Impact investment optimizes risk, return and impact to benefit people and the planet. It does so by setting specific social and environmental objectives alongside financial ones, and measuring their achievement.
From the investor perspective, impact investing is a more sophisticated form of socially responsible investing. Instead of avoiding investments with harmful impacts, an impact investor deliberately seeks to generate, alongside financial returns, a pre-defined and measurable societal benefit.
The global market for impact investing has seen rapid growth in recent years and currently amounts to about USD 500 billion with powerful growth set to continue.
A Centre of Expertise for Impact Investing operates under the Ministry of Economic Affairs and Employment. Its key task is to assist public sector actors in outcomes contracting.
By focusing on outcomes that lead to long-term benefits rather than deliverables in its operations, a public sector organisation can make efficient use of new practices and ensure productive use of tax revenue.
In the outcomes contracting model, service providers are paid only after the desired outcomes have verifiably been produced; this model often requires investor input. Impact investors can provide the funds needed to launch activities, and thereby share the risks involved. Practical examples of such funding schemes include the Social Impact Bond, or SIB model.
Social Impact Bond SIB
Social Impact Bond (SIB) is one way of implementing social outcomes contracting and impact investing. In this model, funds collected from private investors are used to solve a challenge identified by a public sector organisation. Detailed outcome targets are set for the project, and their achievement is measured. The public sector will only pay for pre-determined outcomes, while investors bear the financial risk. The repayment of and return on capital invested depend on the economic benefits that the activities in question deliver to the public sector.
In the SIB model, activities can be preventive and proactive, which is why they generate long-term benefits to society.
In the SIB model, as in all impact investing, investors play a key role. The return-to-risk ratio must be reasonable and acceptable to investors.
Anna Tonteri, Chief Specialist, tel.+358 29 504 7163, anna.tonteri(at)tem.fi