/ 10 April 2014

The buzz behind impact investing

The Buzz Behind Impact Investing

In 2013, for the first time, impact investing was on the agendas at both the World Economic Forum annual meeting in Davos and the G8 meeting in Enniskellen, Northern Ireland. Simply put, impact investing is the space where the world of investing for profit and the world of investing for desired social and environmental outcomes meet and merge.

This investment approach operates in the largely unchartered area between philanthropy and profit maximisation. It is seen to have enormous potential to address pressing global issues such as sustainable agriculture, affordable and accessible healthcare, clean technology and financial services to the poor. While there isn’t yet a consensus on the precise definition of impact investing, there is broad agreement that three elements are essential.

The first element is investor intentionality. Impact investors specifically set out to achieve social and environmental gains. While impact investments are not limited to any particular economic sector, they tend to be made into enterprises and funds that expand access to critical goods and services, and generate positive impact through their operations. Investor activities may be focused in developed or emerging markets, or both.

The second element is investments with return expectations. Impact investments are expected to generate a financial return. These returns can vary from preservation of capital (where an investor does not seek to make any financial gains, but aims only to recover their investment amount) to above-market rates of return. Investments can be made across a range of asset classes, including debt, equity, fixed income, venture capital and private equity, with return expectations linked to specific investor intent.

The third element is impact measurement. Impact investors commit to measuring and reporting the social and/or environmental performance and progress of their underlying investments to ensure transparency and accountability. Approaches to impact measurement will vary based on investors’ objectives and capacities. The choice of what to measure usually reflects investor goals and, consequently, investor intention.

Growing excitement

Excitement about the potential for impact investments is built on the acknowledgment that traditional philanthropy and government resources alone are inadequate to address the magnitude of the social and environmental challenges facing the world. Evidence is growing that many im­pact investments are uncorrelated with the broader market: microfinance lending and community development bond funds, for example, have performed well even during the downturn.

There is vast opportunity for growth in the developing world, where complementary social projects to improve infrastructure, education and health services in those markets are also making sense to mainstream investors. JP Morgan has estimated that up to $987-billion could be invested over the next 10 years to fund the capital needs of just five sub-sectors targeting the poor: urban housing, clean water for rural communities, maternal health, primary education and microfinance.

Growing the sector

Despite the wide interest and enthusiasm in the space, to date the largest providers of capital into impact investing have been family-officers, high net worth individuals and development finance institutions. These groups comprise a mere 2.5% of all global assets.

Accessing even a small part of the remaining 97.5% of global assets remains the challenge, with much of mainstream capital currently either sceptical about the opportunity for impact investing or adopting a “wait and see” attitude while the sector develops a longer track record of successful deals. How then can the stakeholders critical for ensuring that impact investing reaches its potential play their respective roles?

The World Economic Forum, in its recent report on impact investing, makes recommendations for each group, some of the key ones being:

• For impact investing funds: be clear about financial returns and standardise impact reporting.

• For impact enterprises: proactively measure and report on impact.

• For philanthropists and foundations: use grant-funding to help lower risks for early stage enterprises.

• For governments and donors: help de-risk the ecosystem through innovative financing mechanisms, such as social impact bonds.

• For intermediaries: aggregate data on impact investing and publish the findings.

There is an exciting opportunity to grow a healthy, vibrant impact investment sector. If successful, this has the potential to bring about positive social and environmental outcomes on a sustainable basis. However, bold action is required to translate these exciting first steps into a longer-term reality.

Bridget Fury is the director of Aspen Network of Development Entrepreneurs South Africa Chapter. This article originally appeared on www.saiin.co.za

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