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Understanding Impact Investing: Its History, Rise, And Evolution The impact investing market has demonstrated remarkable growth, achieving a compound annual growth rate (CAGR) of 29% over the last four years, reaching an impressive total of $1,164 billion in 2022.

By Pierrick Ribes

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Lucidity Insights

Impact investing stands at the crossroads of philanthropy and traditional investment, offering a dynamic approach to achieving both financial returns and measurable social and environmental impact. It's not just about making a profit; it's about making a difference.


At its heart, impact investing is guided by a few key principles:

  • INTENTIONALITY Impact investments are made with the explicit intention to generate positive, measurable social and environmental impact alongside a financial return.

  • RETURN EXPECTATIONS Unlike philanthropy, impact investing expects a financial return, ranging from below-market to market-rate, depending on the investor's goals.

  • RANGE OF ASSET CLASSES Impact investments span across various asset classes, including but not limited to private equity, debt, and real assets.

  • IMPACT MEASUREMENT A distinctive feature of impact investing is the commitment to measure and report the social and environmental performance of investments. This accountability is essential for understanding the effectiveness and scope of the impact.

  • ADDITIONALITY Additionality is a fundamental principle in impact investing that underscores the need for investments to create real and measurable positive changes that otherwise would not have occurred. Impact investments should go beyond business as usual, and they should be characterized by their capacity to generate new solutions, address social or environmental challenges, or accelerate progress toward desired outcomes.

While traditional investments focus primarily on financial returns, environmental, social, and governance (ESG) investing fundamentally aims to do both well and good, thereby achieving a double-bottom line. This approach was inspired by the United Nations' Principles for Responsible Investment, initiated in 2005. However, while ESG investing incorporates ethical considerations into investment decisions, its focus is not necessarily on creating additional impact. ESG investments might avoid harm or support general good practices, but they don't always aim for or measure specific, additional impacts.

Source: Lucidity Insights

Terrence Keeley, a former executive at BlackRock and the author of Sustainable: Moving Beyond ESG to Impact Investing, raises a critical point about the effectiveness of ESG investments. He argues that only a minimal portion of these investments truly achieve double-bottom-line outcomes. Keeley goes a step further, highlighting that about US$40 trillion in investments, originally intended to yield these dual benefits, fail to do so. He categorizes this amount as "the greatest misallocation of financial assets in history."

This is where the concept of additionality sets impact investing apart from ESG by emphasizing the direct, tangible impacts of investments. It ensures that impact investing goes beyond passive screening or risk mitigation, actively contributing to positive change. As Barbara Scheck, a professor at NYU Abu Dhabi, put it: "Impact investors need to boldly fund ventures that tread where others haven't, ensuring a real additionality in investments."

On the other side of the spectrum of private capital, there is philanthropy. Philanthropy remains a vital and active component within the impact investment ecosystem, continuing to fulfill essential roles, particularly in areas where returns on investment may not be immediately evident or measurable. Unlike the startup and venture capital sector, which has developed a multi-layered funding structure ranging from angel investors and incubators to various stages of venture capital firms, Scheck explains that philanthropy hasn't seen a similar evolution.

This gap has led to situations where many promising initiatives, initially supported by philanthropic funds, struggle or cease operations due to the lack of sustainable, follow-on funding mechanisms. Therefore, while philanthropy is far from obsolete, there is a clear and pressing need for innovation and restructuring in this space to ensure continuity and greater impact of philanthropic endeavors.

Related: Five Graphs About Impact Investing That You Need To See


In his seminal work, Impact Investing: A Brief History, Brian Trelstad from Bridges Ventures navigates the intricate evolution of impact investing. His 2016 publication delves deep into the transformation from traditional investment approaches towards a more socially and environmentally conscious methodology. This transformation, as Trelstad articulates, encompasses a diverse "spectrum of capital," highlighting a profound narrative of how investment strategies have matured to align with the evolving ethos of society and the planet.

Historically, the investment landscape was dominated by two primary types: fiduciary investors, focused solely on maximizing financial returns, and philanthropic donors, whose sole aim was social or environmental betterment without financial gain. This binary landscape began to evolve in the late 1960s and early 1970s, setting the stage for a more nuanced approach to investing.

The emergence of socially responsible investing (SRI) marked a significant shift, moving beyond the simple dichotomy of fiduciary and philanthropic capital. SRI introduced a middle path, where investments were screened not just for financial viability, but also for their social impact. This era saw investors starting to shun companies and practices deemed harmful, like tobacco or weapons manufacturing, reflecting a growing consciousness about corporate responsibility and ethical investment.

