Principles and Practice of Impact Investing

A Catalytic Revolution

Veronica Vecchi, Luciano Balbo, Manuela Brusoni, Stefano Caselli, Veronica Vecchi, Luciano Balbo, Manuela Brusoni, Stefano Caselli

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351284745
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

Impact investing is gaining global attention from society, governments and businesses. Increasingly, it is seen as a new paradigm to deal with the economic crisis and curtailed public budgets, an answer to the diversified needs of society. It now ranks high on the policy agenda of governments and international organizations, and private investors are searching for new investment opportunities to channel the liquidity available.

This book is the first to look at impact investing as a "refocus" of venture capital to sustain the development of societal impact enterprises. Principles and Practice of Impact Investing collects chapters from international experts on the subject, discussing the foundations of the movement, analysing leading international cases and debating future trends in the field. It also includes interviews with some of the most influential stakeholders of impact investing across the world.

The book is an inspirational and practical guide for actors and stakeholders to enable better understanding of impact investing. Taking an international perspective, the chapters primarily deal with mature economies, setting it apart from the existing literature focused on emerging countries. The book will be of interests to practitioners and executives, as well as researchers and MBA students.

1
Impact investments

The emergence of a new beacon in investing?

Harry Hummels¹
Professor Dr of Ethics, Organizations and Society at Maastricht University

A new term is born

The coming together of like-minded spirits

Picture a grand villa at Lake Co mo in the summer of 2007. Weather conditions do not matter in this tiny part of the world. Whether the sun is out, skies are overcast with clouds, rain is pouring down or virulent storms are knocking at the villa's door, the scenery remains ravishing. The villa is the Villa Serbelloni in the picturesque village of Bellagio on the banks of Lake Como. It once belonged to the Princess Delia Torre e Tasso. Currently, the villa is known as the Rockefeller Foundation's Bellagio Center, a place for international conferences and scholarly and artistic residencies. At one of its events in 2007 the term "impact investing" was coined.²

Even though the term was new, the practice it referred to certainly was not. Investors, intending to create positive social or environmental outcomes while generating a financial return, had been around for decades. They simply operated in the margins of the financial system and remained more or less unnoticed. Pioneers such as Accion, Triodos Bank, Acumen, Calvert Foundation, Social Finance, Oikocredit, Microvest, DOEN Foundation and several development finance institutions had been experimenting for more than a decade, if not decades, with new ways to promote social or environmental benefits for the communities they invested in. In 2007 they had built up experience in areas such as renewable energy, microfinance and affordable housing, targeting both financial and extra-financial returns. According to the Monitor Institute the pressing question was, however, whether impact investing would remain "a small, disorganized, underleveraged niche for years or even decades to come" (Freireich & Fulton, 2009, p. 5). Alternatively, the question was whether leaders would come together "to fulfil the industry's clear promise, making the new domain a major complementary force for providing the capital, talent and creativity needed to address pressing social and environmental challenges" (ibid., p. 5).

A major step forward

Several years down the road, the leaders did come together to try to establish an environment in which this force for positive social and environmental change could come to fruition.³ An important element in this development was the launch of the Global Impact Investing Network (GIIN) in 2009 and the activities of the network ever since. Whether the industry has made much progress, however, is a matter of perspective. If one looks at the supply side it is without doubt that every year more capital has been allocated towards impact investments (see J.P. Morgan & GIIN, 2010, 2011, 2013, 2014, 2015; GIIN, 2016), more funds are offered to interested investors,⁴ more networks become actively involved in impact investing,⁵ more articles and reports are being published, more courses are taught on the subject and so forth. Nevertheless, if the United Nations' (UN) Sustainable Development Goals (SDGs) are the benchmark, the only justifiable conclusion is that impact investing still walks around in nappies and requires a lot of nurturing. The SDGs contain targets to, inter alia, end poverty and hunger, improve health and education, achieve gender equality, increase access to clean water and sanitation, and combat climate change. They are likely to dominate the public discussion on international development in forthcoming years. According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2014 additional funding is needed US$1.6-2.8 trillion annually to achieve SDG objectives.⁶ This estimation leaves aside the need for impact investment capital in OECD countries—where a significant part of the current investments Eire made. According to the UN, governments, international organizations, non-governmental organizations (NGOs) and multinational corporations, the private sector can make an important contribution to fund the need for capital. Theoretically speaking, pension funds, insurance companies and asset managers, with total Assets under Management (AuM) of roughly speaking US$100 trillion, have deep enough pockets to invest in the required development. The Social Impact Investment Task force of the G8 (2014, p. 1) remarks in this respect:

Given that $45 trillion are in mainstream investment funds that have publicly committed to incorporate environmental, social and governance factors into their investment decisions,⁷ it would only need a small fraction of this money to start moving into impact investment for it to expand rapidly along the growth path to the mainstream previously taken by venture capital (VC) and private equity (PE).⁸

