3. Historical Development and Investment Rationale

This chapter covers the phenomenon of impact investing. It will introduce the topic and discuss the rationales of investors to allocate part of their resources to impact investing. Those rationales vary for the different groups of investors who are contributing to the capital in the impact investing market.

There are different theoretical approaches to understanding investment decisions. One key consideration is the interplay between financial and social return requirements. Financial returns are easily quantifiable in the form of EBITDA, net profits or revenues, whereas social goals are not easily quantifiable. Both goals are interdependent and trade-offs can occur when capital providers with different return expectations are involved in the financing of a social enterprise. Traditional public sector funding usually comes with restrictions and has an impact on the financing structure of the organization. Similar restrictions can be observed for the different income streams. Crowding-out can occur when donors and public authorities support an organization.