Impact Investing 1.01
What is Impact Investing?
Impact Investing is the act of making investments with the goal of generating positive social and environmental returns as well as financial returns. Investments can be made into companies, funds and organizations, and usually come in the form of traditional debt and equity or newer structures such as social impact bonds [investing in people instead of infrastructure with returns based on impact].
There are a wide range of desired outcomes in terms of the dynamic between social and financial returns; however the industry’s unifying thread is the desire to release the powers of the market onto problems previously relegated to the realm of charity. By doing so, impact investors seek to unleash entrepreneurial creativity traditionally associated with the private sector, create scalable solutions to societal problems, increase the amount of capital dedicated to social causes, and possibly tap into newfound alpha. Simply put, impact investing is viewed as a means to garner private capital to complement and augment public resources and philanthropy. The intention of impact investing is to generate beneficial social and environmental impact while also seeking a financial return (be it both below-market and above market rates of return).
On a more philosophical level it is about acknowledging the central role which capital allocation has in shaping our future, and developing a nuanced way of attacking deep seated social problems. By harnessing investor capital for social enterprises, the goal is to seek innovative solutions that address social and environmental problems.
Initially, the impact investing concept was based on regulatory efforts to minimize negative social consequences of business activities (e.g. impact on the environment from oil spills). Philanthropies also stepped in to support social issues that impacted communities. Increasingly, individual investors have taken on the cause of social responsibility. What appeals to such institutional and private investors is the potential to use the power of business to address complex societal issues while also producing financial and social returns.
Building on the awareness of microfinance and its success in alleviating social and economic measures, impact investing during the past 10 years is increasingly being viewed as a new breed of philanthropist-investor category and addressed in leading academic research.
Over the past five years the number of funds focused on impact investing has grown substantially. According to a 2009 study by the Monitor Group, the impact investing industry is likely to grow from US$50 billion in assets to US$500 billion in assets over the next 10 years. More recently, a JPMorgan Chase/Rockefeller Foundation research paper estimated impact investments dedicated to the “bottom of the pyramid” in emerging markets could reach nearly $1 trillion in invested capital by 2020 – implying the entire market may exceed the trillion dollar mark by a substantial margin.
At the forefront of the impact investing movement is the Global Impact Investing Network (GIIN) which serves as a trade association to the sector. The organization has developed a set of metrics designed to create a universally applicable method of quantifying social and environmental outcomes, e.g.jobs created, coastlines protected. GIIN also actively participates in industry research.
Other participants include development finance institutions (IFC and EBRD), private foundations (Omidyar Network and KL Felicitas), private wealth managers (Capricorn Investment Group), boutique investment funds (Root Capital), community development finance institutions (Carver Federal Savings Bank), mutual funds (Calvert), nonprofits (Acumen), and outside service providers (Arabella Advisors and Social Enterprise Associates), and others listed as GIIN members.
The Impact Investing Family Tree
Impact investing has several close cousins throughout the financial services universe. Impact investments vary by type and objectives, and are made across asset classes, including fixed income, venture capital and private equity. Some similar phenomena and useful terminology include:
Microfinance / Microlending – the provision of banking services including micro-loans to previously unbanked populations. Many consider microfinance to be a subset of impact investing and one of its first success stories.
Socially Responsible Investing (SRI) – investing with a mind to minimizing negative externalities; for example considering a company’s environmental footprint before adding it to a portfolio or avoiding companies that sell addictive products like tobacco.
Sustainable and responsible investing – related to SRI but instead of socially responsible, it is now referred to as sustainable responsible investing; the difference being that investors don’t have to sacrifice returns for their social values. Sustainable investing is estimated to grow to US$41 trillion related to wealth transfer from baby-boomers to the millennial generation.
Values Based Investing (VBI) – investing in a manner consistent with your personal value system, for example avoiding companies engaged in activities which you find offensive. (Quite similar to SRI.)
Venture Philanthropy – an approach to charity and non-profit development that utilizes principles typically associated with venture capital, i.e. large investments in early stage operations, active engagement between management and the VC team, tailored financing, and long strategic horizons.
Environment, Social, and Governance (ESG) – a series of criteria that investors consider beyond a given company’s potential financial return. Environmental criteria examine a company’s environmental stewardship, social criteria examine its relationship to its employees, customers, and community, and governance criteria examine its corporate governance and executive pay scale. Some mutual funds and some ETFs (Exchange Traded Funds) offer investors access to portfolio’s screened based on ESG information.
A Sampling of Social Enterprises
In addition to capital allocators and managers, a robust impact investing universe requires social enterprises developing products and services creating a positive social impact. A social enterprise applies commercial strategies to its operations in order to maximize improvements to human and environmental ecosystem; instead of a focus on maximizing profits for external shareholders. Several organizations track, recognize and award social entrepreneurs globally, including Ashoka and Echoing Green. Examples of active social businesses include:
EcoTrust Forests, LLC – an investment management and advisory services company that practices ecological forestry and focuses on improving forest health while producing high quality timber, biomass, and carbon.
Blue Marble BioMaterials – an American biotech company utilizing a proprietary microbial process to replace a wide variety of petroleum based chemicals with fully sustainable zero carbon replacements.
Clean Energy – a renewable energy company focused on developing the first wind farm in Mongolia, the Salkhit Wind Farm Project, which aims to improve the living conditions of the population through the production of electricity by a local, clean and renewable energy resource.
d.light – is a for profit company that designs, manufactures and distributes solar light and power products throughout the developing world; serving over 60 countries and aiming to provide power to at least 100 million people by 2020.
Vindhya e-Infomedia Private Limited (Vindhya) – a business process outsourcing firm based in India that that primarily employs differently-abled individuals and focuses on assisting microfinance organizations maximize the efficiency of their operations.
Upcoming Industry Events [
Financial Advisor / Private Wealth Impact Investing Conference – July 30, 2014 – Denver, CO
SOCAP – September 2, 2014 – Sand Francisco, CA
High Water Women Impact Symposium – October 21, 2014 – New York City
Talking Data: Measurement with a Message – November 4, 2014 – Toronto, Canada