The evolution of impact investing
In 2007, the term “impact investing” was coined by The Rockefeller Foundation, putting a name to investments made with the intention of generating both financial return and social and/or environmental impact.
Since then, a greater variety of investment products have been designed to attract a broader range of investors; options for impact investing have grown to include everything from microfinance funds to private equity and structured-debt. The innovation charity, Nesta, is even calling for the launch of specialised impact investing ISAs to meet demand from smaller investors who want access to this growing asset class. All around the world, there are positive stories of how impact investments are meeting needs in both developed and emerging economies in areas as diverse as childhood education, housing, clean technology, and financial services for the poor.
The recent rise of impact investing cannot be denied; more and more journalists are dedicating column inches to the opportunities and benefits it provides and even books dedicated to the subject can now be found in the finance section of most good bookshops. Several panel discussions have also taken place at The Milken Institute’s global conferences, helping impact investing evolve beyond a niche concept to something that might appeal to a more mainstream audience.
According to a survey by J.P. Morgan and the Global Impact Investing Network (GIIN) of 125 major institutional investors, $46bn in impact investments was under management in 2014, up nearly 20% from the previous year. Despite impressive growth, impact investing still only represents a tiny 0.02% of the $210tr in global financial markets. Nonetheless, it could one day become a trillion-dollar industry.
A lack of understanding
The current problem facing impact investment managers is this: mainstream investors continue to avoid impact investing despite the seemingly significant financial and social benefits, the greater airtime it now gets and the increase in allocation by institutional investors.
At a time when the business of sustainability seems to be the topic du jour, we must ask why this is.
Research by The Case Foundation found that a lot of work still needs to be done to make impact investing more ‘investor friendly’ - too many investors still associate it with high risks and below-market returns. The research suggests that there be a robust pipeline of investable deals; better data on business and fund performance; expanded opportunities for exits and the return of capital; actionable research on impacts and outcomes; more products and easier “on ramps” for people to get started.
Perhaps the most obvious explanation for the resistance to impact investment is confusion. Common questions include ‘what exactly is impact investing and how is it different from what I’m already doing?’ A lack of understanding is a fair reason for not investing in something. In order to change this mind-set, managers should look at how they are communicating with their potential investor base.
Getting the message right
To begin with, it seems that there is a general misunderstanding between impact and another type of investment, which seeks to consider both financial return and social good, namely socially responsible investing (SRI). Where socially responsible investing fund managers are generally passive and adopt a “do no harm” approach, impact investing funds typically not only seek to create positive impact, but measure and report their impact in a transparent way. It is important to highlight this difference, as many investors who have allocated investment to SRI may view their investment as equal to impact investment, in terms of benefitting society and/or the environment.
Information about impact investment – success stories, etc. – must be distributed to a wider audience. A clear and targeted communications strategy is crucial in order to ensure key messages are conveyed. A good PR campaign help a company explain what impact investing is and outline its benefits. Similarly, PR can help the company to differentiate itself from its peers by explaining its investment strategy and philosophy. In doing so, and by proving you can deliver positive market-rate returns in a transparent manner, you will help to alleviate some of the scepticism that surrounds impact investing.
The future of impact investing
Many high net worth individuals, institutional investors, financial and wealth advisors and even philanthropists are looking for new opportunities to deploy capital in exciting companies and growing markets. According to the 2015 BNP Paribas Individual Philanthropy Index, which surveyed 400 philanthropists with at least $5 million in investable assets in the United States, Europe, the Middle East and Asia, around 52% of respondents saw “impact/mission investing” as the most promising trend in philanthropy.
Millennials are also playing their part and are critical to the future of impact investing. As part of a demographic transition over the next several decades, it is estimated that trillions of dollars in financial and non-financial assets will pass from Baby Boomers to their heirs. Furthermore, Millennials, far more than previous generations, consider social responsibility to be a major factor in evaluating investments and consequently have a keen interest in impact investing.
It must also be considered, that as the more socially conscious Millennial generation of entrepreneurs build impact-driven businesses, the supply of impact investment opportunities will vastly expand, thus building a virtuous investment cycle at the same time.
Engaging with the ‘next generation’ of investors will be crucial growing impact investing into a fully developed and well regarded asset class. No one need sacrifice returns or absorb any more significant risk than a mainstream investment in trying to make the world a better place.
By ensuring that messaging is specific and targeted to each investor group, whilst also highlighting success stories and demonstrating that there are tangible impact investment opportunities with potential for financial return, managers can overcome scepticism and confusion and ensure impact investing reaches its full potential.