Impact investing: How does it differ from traditional investment strategies?

When you make an investment on the stock market, your usual aim is to make a good financial return. While you might avoid certain companies you believe are unethical or risky, in general, the primary focus is on profit. 

Impact investing is a slightly different concept. The aim of these investments is to deliver a positive, measurable social or environmental impact, as well as generating a financial return. So, rather than just avoiding certain companies, it’s about making a proactive choice to put your wealth into specific companies. 

Some thinking is that impact investing can only occur in the shape of buying new shares or funding a new project. The thinking behind this is that buying existing shares of a company on the stock market isn’t giving the organisation extra money to grow; rather, it is simply transferring ownership. 

The UK’s impact investment landscape is evolving rapidly

According to the Impact Investing Institute’s 2024 report: 

• The UK impact investment market was worth £76.8 billion in assets under management at the end of 2023, a £19.3 billion increase since 2021.

• Two-thirds of UK impact investors plan to increase or sustain their allocation of capital to these projects, companies, and assets over the next five years.

Investors are shifting so significantly towards impact investment as many now want more alignment between their personal values and their investment portfolios. It offers them the dual opportunity to make a difference in areas close to their hearts, at the same time as boosting their wealth. 

Plus, companies which address major global issues tend to be forward-thinking, often making them better positioned for future success than older, more traditionally focused companies. 

Nor is it the case that making an investment for the good means you must sacrifice financial returns. According to the Global Impact Investing Network (GIIN) in 2025, portfolio performance meets or exceeds investor expectations for both social and environmental impact and financial return. 

The 3 main ways to make impact investing part of your strategy

1. Direct investment in impact-driven companies

This means you buy shares or loan money to a company with a social or environmental agenda. Rather than buying old shares on the stock exchange, you are injecting cash directly into a business that aligns with your values. 

Investing in this way can give you more transparency than buying shares in a large global corporation. Impact investing can be more local, so you can often physically see the project come to life, and you often get updates from the founders. It offers a much higher level of engagement and emotional connection than traditional investment gives. 

There are also certain tax incentives. The Seed Enterprise Investment Scheme (SEIS) is designed for very early startups, and the government will give you 50% of your investment back as a deduction from your Income Tax bill. Meanwhile, the Enterprise Investment Scheme (EIS) is for slightly larger startups, and you’ll receive 30% of your investment back as an Income Tax deduction. Under both schemes, if the company succeeds, you won’t usually pay Capital Gains Tax (CGT) on profits. 

However, these can be risky schemes, as a large number of new businesses fail in their early years. You need to understand the full implications before investing, as you could stand to lose your whole investment. Your investment is also usually highly illiquid, often tied up for between 5 and 10 years. 

2. Purchasing green bonds

Here, you’ll be loaning money to a government body or organisation with the specific intention of funding environmental projects. These could take the form of offshore wind farms or clean public transport, for example. 

In the UK, these come in the shape of: 

• NS&I Green Savings Bonds: for everyday savers who want to support the UK’s transition to net-zero while earning a fixed rate of return.

• UK Green Gilts: Sovereign bonds issued by the UK government.

As these are government-backed, they’re usually very low risk and offer a predictable return. Plus, the government issues reports so you can see how and where your money was spent. However, as returns are fixed, be aware they may not outweigh inflation in times of high growth. 

3. Investing through impact investment funds

This method involves pooling your money with other investors into a fund, an investment trust, or an Exchange-Traded Fund (ETF), managed by professionals who will select a diversified portfolio of impact assets.

Your money is usually highly accessible, can be diversified across a large number of projects, and is managed by experts so you don’t need to worry about the admin yourself. 

However, you do usually pay ongoing management fees. 

The investment risks to be aware of with impact investing

All investments carry an element of risk, and impact investments are no different. Just because an investment aligns with your values doesn’t mean it’s right for you, and past performance isn’t a reliable indicator of the future. Always do your due diligence and research the companies you’re planning to invest in. It’s always recommended that you take financial advice before proceeding with any investments. 

Please note:

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.