Impact investing is a distinct strategy with a dual mandate to generate measurable positive social change and market-rate financial returns. Financial and social objectives must be specified in advance to ensure that the impact achieved is intentional, and one cannot be sacrificed for the other. Performance measurement must give consideration to both objectives.
Impact investing is a rapidly growing sector to which many institutional investors are increasingly deploying capital. Despite the term impact investing being a decade old, the sector is still in its infancy. Progress toward maturation has been made, but the industry is still refining definitions and benchmarks. Th is paper provides more detail on that progress.
Thus far, impact investors report investment performance that has largely met or exceeded expectations. However, one must consider that this performance has coincided with a period of broad-based economic expansion, and some impact investment strategies will be tested for the first time when the economic cycle turns.
Real estate is an appealing asset class within impact investing because of its attributes, notably the ability to invest in tangible projects that address critical social needs while generating market-rate financial returns. By our estimates, it accounts for approximately 10% to 15% (or $27 to $40 billion) of total reported impact investing assets under management.
Many real estate investments suitable for impact investing have long been included in traditional real estate portfolios. Th e key differentiation is that an impact real estate portfolio must be comprised solely of investments that are expected to have measurable social impact.
Impact investments in real estate can take multiple forms, each of which aims to preserve or improve a community’s health by addressing critical social needs, often by incorporating environmental sustainability principles. Impact investments in affordable housing can create or preserve access to existing economic opportunity. In communities with ample affordable housing but a lack of economic opportunity, impact investments in larger-scale “transformative developments” aim to increase upward mobility.