Impact investing

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Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return."[1] Impact investments provide capital to address social and/or environmental issues. They can be made in either emerging or developed markets, and depending on the goals of the investors, can "target a range of returns from below-market to above-market rates".[2] Impact investors actively seek to place capital in businesses, nonprofits, and funds in industries such as renewable energy,[3] basic services including housing, healthcare, and education, microfinance, and sustainable agriculture.[4] Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income.

Institutional investors, notably North American and European development finance institutions, pension funds and endowments have played a leading role in the development of impact investing.[5] Under Pope Francis, the Catholic Church has witnessed an increased interest in impact investing.[6]

Background[edit]

Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences (unintended consequences, externalities) of business activities.[citation needed] However, a history of individual investors using socially responsible investing to express their values exists, and such investing behavior is usually defined by the avoidance of investments in specific companies or activities with negative effects.[7] In his paper "The Nature of Returns: A Social Capital Markets Inquiry into Elements of Investment and The Blended Value Proposition", Jed Emerson first introduced the concept of blended value, relating it to the pursuit of maximized social, environmental, and financial returns on capital investments.[8] In 2011, Antony Bugg-Levine and Jed Emerson co-authored the first book on impact investing, Impact Investing: Transforming How We Make Money While Making a Difference.[9] Since then, Emerson has produced a large body of work detailing the diverse investment vehicles available to maximize the social, environmental, and financial value of investments, [10] as well as work related to the construction of an impact investment portfolio.[11]

Simultaneously, approaches such as pollution prevention, corporate social responsibility, and triple bottom line began as measurements of non-financial effects, both inside and outside of corporations.[12] In 2000, Baruch Lev, of the NYU Stern School of Business, collated thinking about intangible assets in a book of the same name, which furthered thinking about the non-financial effects of corporate production.[13]

Finally, around 2007, the term "impact investing" emerged.[14] A commitment to measuring social and environmental performance, with the same rigor as that applied to financial performance, is a critical component of impact investing.[15]

The industry[edit]

The number of funds engaged in impact investing grew quickly over a five-year period and a 2009 report from research firm the Monitor Group estimated that the impact investing industry could grow from around US$50 billion in assets to $500 billion in assets within the subsequent decade.[16] Such capital may be deployed using a range of investment instruments, including equity, debt, real assets, loan guarantees, and others.[16] The growth of impact investing is partly attributed to the criticism of traditional forms of philanthropy and international development, which have been characterized as unsustainable and driven by the goals—or whims—of the corresponding donors.[17]

Currently impact investing is still only a small market when compared to the global equity market, estimated at US$61 trillion (market capitalization of domestic listed companies) by the World Bank in 2015.[18] Impact investors managed USD 114 billion in impact investing assets, a figure that serves as a best-available 'floor' for the size of the impact investing market, according to GIIN's 2017 Annual Impact Investor Survey. The largest sectors by asset allocation were microfinance, energy, housing, and financial services.[19][18]

Many development finance institutions, such as the British Commonwealth Development Corporation or Norwegian Norfund, can also be considered impact investors, because they allocate a portion of their portfolio to investments that deliver financial as well as social or environmental benefits.[20]

Impact investing is distinguished from crowdfunding sites, such as Indiegogo or Kickstarter, because impact investments are typically debt or equity investments over US$1,000—with longer-than-traditional venture capital payment times—and an "exit strategy" (traditionally an initial public offering (IPO) or buyout in the for-profit startup sector) may be non-existent. Although some social enterprises are nonprofits, impact investing typically involves for-profit, social- or environmental-mission-driven businesses.

Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit, B Corporation, Low-profit Limited Liability Company, Community Interest Company, or other designations that may vary by country. In much of Europe, these are known as 'social enterprises'.[21]

Institutional Impact Investing[edit]

Institutional investors[edit]

Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. "Social venture capital", or "patient capital", impact investments are structured similarly to those in the rest of the venture capital community. Investors may take an active role mentoring or leading the growth of the company,[22] similar to the way a venture capital firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.[23]

Impact investment "accelerators" also exist for seed- and growth-stage social enterprises. Similar to seed-stage accelerators for traditional startups, impact investment accelerators provide smaller amounts of capital than Series A financings or larger impact investment deals.[24] Most "impact investment accelerators" are nonprofits, raising grants from donors to pay for business development services; however, commercially orientated accelerators providing investment readiness and capital-raising advisory services are emerging.

