Impact investing grew to $715 billion in 2020. Meaning everyday investors want their money to do more than sit in a bank account. It shows that more investors are putting capital into investments that bring them both financial returns and positive change in the world.

But jumping into social projects without knowing how to evaluate them can cost you money and leave you frustrated (we’ve watched people learn this lesson the expensive way).

That’s why in this article, we’ll cover the basics of impact investing, how to evaluate projects properly, and some useful questions to ask before investing.

So, let’s learn more about investments that match your values while protecting your assets.

Impact Investing 101: What It Is and Why It Exists

Impact investing is when you put money into companies that solve social problems and get financial returns. And it exists because people want their money to create positive change while still generating returns.

We’re looking at businesses that tackle climate change, expand education access, or improve healthcare in underserved markets. It challenges the old idea that only governments and charities should fix society’s biggest problems.

The impact investing market has grown because people realized that traditional investments often ignore the world’s most pressing challenges. On top of it, you can actually make money while funding solutions to environmental issues or social gaps.

Now let’s take a look at how this investment is different.

How Impact Investing Differs from Traditional Investment

Traditional investing focuses solely on financial gains, while impact investing tracks both money and social outcomes. Your broker measures success by looking at quarterly returns and portfolio growth.

Impact investors intentionally choose companies that work on specific issues like climate change or healthcare inequality. Say, they want to know how many tons of carbon were reduced or how many patients received better care.

Most traditional investors never ask about environmental impact or social outcomes. But in impact investment, you measure success against two goals: your financial return and the actual positive change created.

The Range of the Impact Investing Market Today

The IFC reported nearly $2.3 trillion in impact investments during 2019 under its broadest definition. That number includes everything that supports projects across different markets, including private equity deals and development finance institutions.

And private impact investments from VC firms and private equity totaled roughly $594 billion of that amount. These investments went into companies across various sectors, like sustainable agriculture and clean energy infrastructure.

Today, experts estimate the market could grow to $26 trillion if supported properly over the next decade. The range depends on how many asset owners and investors decide to allocate resources toward investments.

Next, let’s look at the leading network of firms making waves in impact investing right now.

The Big Names in Beginner Impact Investing

Our tests with various impact funds revealed that firms with clear diversity targets usually receive more consistent social outcomes alongside financial returns. Take a look at some of the top firms that work for diversity.

Diversity Firms in Social Impact

Better Ventures is a certified B-Corp that is writing checks from $500,000 to $1.5 million for social startups. Along with that, Obvious Ventures, Reach Capital, and VIAGlobal Ventures are some other recognizable firms in the space right now.

These impact investors manage portfolios worth billions and focus their investments on companies solving diversity issues. Their commitment to diversity targets shows they’re serious about backing underrepresented entrepreneurs.

Sustainable and Climate-Focused Impact Investing

One of the most famous impact investment success stories is Impossible Foods. They revolutionized alternative meat and pulled in capital from asset owners who saw both the environmental benefits and the market opportunity.

Goodr manages surplus food waste, while Persefoni uses AI to help companies measure their carbon footprint. Both received backing from impact investors who understood the range of problems these companies address.

What Asset Owners Are Actually Doing with Their Money

Asset owners use impact analysis to improve how their portfolios respond to changing environmental conditions. They’re not waiting for regulations to force their hand.

For instance, banks and pension funds offer clients investment opportunities connected to particular social or environmental causes. These organizations manage massive amounts of capital and can influence entire markets.

Besides that, family foundations invest significantly larger amounts of assets to develop their core goals while growing their endowments. They see impact investing as a way to put more resources toward their objective without just giving money away.

How Do You Evaluate a Social Project Before Investing?

When reviewing project proposals, you need to read between the lines and assess their real impact, transparency, and how effectively they address the social issue. It’s because glossy reports don’t always match actual results.

This is how you can evaluate a social project before you decide to invest.