This chapter

This contribution describes the development of impact investing. It is a growing and maturing field of investments for various investors with numerous instruments in different asset classes. Section 2 describes impact investing as a crystallization point of different initiatives—ranging from socially responsible investments to mission-related investing and to development finance. Impact investing brings together different approaches in a "big tent" and invites asset owners, asset managers and service providers to engage in an open discussion. Section 3 demonstrates that impact investing is a colourful field of contributions from a multitude of investors with different objectives, needs, resources and expectations. With the rapid growth of the market it is not so much the amount of invested capital that is relevant to describe the development of the field; more important are the forces that are driving the growth, while occasionally causing it to slow down again. Section 4, therefore, looks out to the future to shed some light on these driving forces and to the barriers that impact investors face. The underlying thesis of this chapter is that impact investing has the potential to move from individual and more isolated impact investments to more concerted efforts to develop a global market with a large variety of private and public players and a wide range of investment opportunities.

Impact investing as a crystallization point

No deus ex machina

The Monitor Institute was one of the first to recognize the opportunity of investing to promote social and environmental good. According to the institute in its Investing for Social and Environmental Impact (Freireich & Fulton, 2009), the idea of investing for the common good "is moving from a periphery of activist investors to the core of mainstream financial institutions". Although somewhat overstated at the time,⁹ the report described a discernible trend of investing for the common good beyond philanthropists and wealthy individuals or families (Rodin & Brandenburg, 2014, p. 6). The first decennium of this century showed a broader interest in social investing not only from a range of foundations and high-net-worth individuals (HNWI), but also from family offices and private banks. Gradually others such as international and development finance institutions, development organizations and asset managers have picked up the trend too. Institutional investors such as pension funds and insurance companies are still seen as laggards in this field—with a few "notable exceptions" (World Economic Forum, 2013a, p. 13).¹⁰ Let's start this overview with the work that foundations have done in this area.

The US tax code allows a 501c3 foundation to make investments if these are made in support of the foundation's charitable purpose (IRS, 2015). Usually, these investments are referred to as programme-related investments (PRIs). The Jesse Smith Noyes Foundation, however, was quite critical about the tiny fraction of its capital that was donated or invested in line with its mission. The foundation, therefore, had already asked itself in the 1990th what to do with the management of the endowment? As a result, it decided to "reduce the dissonance" between the management of the endowment and the philanthropic mission of the organization (Hummels, 2009). Or, put differently, the foundation decided to bridge the "investment gap" (Emerson, 2003, p. 40) between social and financial capital—and it surely was not the only one.¹¹ The initiative resonated well with US and other foundations across the globe. Mission-related investing (MRI)¹² was soon to become a significant investment activity among a wide range of foundations. Other initiatives followed with more or less the same objectives—be it with different names such as "mission connected investing",¹³ "mission investing",¹⁴ "proactive social investments" (PSIs),¹⁵ "program-related investing" and "venture philanthropy".¹⁶

A second trend that was instrumental in the birth of impact investing was the rise and development of socially responsible investing. Impact investors, however, are ambitious to go beyond traditional "socially responsible investing". Their ambition is to actively place capital in businesses, projects, commodities, cooperatives or financial institutions with an objective to promote environmental or social objectives. Investors are often found among family offices, philanthropic foundations or church communities, but are not restricted to these groups. Development finance institutions, asset managers and a few institutional investors have also become part of the spectrum. Apparently, the investors were sufficiently convinced of the business case for integrating social and environmental objectives in creating long-term financial returns and minimizing risk (Margolis & Walsh, 2001; Gompers et al., 2003; Orlitzky et al., 2003; Statman, 2000, 2006; Derwall et al., 2005; Garz & Volk, 2007; Hill et al., 2007; UNEP FI, 2006, 2010, 2011; Bauer & Hummels, 2010). A case in point that particularly attracted the attention of institutional investors was the 2007 initial public offering (IPO) of Mexican microfinance institution Banco Compartamos. The IPO suggested—at least in the short term—that providing access to finance to poor people could lead to highly competitive market-rate financial returns. As a result the flow of private investments to the microfinance market increased significa...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Foreword
• Table of abbreviations
• 1 Impact investments: The emergence of a new beacon in investing?
• 2 The early days of impact investing: Market size, investment type and returns
• 3 Early attempts at benchmarking impact investments
• 4 Impact investing as a societal refocus of venture capital: The perspective of mature economies
• 5 Measuring impact: A debate about the concepts of profit and value
• 6 The future of impact investing
• 7 Social enterprises
• 8 From traditional philanthropy to venture philanthropy
• 9 Public-private collaborations for social impact creation
• 10 The science of shared value: Integrating business and social analytics
• 11 Innovating for impact investing: Financial institutions and beyond
• 12 The development of an impact-driven portfolio
• 13 Social impact from giving to investing
• 14 Creating the ecosystem for impact investing
• 15 Leveraging the ecosystem for growth: Case studies from India
• 16 Pioneer to mainstream: Lessons from the Indian impact investing ecosystem
• 17 Impact investing in Central America: An analysis of the growth, diversity and potential of a young investment strategy in an emerging market
• 18 Impact investing in Africa
• About the contributors