Impact investing: on its way to mainstream?

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Impact investing is a hot topic. It has recently emerged as an investment approach that aims to solve social or environmental challenges while generating a financial return. Targeted areas are in both emerging and developed markets and include affordable housing, health care, nature conservation, education, renewable energy, and financial services for the poor. It has attracted the interest of a growing number of foundations, development finance institutions, institutional investors, individual investors, and fund managers. Does impact investing have the potential to enter the mainstream?

What our panel thinks

Luther Ragin, Jr.

Chief Executive Officer, Global Impact Investing Network

Because impact investing covers a broad scope of activity, it has significant potential to become a larger part of the mainstream investment market. Impact investments are investments made into companies, organisations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on the circumstances.

When providing illustrative examples, leaders in the industry are often eager to highlight investments at the frontier of social and environmental innovation. However, it’s important to remember that the impact investment market offers a wide range of opportunities, including some very basic financial vehicles. For example, investors with cash holdings in savings accounts can move those assets to a community development or sustainable development bank that makes loans to businesses that focus on improving the lives of disadvantaged people in various parts of the world.

The common thread to all impact investments – and the key to the credibility of the industry as a whole – is a commitment to transparency and accountability around social and environmental performance. The impact investment market is wide open to mainstream investors with the conviction to identify social and environmental goals and track their progress towards achieving these goals through their portfolio holdings.

Tammy Newmark

Fund Manager and President EcoEnterprises Fund

What a relief to now have the banner of impact investing to define our work. For almost twenty years, I have been championing venture financing for community-based businesses integral to the livelihood of local peoples  and sustainability of the natural resource base. Such companies offer a wide range of innovative products: from organic shrimp and dried fruit, FSC-certified furniture and biodynamic flowers to acai juice smoothies. To finally be able to explain my work by having a network of other players also touting the niche takes us all to a profoundly different level. This umbrella has led to an acceleration of thinking and doing in the field, inviting more sophisticated financiers, investors, and investment managers into the fold. All of this contributes to the mainstreaming of our objectives, which, given the significant environmental and social challenges at hand, is none too soon.

As I explain in my book “Portfolio for the Planet: Lessons from 10 Years of Impact Investing”(Earthscan/Routledge Press) we started a decade ago as a small hybrid investment fund with a significant grant-based technical assistance component. This instrument provided proof-of-concept, mirroring the limited appetite for such approaches in the field. In December 2011, we launched EcoEnterprises Partners II, LP, with a cap-goal of $30 million, six times the size of the first fund and designed as a more traditional venture capital instrument, reflecting the evolution and growth of investor demand in our space.

I am often asked when impact investing will truly be mainstreamed. With the increased standardisation of impact metrics, a deeper range of product offerings, and continued education on the importance of values-based investing, I think in ten years’ time when we launch “EcoE III”, our appeal will go beyond our historical investor base and scale our efforts further.

Marilou van Golstein Brouwers

Managing Director Triodos Investment Management

There is a growing awareness that how we use and invest our money, matters. That we can make money work for a positive and sustainable change in society. A change that is very much needed in light of the many crises our interconnected world is currently facing. Not only a debt crisis but also a climate crisis and a food crisis. We are facing the end of economic growth as we have known it for many decades. To build a fairer, more sustainable future, it is clear we need to transform our economy  that is reaching social and ecological limits. We need a transition to an economy where planet and people come first. Investors and financial institutions play a crucial role to make this transition happen. Investing in this new economy generates social and environmental returns as well as long-term stable financial returns. In our thirty-year experience as a sustainable bank and impact investment manager there is no trade-off. On the contrary; investing in sustainability is bringing a return today, and is preventing enormous societal costs for the future. I would argue this is the new fiduciary responsibility of investors. Impact investing is not about ticking boxes but it is a new investment paradigm. Investing based on values, with an intentional focus on positive social and environmental impact results in long-term stable returns and lower risk. Impact investing: on its way to mainstream? Yes, because there is no other way.

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This article has been posted in Responsible finance.

4 comments

  1. Huib-Jan de Ruijter

    I couldn’t agree more with the comments posted by the panel.

    For development banks like FMO it is fantastic to see the increased attention for impact investing. Whilst the label is relatively new FMO was established to do exactly that, i.e with the goal of empowering entrepreneurs in emerging economies. So you could say we are an impact investor avant la lettre.

    We witness increasing attention from different asset owners for impact investing – ranging from private individuals who want to invest their money in line with their values to pension funds who consider it important that their pensioners can enjoy their pension in a world which is worth living in.

    So yes, impact investing has the potential to become mainstream. Key question is how can we accelerate this process?

  2. Jorim Schraven

    As the comments above suggest, the essence of true impact investing is to change the primary objective from maximising return to maximising something else.

    In practice, I see an increasing awareness in the investment and banking community that there ought to be constraints to maximising returns. So investors may increasingly maximise returns subject to keeping with international labour standards or for instance the Equator principles.

    This is still quite different to maximising something else, subject to a certain return requirement. That implies a more radical shift in approach and thinking. In my view, before impact investing can truly become mainstream, we must first get a whole lot more clear and specific on what the ‘something else’ is or could be. As Luther Ragin, Jr. puts it, impact must be measurable.

    Once the impact investor community has come up with a practical, measurable and inspiring ‘impact’ to replace return as the primary objective of investing, we may see impact investing become mainstream in the true sense of the word.

  3. Peter J Bury

    My life experience has taught me to trust my first reaction. “impact investing” , I can’t believe it. This is just another example of the never ending urge of humanity to come up with new jargon to attract attention and tap alternative sources of funding when current ones dry up. Enough a justification for “impact investing”? Not sure. A very first question would be what does “impact investing” mean, and is that obvious?

    From Zola Predosa, Peter

  4. Els Boerhof

    In my opinion it is no longer about ‘having the potential’, it is already happening. Retail and high net worth individuals, institutional investors, they already invest in the sector. It yet needs to reach more scale but given the serious interest there is for the sector, this is only a matter of time. Also, more and more data about the positive correlation between good ESG performance and financial returns become available. This will further help the sector. It would be nice if Upsides could publish some of these data.

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