovation and market-oriented strategies with a stronger social purpose. This method of investment allows for intention to be focused on generating positive social and/or environmental impact in addition to a purely financial return. Some argue that intention is less important and that anyone who creates a good job, for example, is an impact investor. From this point of view, it might be said that all organizations create social value no matter whether they are primarily financially driven, as long as they ethically employ people at good wages with good benefits.

Jed Emerson, the co-author of a new book on impact investing, is one of the main proponents of the position that impact investors have to use premeditated intent to create positive results before they can be considered part of the community of accepted devotees of the practice. He said “It is about having the right intentions, to improve the world as well as make money, and about taking seriously the process, especially measuring social performance.”

An arena of impact investment that has witnessed much activity recently is the bond market. Bond-related investments include social impact bonds in the United Kingdom and pay-for-success bonds in the United States. The basic idea of social impact bonds is that practitioners create projects which are paid for as bonds are sold. These bonds are usually not bought by private individuals. Instead organizations make the purchases. The funds raised are then often used by social enterprises to finance projects. The investors are paid with interest if the programs reach certain desired social outcomes agreed in contracts. Sample results might include reducing crime, increasing education rates, or decreasing recidivism (the rate at which convicted criminals return to prison).

In the UK, social impact bonds, such as the one structured to decrease recidivism in Petersborough, penalize investors if few or no goals are met. Those who bought the bonds could lose everything, if the project meets none of its goals. Although investors have not yet received financial benefits, the Petersborough bond is reported to be creating significantly positive social returns.

President Obama, in the 2012 US budget proposal, pledged $100 million to be allocated to run pay-for-success pioneer programs. The pay-for-success programs are meant to fund certain types of campaigns, such as job training, education, juvenile justice, and care for children with disabilities. The application of impact investment is just one example that shows how Americans may be tackling social issues in a different way in the near future.

In the United States, Community Development Financial Institutions (CDFIs) are leading a significant proportion of thrust in impact investments. Since the US government codified these programs in 1994, CDFIs have made a large impact on social welfare. CDFIs are supported by the US Treasury Department. Through CDFIs, monies are lent by private or non-profit lenders who make loans available to private businesses and other non-profit social enterprises which often struggle to get finance from traditional banks and credit companies. CDFIs work with banks, often in deprived communities, by offering loans at reasonable rates to institutions that otherwise would have less access to credit.

CDFIs are also effective in the UK. However, in the UK, more loans go to individuals. For instance, from 2010 to 2011, CDFIs lent $312 million to around 23,000 customers. The vast majority of these borrowers were individuals. On the other hand, $38 million was lent to 1,500 businesses, resulting in the generation of a $280 million in return and the creation of over 5,700 jobs.

The possibilities of impact investing have also been embraced by the Gates Foundation, one of the supporters of GIIN (the Global Impact Investing Network). The Gates Foundation has done some pioneering work in this space and have funded businesses that create social benefits.

For example, the Gates Foundation invested $400 million into a financial facility in 2009 to see if financial innovations can motivate the placement of considerably larger sums of money from governments and private investors to help organizations overcome capital shortages. The foundation expected that this would encourage risk sharing among providers of capital. Alex Friedman, the Gates Foundation’s chief financial officer, said: “We want to show the private capital markets that there is money in this, that it is a sustainable business.” The new approach will “let the foundation operate almost like a merchant bank for the poor,” a model it believes can be widely imitated.

Although many hurdles must be overcome before impact investing grows in the future, it has been shown to be an important bridge between lower income communities and institutions with access to finance. To emphasize the growth of social finance, David Cameron, the Prime Minister of the United Kingdom, is using some of the influence of his presidency of the G8 to move forward the cause of impact investing and social impact bonds this year.

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