Large corporations are also emerging as powerful mechanisms for impact investing. Companies that seek to create shared value through developing new products/services, or positively impacting their operations, are beginning to employ impact investments through their value chain, particularly their supply chain.[25]

Impact investing can help organizations become self-sufficient by enabling them to carry out their projects and initiatives without having to rely heavily on donations and state subsidies. [26]

Increased supranational and pension cooperation[edit]

Governments and national and international public institutions including development finance institutions have sought to leverage their impact-oriented policies by encouraging pension funds and other large asset owners to co-invest with them in impact-informed assets and projects, notably in the Global South. World Pensions Council and other US and European experts have welcome this course of action, insisting nonetheless that:

”Governments and international institutions need to do more if they truly seek to ‘unlock’ private sector capital in a meaningful way. They have to ask themselves the following questions: what are the concrete legal, regulatory, financial and fiduciary concerns facing pension fund board members? How can we improve emerging industry standards for impact measurement and help pension trustees steer more long-term capital towards valuable economic endeavors at home and abroad, while, simultaneously, ensuring fair risk-adjusted returns for future pensioners?”[5]

Mission investing by foundations[edit]

Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals.[27] Jed Emerson has published viewpoints in favor of this strategy, asserting that foundations' endowments should be invested in alignment with the mission of the foundation, rather than solely to maximize financial return.[28] Mission investments include any type of investment that is intended and designed to generate both a measurable social or environmental benefit and a financial return:

  • Program-related investments (PRIs) or other concessionary (below-market rate) investments are primarily made to achieve programmatic rather than financial objectives. This category includes grant support, equity (stock), subordinated loans, senior loans, below-market cash deposits and loan guarantees. For private foundations, PRIs count towards the required 5 percent annual payout.
  • Market-rate investments (MRIs) expected to generate a market-rate financial return on investment comparable to an ordinary investment of a similar type and risk profile. They are designed to have a positive impact while contributing to the foundation’s long-term financial stability and growth. This category includes market-rate cash deposits, fixed income (bond), private equity and public equity (stocks).[29]

The F.B. Heron Foundation Mission-Related Investing Continuum

Impact investing by individuals[edit]

Impact investing historically took place through mechanisms aimed at institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to such ventures.

Exchange-traded funds[edit]

Exchange-traded funds like the SPDR Gender Diversity ETF (NYSE ArcaSHE) from State Street are publicly traded and hence available to anyone with a stock brokerage account. MSCI offers 11 environmental, social and governance index ETFs, including popular low-carbon and sustainability indexes.[30]

Syndicate or pooled investing[edit]

Groups of angel investors focused on impact, where individuals invest as a syndicate also exist. Examples include Investors' Circle in the US,[31] Clearly Social Angels in the United Kingdom[32] and Toniic in Europe.[33]

Digital microfinance platforms[edit]

Web-based investing platforms, which offer lower-cost investing services, also exists. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans, rather than equity investment, are prevalent in these platforms. MyC4, founded in 2006, allows retail investors to loan to small businesses in African countries via local intermediaries. Microplace was an early United States provider of such services which ceased taking on new loans in 2014, stating that its results "haven't scaled to the widespread social impact we aspire to achieve".[34]

Impact investing in Asia[edit]

Impact Investing in Asia is a burgeoning sector with many funds currently in play. However, many funds suffer from finding robust levels of investment opportunities for their pipeline given their ability to hedge internal requirements and risks and a potential inability to exit the various investments that they are invested in.[citation needed]

See also[edit]

References[edit]

