What Types of Returns Do I Get from Social Impact Investing?

Mar 12, 2018 10:58:36 AM / by Koen The, CEO | 3 minute read

Social impact investing can provide a range of returns, depending on the type of investment. Some online platforms offer equity-based investments and some operate on a lending based model, but these models can vary depending upon the types of businesses they work with.

Social Impact Investing Returns

There is also a range of traditional investing options for impact investment, such as investment bank funds, venture capital, private equity, and options for individual retail investors.

Most impact investors seek investments that are in line with average market performance. Smaller groups of investors are looking for market-outperforming and underperforming investments, but they are usually investing with very specific goals in mind.

According to The GIIN investment Annual Impact Investor Survey of 2017, 79% of impact investors experienced returns that were in line with their expectations for general market performance, while only 2% said their investments underperformed their expectations.

What Determines Social impact Investment Returns?

Returns on social impact investments are determined in largely the same way they are in other investment options, they are based on the risk factors of the organization that is seeking investment.

A number of factors contribute to the actual percentage return you get on your investments. For example, Lendahand’s crowdfunding platform operates on a lending model. Our loans have interest rates ranging from 2.5-8% per year (with an average net return of 4.1%), and these interest rates are based on the associated risks of the borrowers.

The assessment of said risks is among others based on:

  • business model and track record
  • management team and relevant experience
  • portfolio quality (if any)
  • procedures and policies (e.g. credit policy)
  • social impact created
  • ownership/corporate structures as well as governance
  • financial health assessed by in-depth financial analysis relating but not limited to liquidity position, solvency, equity/debt, cash flow management and debt servicing capacity
  • location of operations and the geopolitical and geographical risks associated with it as well as the macroeconomic conditions of their local economy
  • market demand and competitive factors for their particular industry
  • other risks involved with their unique situation
  • Once the risk profile of an investment opportunity is assessed, an interest rate is determined to that project’s financing, thusly determining the potential return for our investors.

Social impact Investing Risk vs. Reward

As risk factors determine the interest rates given to investment opportunities, it makes sense that the riskier the investment the higher the return. That’s why it’s important to always evaluate the risks of each investment that you consider and not just potential returns. Also, it’s recommendable to spread, spread, spread, and only put a limited amount of your available capital at risk.

The Myth of Low Returns from Impact Investing

One of the most common misconceptions about social impact investing is that it generates lower returns than traditional investment opportunities. This could not be farther from the truth. For example, one McKinsey study of impact investments made in India from the years 2010-2015 showed that investors earned a median Internal Rate of Return (IRR) of 10%. Furthermore, the top third of investors earned a median 34% IRR, which shows quite clearly that investors can experience attractive returns from social impact investments.

Individual Investors Getting in on the Action

Up until now, the largest piece of the impact investing pie has been made up of institutional investors, but more and more opportunities are beginning to open up for individual investors. Due to the growth in exposure and knowledge of the Impact Investing field in general, more investors are becoming aware of the potential returns they can earn, both financially and socially.

Instead of leaving all the fun to the large organizations, individuals across the world are getting in on the social impact investing action, and we're happy to be a part of it. 

Topics: impact investing

Koen The, CEO

Written by Koen The, CEO

I would like to use my skills from various investment banks in London to give children in poor countries a better future. By investing sustainably, you improve the future of many but also of yourself. Previously with Goldman Sachs and Barclays.

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