Parallel to the rise of SRI, the Ford Foundation pioneered program-related investments (PRIs), a concept that further blurred the lines between philanthropy and investing. PRIs were low-interest loans aimed at financing initiatives like urban redevelopment, effectively using philanthropic funds to create income-generating models. This approach allowed philanthropic capital to be recycled and leveraged more effectively, transitioning certain initiatives towards more traditional investments.


As the new millennium dawned, investors began to question if deliberately choosing investments based on positive social or environmental impact could yield equal or better returns. This line of thought gave birth to sustainable investing and, subsequently, impact investing. Leaders in sustainable investing, like Generation Investment Management, co-founded by David Blood and Al Gore, championed the idea that capital allocation could create more substantial social or environmental benefits.

Impact investing emerged from this intersection, driven by the belief that investing in business models addressing significant challenges like climate change or public health could generate competitive financial returns alongside measurable social and environmental impact. This belief, now increasingly backed by empirical evidence, suggests that private fund strategies under impact investing can deliver returns competitive with traditional investment strategies.

Source: Impact Investing Institute

Over the past 20 years, impact investing has undergone a remarkable evolution, driven by a confluence of societal, economic, and technological factors.

1. GOVERNMENTAL FINANCIAL CONSTRAINTS: A PUSH TOWARDS PRIVATE CAPITAL A significant driver of impact investing's growth has been the evolving role of governments worldwide. Struggling with mounting debts and economic pressures, many governments have found themselves increasingly unable to shoulder the entire burden of social welfare and environmental conservation. This constraint has led to an opening for private capital to step in, addressing societal needs that were traditionally the domain of public funding. Impact investing has emerged as a crucial mechanism in this context, enabling private investors to contribute meaningfully to areas once funded predominantly by governments.

2. DEMOGRAPHIC SHIFTS: THE CHALLENGE OF AGING POPULATIONS Another important factor has been demographic change, particularly the challenge posed by aging populations. As a larger segment of society enters retirement, governments are faced with increased healthcare and pension costs, reducing the funds available for other societal needs. This demographic shift has accentuated the need for alternative sources of funding for social initiatives, where impact investing has played an increasingly significant role.

3. GENERATION Z: A QUEST FOR PURPOSEFUL EMPLOYMENT The rise of Generation Z has brought a fresh perspective to the workforce. This generation, more than any before, seeks employment that aligns with their values, and offers a sense of purpose. Their inclination towards careers that contribute positively to society has also influenced the investment landscape, with more funds being directed towards companies and projects that reflect these values.

4. THE POWER OF SOCIAL MEDIA: AMPLIFYING AWARENESS The advent and widespread adoption of social media have revolutionized access to information. Today, we are more connected and informed about global events and issues than ever before. This immediacy in knowledge has heightened awareness about major disasters, social injustices, and environmental issues, fueling a collective desire to contribute towards meaningful change. Impact investing provides a platform for this, allowing investors to directly address pressing global challenges.

5. THE RISE OF SOCIAL CAPITALISTS An intriguing development in the financial world has been the emergence of social capitalists. These individuals, often young high-net-worth individuals (HNWIs) and predominantly from the tech industry, are redefining philanthropy. By using their wealth to establish foundations and impact investing funds, they are blending traditional philanthropic methods with a more investment-driven approach to social good.

6. THE "PROFIT WITH PURPOSE" MOVEMENT Finally, the "profit with purpose" movement encapsulates the ethos of impact investing. It's a philosophy that challenges the traditional notion that financial success and social/ environmental impact are mutually exclusive. This movement advocates for a business and investment model that achieves both profit and purpose, symbolizing the essence of what impact investing is all about.

The impact investing market has demonstrated remarkable growth, achieving a compound annual growth rate (CAGR) of 29% over the last four years, reaching an impressive total of $1,164 billion in 2022. According to the Global Impact Investing Network's (GIIN) research, 92% of impact assets under management (AUM) is allocated by organizations headquartered in developed markets, while those in emerging markets account for only 8%.

Explore how impact investing aligns capital with positive societal and environmental outcomes- check out our special report on impact investing here.

This article was originally published on Lucidity Insights, a partner of Entrepreneur Middle East in developing special reports on the Middle East and Africa's tech and entrepreneurial ecosystems.

Related: Paradigm Shift: The World Simply Can't Afford To Make Unsustainable Investments Anymore

Pierrick Ribes

Contributing Writer and Researcher, Lucidity Insights

Pierrick Ribes is a Contributing Writer and Researcher for Lucidity Insights. He is interested in disruptive technologies such as Web3, blockchain, digital currencies and retail tech. His career in strategy consultancy coupled with his inquisitive mind make him a thoughtful and investigative storyteller.

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