  1. ^ "2017 Annual Impact Investor Survey" (PDF). The Global Impact Investing Network. Archived from the original (PDF) on 2016-09-02. Retrieved 2017-03-14.
  2. ^ "Lessons Learned from Microfinance for the Impact Investing Sector". Impact Investing Policy Collaborative (IIPC). Impact Investing Policy Collaborative (IIPC). 2013. Retrieved 16 December 2013.
  3. ^ "GridShare -- Renewable Energy Crowdfunding". GridShare -- Equity based renewable energy crowdfunding platform. Retrieved March 8, 2018.
  4. ^ Rodriguez, Giovanni. "Can Silicon Valley Leaders Help Solve The Global Food Challenge?". Forbes. Retrieved 2018-03-09.
  5. ^ a b Firzli, M. Nicolas J. (7 July 2017). "G20 Nations Shifting the Trillions: Impact Investing, Green Infrastructure and Inclusive Growth" (PDF). Revue Analyse Financière. Paris. Retrieved 7 July 2017.
  6. ^ The Catholic church dabbles with impact investing Some Worry, The Economist
  7. ^ Hayat, Usman (4 November 2012). "Impact investing: making money the charitable way". Financial Times. Retrieved 14 August 2014.
  8. ^ Emerson, Jed (2000). "The Nature of Returns: A Social Capital Markets Inquiry into Elements of Investment and The BVP" (PDF).
  9. ^ Emerson, Jed; Bugg-Levine, Antony (2011). Impact Investing: Transforming How We Make Money While Making a Difference. ISBN 978-0-470-90721-4.
  10. ^ Emerson, Jed (2004). "The Investors' Toolkit: Generating Multiple Returns Through A Unified Investment Strategy" (PDF).
  11. ^ Emerson, Jed; Smalling, Lindsay (2015). "Construction of an Impact Portfolio: Total Portfolio Management for Multiple Returns" (PDF). ImpactAssets.
  12. ^ Bugg-Levine, Anthony (2011). Impact Investing: Transforming How We Make Money While Making a Difference (1 ed.). John Wiley & Sons. ISBN 0470907215.
  13. ^ Transcript from Intangible assets by Baruch Lev
  14. ^ "The State and Future of Impact Investing". Forbes. 2012-02-23. Retrieved 14 August 2014.
  15. ^ Is 'Impact Investing' Just Bad Economics?, Forbes, April 22, 2014
  16. ^ a b Jessica Freireich and Katherine Fulton (January 2009). "Investing for Environmental and Social Impact" (PDF). Monitor Institute. Monitor Institute. Retrieved 15 December 2013.
  17. ^ "Impact investing for sustainable development". Partners Global. Partners Global. Archived from the original on 2015-06-15. Retrieved 2015-04-16.
  18. ^ a b [1]
  19. ^ Morata, Ed (21 April 2017). [why-impact-investing-may-flourish-in-the-age-of-donald-trump "why-impact-investing-may-flourish-in-the-age-of-donald-trump"] Check |archive-url= value (help). Forbes. Archived from the original on 21 April 2017. Retrieved 17 August 2017.
  20. ^ "Impact investing how it works". Investopedia. Retrieved 14 July 2015.
  21. ^ Sherwood, Bob (4 August 2011). "Social enterprise start-ups blossom". Financial Times. Retrieved 8 October 2014.
  22. ^ Financial Advisor Magazine (2 June 2010). "Wealthy Attracted To Impact Investing". NASDAQ. NASDAQ. Retrieved 15 December 2013.
  23. ^ Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds, §6:43 (Thomson West, 2013)
  24. ^ Baird, Ross (1 June 2013). "Bridging the "Pioneer Gap": The Role of Accelerators in Launching High-Impact Enterprises" (PDF). Aspen Institute. Retrieved 8 October 2014.
  25. ^ "Unpacking the Impact in Impact Investing". SSIR. Retrieved 14 July 2015.
  26. ^ "What is Impact Investing?". ADEC Innovations ESG Solutions. Retrieved 28 November 2017.
  27. ^ Berliner, Peter. "About Mission Investing". Mission Investors Exchange. Retrieved 19 November 2014.
  28. ^ Emerson, Jed (2003). "Where Money Meets Mission: Breaking Down the Firewall Between Foundation Investments and Programming" (PDF). Stanford Social Innovation Review.
  29. ^ Berliner, Peter; Spruill, Vikki (September 2013). "The Many Forms of Impact Investing". Community Foundation Field Guide to Impact Investing.
  30. ^ Sullivan, Paul (2016-03-04). "In Fledgling Exchange-Traded Fund, Striking a Blow for Women". The New York Times. ISSN 0362-4331. Retrieved 2016-12-17.
  31. ^ Field, Anne (1 April 2013). "Investors' Circle Continues Its Upward Spiral". Forbes. Retrieved 8 October 2014.
  32. ^ Cohen, Norma (2013-03-22). "Making good and doing good". The Financial Times. Retrieved 8 October 2014.
  33. ^ Say, My (5 February 2013). "5 Key Trends In Impact Investing". Forbes. Retrieved 8 October 2014.
  34. ^ "The Future of Microplace". Microplace. Archived from the original on 6 September 2015. Retrieved 1 October 2015.

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