Impact Investing: What You Need to Know
- Shrilaxmi Patil
- Jun 4
- 9 min read
Updated: Jun 12
Impact investing is gaining popularity as a way to align capital with purpose. But is it really the most effective way to do good? This article explores what impact investing is, how it works, and how it compares to high-impact donations.
What is Impact Investing? Understanding the Basics
Impact investing is a fast-growing approach that tries to bridge two goals: making money and doing good. The idea is to invest in companies, funds, or projects that not only aim to earn a return, but also contribute to solving social or environmental problems—like reducing poverty, improving healthcare, or addressing climate change.
In theory, this means you don’t have to choose between “doing well” financially and “doing good” for the world. You can do both. Examples include:
Investing in renewable energy startups
Supporting fintech companies that expand access to savings and credit in low-income areas
Purchasing green bonds—loans used to fund climate or sustainability projects
This is different from ESG (Environmental, Social, and Governance) investing. ESG funds generally invest in companies with good internal policies—like reducing emissions or increasing board diversity—and exclude harmful industries like tobacco or fossil fuels. ESG is mostly about avoiding harm.
High impact investing goes further. It’s about creating good—funding new solutions to social problems. But that raises an important question: Is impact investing the most effective way to do good with your money? Especially when compared to something like donating to carefully vetted, high-impact charities?
How Does Impact Investing Work? A Step-by-Step Breakdown
If you’re interested in investing with impact, here’s how it usually works:
Clarify your goals
What causes matter most to you—climate change, global health, education, animal welfare? This will guide what you invest in.
Choose your investment type
There are several ways to invest for impact:
Public equities (shares in companies listed on stock exchanges)
Private equity or venture capital (investments in early-stage, often riskier companies)
Green or development bonds (loans used for infrastructure or public service projects)
Nonprofit loan funds (capital given to charities or social enterprises as loans)
Evaluate the impact
This is the hardest part. Ask: What will actually change because of my money? Would this project have happened anyway without me? This is called a counterfactual question. It’s about understanding what your investment causes that wouldn’t otherwise happen. It’s central to whether you’re making a meaningful difference.
Monitor outcomes Some investors use tools like:
IRIS+ (Impact Reporting and Investment Standards)
GIIRS (Global Impact Investing Rating System)
Alignment with the UN Sustainable Development Goals (SDGs)
These tools help with consistency, but don’t usually include rigorous impact evaluation or conservative modelling—things that matter a lot when assessing effectiveness.
Reinvest or donate the returns
If your investment makes a profit, you can reinvest it for further impact—or donate it to high-impact charities.
ESG vs Impact Investing: Understanding the Difference
People often mix up ESG and impact investing, but they’re not the same:
ESG investing is mostly about ethics and risk. It screens companies based on how they operate—like whether they treat workers fairly or manage emissions. It’s a way to avoid supporting harmful practices.
Impact investing is about actively solving problems. It aims to fund new ideas or organisations that create measurable social or environmental change.
Two key ideas help define impact investing:
Intentionality: You’re aiming to do good, not just avoid harm.
Additionality: Your money makes something happen that wouldn’t have happened otherwise.
Most ESG investments meet the first condition. Fewer meet the second.
Real-World Examples of Successful Impact Investing
Some well-known impact investors include:
LeapFrog Investments, which focuses on healthcare and financial services for underserved people in Asia and Africa
Acumen Fund, which provides “patient capital”—long-term, risk-tolerant investment—to early-stage social enterprises
Global Innovation Fund (GIF), which backs innovations in health, education, and gender equality using a mix of donor and investment capital
But even strong examples have limitations. GIF once claimed that their investments were three times more impactful than top global health charities. A review at Founders Pledge—using more conservative assumptions—found that the actual impact was likely much lower. The estimate dropped sharply once counterfactuals, uncertainty, and attribution were factored in.
This is a broader issue. Most impact evaluations don’t use the same level of rigour as organisations like GiveWell, which often adjust their estimates downward to reflect uncertainty and possible overstatements.
Strategic Framework for Effective Impact Investing
If you still want to try impact investing, here’s what to focus on:
To make a real difference, two things need to be true:
Enterprise impact – The business itself must be solving an important problem in a meaningful way.
Investment impact – Your capital must have enabled that solution. In other words, your investment needs to be additional.
To increase your chances, you can follow these five principles:
Focus on underserved populations or ventures with big positive externalities (e.g., vaccines, clean energy, meat alternatives)
Prioritise neglected issues, like malaria, animal welfare, or extreme poverty
Invest in underfunded or inefficient markets where capital is genuinely needed
Be willing to accept lower financial returns in exchange for higher social value
Use your unique knowledge, networks, or access to find overlooked opportunities
That said, even with all of this, it’s hard to find investments with high additionality and reliable, evidence-backed outcomes. Often, the ventures would have raised funds anyway, or they address lower-priority problems from an impact-per-dollar perspective.
