Impact investing

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside (or in lieu of) a financial return."[1]

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 holistically, across all asset classes, with an initial focus on private equity, venture capital and green infrastructure[2]

"Impact investments can be made in emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances." Impact investing tends to have roots in either social issues or environmental issues, and has been contrasted with microfinance.[3] Impact investors actively seek to place capital in businesses, nonprofits, and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income.

Background

Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences of business activities.[needs reference] 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.[4] In the 1990s, Jed Emerson advocated the blended value approach; that is, for foundations' endowments to be invested in alignment with the mission of the foundation, rather than to maximize financial return, which had been the prior accepted strategy.[5]

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.[6] 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.[7]

Finally, around 2007, the term "impact investment" emerged — an approach that deliberately builds intangible assets alongside tangible, financial ones.[8] A commitment to measuring social and environmental performance, with the same rigor as that applied to financial performance, is considered a critical, even indispensable, component of impact investing.[9]

The Industry

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 US$500 billion in assets within the subsequent decade.[10] Such capital may be in a range of forms, including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology.[10] 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.[11]

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.[12]

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'.[13]

Institutional Impact Investing

Institutional investors

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,[14] 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.[15]

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.[16] 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.[17]

Increased supranational and pension cooperation

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?” [2]

Mission investing by Foundations

Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals.[18] They include any type of investment that is intended and designed to generate both a measurable social or environmental benefit and a financial return:

Impact Investing by Individuals

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

Exchange-traded funds like the SPDR Gender Diversity ETF (NYSE Arca: SHE) 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.[20]

Syndicate or Pooled Investing

Groups of angel investors focused on impact, where individuals invest as a syndicate also exist. Examples include Investors' Circle in the US,[21] Clearly Social Angels in the UK [22] and Toniic in Europe.[23]

Digital Microfinance Platforms

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".[24]

Impact Investing in Asia 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.

See also

References

  1. ↑ "Introducing the Impact Investing Benchmark" (PDF). The Global Impact Investing Network & Cambridge Associates. Archived from the original (PDF) on 2016-09-02. Retrieved 2017-03-14.
  2. 1 2 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.
  3. ↑ "Lessons Learned from Microfinance for the Impact Investing Sector". Impact Investing Policy Collaborative (IIPC). Impact Investing Policy Collaborative (IIPC). 2013. Retrieved 16 December 2013.
  4. ↑ Hayat, Usman (4 November 2012). "Impact investing: making money the charitable way". Financial Times. Retrieved 14 August 2014.
  5. ↑ Billy Parish (August 2012). "Mosaic Conversations: Jed Emerson and the Emerging Impact Investment Ecosystem". Mosaic. Mosaic Inc. Retrieved 15 December 2013.
  6. ↑ Bugg-Levine, Anthony (2011). Impact Investing: Transforming How We Make Money While Making a Difference (1 ed.). John Wiley & Sons. ISBN 0470907215.
  7. ↑ Transcript from Intangible assets by Baruch Lev
  8. ↑ "The State and Future of Impact Investing". Forbes. 2012-02-23. Retrieved 14 August 2014.
  9. ↑ Is 'Impact Investing' Just Bad Economics?
  10. 1 2 Jessica Freireich and Katherine Fulton (January 2009). "Investing for Environmental and Social Impact" (PDF). Monitor Institute. Monitor Institute. Retrieved 15 December 2013.
  11. ↑ "Impact investing for sustainable development". Partners Global. Partners Global. Retrieved 2015-04-16.
  12. ↑ "Impact investing how it works". Investopedia. Retrieved 14 July 2015.
  13. ↑ Sherwood, Bob (4 August 2011). "Social enterprise start-ups blossom". Financial Times. Retrieved 8 October 2014.
  14. ↑ Financial Advisor Magazine (2 June 2010). "Wealthy Attracted To Impact Investing". NASDAQ. NASDAQ. Retrieved 15 December 2013.
  15. ↑ Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds, §6:43 (Thomson West, 2013)
  16. ↑ 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.
  17. ↑ "Unpacking the Impact in Impact Investing". SSIR. Retrieved 14 July 2015.
  18. ↑ Berliner, Peter. "About Mission Investing". Mission Investors Exchange. Retrieved 19 November 2014.
  19. ↑ Berliner, Peter; Spruill, Vikki (September 2013). "The Many Forms of Impact Investing". Community Foundation Field Guide to Impact Investing.
  20. ↑ 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.
  21. ↑ Field, Anne (1 April 2013). "Investors' Circle Continues Its Upward Spiral". Forbes. Retrieved 8 October 2014.
  22. ↑ Cohen, Norma (2013-03-22). "Making good and doing good". The Financial Times. Retrieved 8 October 2014.
  23. ↑ Say, My (5 February 2013). "5 Key Trends In Impact Investing". Forbes. Retrieved 8 October 2014.
  24. ↑ "The Future of Microplace". Microplace. Retrieved 1 October 2015.
Firzli, Nicolas J. (2017). Revue Analyse Financière (PDF). 64 (3): 15–18 http://amnt.org/wp-content/uploads/2017/07/G20-Nations-Shifting-the-Trillions__RAF__Q3-2017.pdf.  Missing or empty |title= (help)
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