Intentionality and Evidence-Based Decision Making

Begin by developing a theory of change. That’ll help you identify the exact path to reach social and environmental goals.

Think of it as a roadmap that shows how the project moves from idea to actual impact in communities or markets. You want the project team, investors, and beneficiaries all working toward the same targets.

After that, setting performance targets using standardized metrics makes it easier to compare different investment opportunities. When one project says they’ll reduce carbon emissions and another focuses on education, you need common measures to evaluate which deserves your capital.

Tracking Performance Against Your Original Goals

The evaluation process works best when you stay involved and request updates throughout the investment period, instead of just annual reports. This report keeps everyone accountable for results.

Plus, using data and learnings from past investments helps improve future impact returns over time. Each project teaches you new things about managing expectations, evaluating opportunities, and determining which strategies actually bring results.

We’ve seen a retired teacher invest $25,000 in affordable housing development, generating steady income plus measurable social benefit. He received quarterly reports that showed occupancy rates and tenant feedback. And the project gave him a reliable financial return while addressing housing challenges in his city.

Can You Really Measure Social Impact?

Yes, social impact can be measured, but it’s complex and depends on the goals and methods that are used to track the changes.

Measuring impact is messier than measuring dollars. So there’s no singular method. Some investors track simple ideas like how many people gained access to clean water. And others want more detail on long-term outcomes and behavior changes in communities.

The OECD provides evaluation criteria that give you a framework for making judgments about policies, strategies, programs, projects, or activities you support. You’re essentially asking whether the money created any change at all or just looked good on paper.

Imbalance Between Climate Change and Healthcare

Climate change investments pull in billions from private equity because the sector combines urgent global need with long-term profit potential. And most of the money flows to sectors that already have plenty of attention, while some other sectors stay undersaturated.

Take a look at some of the imbalances among the sectors.

• Oversaturated Sectors: Private equity firms and asset owners pour capital into these areas because the infrastructure needs are huge, and the returns look solid. The environmental benefits are easier to measure, too. 
• Deprived Sectors: Healthcare access, education improvement, and financial inclusion receive less funding despite enormous global need. These investments require longer development timelines. So private equity firms often skip them because the risk feels higher.

Geographic distribution shows that investors prefer putting assets into stable regions, even though underserved communities in developing markets need the resources more. The infrastructure and regulatory challenges in those areas push many investors away.

Questions to Ask Before You Invest in Any Social Project

Now that you’re ready for social investments, we recommend you ask these four questions before you proceed. These will save you from discovering problems after you’ve already written the check.

Take a look at these questions.

Problem & Metrics

What specific social or environmental problem does this project address, and how will success be measured?

You need clear details on the issue and the metrics they’ll use. Vague answers about “making the world better” won’t help you decide if your investments are working.

Team & Transparency

Who are the key players involved, what’s their track record, and how transparent are they about results?

Look at the team’s past projects and whether they share honest feedback with investors. Experience in managing similar investments is more important than good intentions and interest.

Impact vs. Returns

How does the project balance financial return with environmental impact, and what happens if goals conflict?

Some projects prioritize one over the other when there’s pressure. So when you know their process for handling trade-offs, it shows you their real priorities.

Reporting & Data

What data will you receive regularly to track both financial performance and the actual impact created?

Monthly or quarterly reports should cover both your money and the outcomes. If they can’t commit to regular updates, that’s a red flag about their evaluation system.

Take Your First Step into Responsible Investing

Impact investing offers plenty of opportunities if you want to create value in communities while growing your assets. It combines financial returns with social good, but you need proper evaluation skills to avoid mistakes.

So, start by understanding the basics, asking the right questions, and learning from case studies before putting your money in. Based on our firsthand experience connecting investors with social projects, the investors who succeed are the ones who start with education, not enthusiasm alone.

And once you understand the basics and remember to ask the right questions. If you need more consultation on impact investment, our team at Social Investment Taskforce can help you connect with vetted opportunities that bring both returns and positive change.