Critical Assessment: Challenges and Limitations
In a recent report at Founders Pledge (co-authored with John Halstead), several recurring problems were identified:
Finding impactful companies is hard, especially in areas where charities are already working more effectively
Public stocks usually lack additionality—your money doesn’t change what the company does
Profit vs. impact trade-offs are real—if you expect market-rate returns, you're probably not taking risks others won’t
Displacement happens often—you may just crowd out another impact investor
Impact claims are often untested, with little use of randomised controlled trials (RCTs) or conservative modelling
So while investing with impact can feel empowering, it’s often high effort, high uncertainty, and lower cost-effectiveness compared to targeted charitable giving.
Why Choose Impact Investing? Key Reasons to Get Involved
Despite its challenges, impact investing can still make sense in certain cases:
It allows you to align your investments with your values
It can shape norms—through shareholder voting, engagement, or divestment
It can work alongside philanthropy—especially if you donate your returns
It’s an option for people who aren’t ready or able to give away large sums of capital
Just keep in mind that if your goal is to maximise impact per rupee, impact investing is usually not the best tool.
Who is Making Impact Investments?
Entities engaging in impact investing in India include:
Institutional investors – like pension funds and big asset managers
Foundations and family offices – e.g., Gates Foundation, Omidyar Network
Retail investors – through ESG mutual funds, crowdfunding, or robo-advisors
Development finance institutions (DFIs) – e.g., the International Finance Corporation (IFC), which invest in emerging economies
But as more capital enters the space, the best opportunities often get crowded—limiting your ability to make a meaningful difference with new money.
How Do Impact Investments Perform Financially?
On average, high impact investments generate slightly lower financial returns than conventional investments. One study by the University of California found:
Median internal rate of return (IRR) for impact funds: 6.4%
Median IRR for traditional funds: 7.4%
So you might be giving up a little in returns. But that trade-off only makes sense if the social return is high. And that’s where the uncertainty lies.
How Big is the Impact Investing Market?
According to the Global Impact Investing Network (GIIN), the total size of the impact investing market is now over $1.5 trillion.
But bigger doesn’t mean better. As more capital flows in, the additionality of each investor decreases. Crowding out—where your investment simply replaces someone else’s—is a growing concern.
How Can I Participate in Impact Investing?
If you’d like to try high-impact investing, here’s how to approach it thoughtfully:
Focus on early-stage startups or neglected areas
Be open to below-market returns
Use personal knowledge or networks to find high-impact deals
Combine it with high-impact giving
Always ask: What’s the counterfactual? What would happen if I didn’t invest?
Alternatively, consider an “invest to give” strategy: invest traditionally, grow your capital, and plan to donate the proceeds later.
How to Explore Impact Investing Through a Donor-Advised Fund
Donor-Advised Funds (DAFs) are like charitable investment accounts. You can:
Donate money now and get a tax deduction
Invest it in the meantime (some offer impact-aligned options)
Distribute grants over time to charities you choose
Some DAF providers offer ESG or impact investment portfolios, or allow recoverable grants, where your donation may be repaid and regranted. This can be a good hybrid model—but it still usually doesn’t match the cost-effectiveness of giving directly to high-impact charities today.
How Impactful Giving Help You Make a Difference
At Impactful Giving, we help donors make sense of all this. Our goal is simple: help people do the most good per rupee donated.
Effective charities working on malaria prevention, increasing vaccination uptake, or farm animal welfare routinely achieve cost-effectiveness that outperforms impact investing by an order of magnitude.
Conclusion: Donating Effectively Often Outperforms Impact Investing
Impact investing can be a meaningful way to align your money with your values. It’s a step up from investing purely for profit. But if your goal is to do the most good, the evidence is clear: donating—now or later—is more effective.
In summary:
If you want to retain your money and have some positive influence, impact investing can help.
If you want to maximise your impact, donating to proven, high-impact charities is better.
At Impactful Giving, we encourage funders to go beyond intentions and look at what actually works. With limited resources and unlimited need, effective giving remains one of the most powerful tools we have.
Frequently Asked Questions
Can impact investing generate strong financial returns?
Sometimes. Some impact investments report solid returns, especially in sectors like clean technology or financial inclusion. However, they still tend to underperform traditional investments on average. One study found a typical internal rate of return (IRR) of 6.4% for impact investments, which was lower than 7.4% for conventional funds. If you’re expecting market-rate returns and high social impact, you may be disappointed because those goals often pull in different directions.
How do I know if an investment is truly ‘impactful’?
Is impact investing a good option for beginners?
How does impact investing differ from traditional philanthropy?
What role does impact investing play in India’s economic growth?
Impact investing can help scale social enterprises, expand access to capital, and encourage innovation. Funding areas like renewable energy, affordable healthcare, and rural fintech has the potential to spur economic growth. It also attracts global capital to sectors often overlooked by traditional finance. That said, most growth and employment in India still come from public investment, mainstream finance, and philanthropy. Impact investing is a small but growing piece of the pie.
What is the potential for high-impact investing in emerging markets?
How can institutions participate in impact investing?
What are some common misconceptions about impact investing?
