NextBillion Editor’s note: This post is in response to a recent NextBillion interview with Felix Oldenburg, Ashoka’s Europe and Germany director, who criticized the premise that impact investing will significantly grow social enterprises and affect social change.
Impact investing. A non-scientific survey (my own) of related news articles, reports, blog posts, dedicated web sites, Twitter mentions and other communications hits reveals that impact investing is a hot term. And why not? I’m frankly unsurprised that a range of people would be interested in an investment type that aims to solve social or environmental challenges while generating a financial profit. If it’s possible, then why not?
The devil, of course, is in the details. Not every investment is an impact investment; not every enterprise can (or should) be funded by impact investors. And new impact investors may be unclear on the best ways to identify and manage their new investments. Naturally, some social enterprise leaders are suspicious of impact investing; others suggest keeping it simple and focusing on the impact aspects – the rest will come.
The questions are complex, and the debate is just getting started, so I was pleased to be able to interview Amit Bouri, Director of Strategy and Development at the Global Impact Investing Network (GIIN). In our interview, Amit touches on the definition of impact investing, discusses the role of impact investing in the social enterprise sector, responds to recent criticism of the field, and charts the path forward.
NextBillion.net: How do you define impact investing?
Amit Bouri: Impact investments aim to address social or environmental challenges while generating financial profit. Impact investing is a broad sector in terms of actors and impact scope. Impact investors include large foundations, traditional financial institutions, high net worth individuals, and government agencies, among others, whose financial return expectations range from a return of principal capital to market-beating profits. Additionally, impact investments target many different areas of social and environmental impact around the world, including affordable housing, health care, education, and alternative energy. Across these diverse geographies and sectors, all impact investing requires management of social and environmental impact in addition to financial risk and return.
NextBillion.net: How does it fit into the social enterprise sector?
Bouri: Impact investing plays a critical role for a segment of the social enterprise sector. Impact investors seek social or environmental impact alongside financial returns, and they pursue this strategy by providing sustainable financing to mission-driven entrepreneurs looking to grow and scale market-based solutions that aim to address social problems. What we at the GIIN find compelling about the emerging impact investing industry is its potential to channel vast pools of capital that have not historically been available to mission-driven enterprises.
As this market grows, the GIIN is working to ensure that impact investing remains beneficial, additive, and complementary to social entrepreneurs’ existing funding options. To this end, we were encouraged to see results from a recent Hope Consulting study, which found that impact investments are not likely to “cannibalize” philanthropic dollars, but instead are likely to come from resources that otherwise would have been invested in purely profit-seeking ventures. Though there is always a need for more grant funding, the additional stream of funding capital provided by impact investors is positive for the social enterprise sector.
NextBillion.net: What types of social enterprises benefit from impact investing? What types of social enterprises DON’T benefit from impact investing?
Bouri: All social enterprises can benefit from a strong impact investing industry. Impact investing is not a silver bullet, but it does increase the likelihood that entrepreneurs will be properly matched with funds most appropriate for their impact model. A market with such a diversity of mission-driven entrepreneurs and social enterprise models needs many different types of capital, including impact investment debt and equity, along with philanthropic funding and government aid.
Of course, impact investments are not the best option for all social enterprises, and we trust that social entrepreneurs are in the best position to define their own capital needs. Likewise, supporters of social enterprises must be thoughtful about which types of capital are most effective at enabling a given enterprise to realize its impact objectives. Some strategies for addressing social and environmental issues will always require grant funding. Philanthropic dollars are the most scarce and precious funding stream, so increasing the amount of philanthropic capital available is essential to the growth of the social enterprise sector. A strong impact investing market also expands the set of capitalization choices for social entrepreneurs while helping to free up philanthropic funds to be matched with those ventures that most critically need grant support.
NextBillion.net: There are obvious differences in the financial relationship between impact investors and the social enterprises they fund, and the relationship between philanthropic funders and their grantees. Aside from these financial considerations, are there other differences in the ways that impact investors interact with social enterprises?
Bouri: Impact investors are similar to other capital providers – each donor, philanthropist, and impact investor has various requirements, conditions, and benchmarks for the enterprises they fund. This is another reason why it’s important that the right kind of funding is matched with aligned investment opportunities. Recognizing the diversity of impact investors, the GIIN is working to foster an environment where these funders – including government agencies, wealth managers, large-scale foundations, and traditional financial institutions – can learn from each other. For example, impact investors at traditional finance institutions should collaborate with development-focused organizations to better support the social and environmental performance of their investees. In a new industry that merges social, environmental, and financial interests, this type of collaboration will ultimately benefit both investors and the mission-driven businesses they support.
NextBillion.net: How do you respond to critics who argue that impact investing hype outpaces the social impact it has created?
Bouri: We are encouraged by the increased enthusiasm for impact investing. Although this is a young industry, we are excited about the creation of new angel investor groups, impact investment funds, and bank units dedicated to impact investing. It is now the collective responsibility of the impact investing industry – investors, social entrepreneurs – to see that this new impact investment capital is effectively mobilized.
A decade from now, the success of the impact investing industry will be measured not by enthusiasm or intention, but by the social impact it has created. The GIIN is working to turn interest into action by addressing barriers to investment. In addition to our work supporting and disseminating key industry research, the GIIN recently launched ImpactBase, an online database of impact investment funds, to help connect investors and fund managers with aligned interests. Since its launch in February, more than 94 funds have created profiles and 255 accredited investors have subscribed. Of course, this is just one tool to help facilitate the flow of capital from impact investors to social businesses, and more are needed to fully translate today’s growing interest into social impact.
NextBillion.net: What other elements of the financial ecosystem are required to facilitate effective impact investing?
Bouri: Another critical barrier to impact investment is the lack of transparent, credible, and comparable performance data. The GIIN’s Impact Reporting and Investment Standards (IRIS) initiative aims to help address this challenge by providing standardized social and environmental performance reporting metrics for organizations receiving impact investment capital. Over time, the IRIS initiative is collecting and analyzing anonymous IRIS data in an effort to establish an expansive and compelling evidence base of the impact investing industry’s social, environmental, and financial performance. This data helps ensure fair and transparent communication between investors and enterprises about social and environmental performance targets, while also driving market intelligence about performance expectations for these enterprises. We’re excited to release the first IRIS data report this summer.
IRIS also provides a foundation for additional market infrastructure, such as the Global Impact Investing Ratings System (GIIRS) operated by the U.S.-based nonprofit B Lab. GIIRS compiles IRIS-defined data with additional survey questions to provide social enterprises and impact investment funds with an impact rating akin to a Morning Star or Moody’s rating. Both IRIS and GIIRS reduce the reporting burden for social enterprises with multiple investors and provide credible data about the social and environmental performance of impact investments. As this industry grows, we expect that additional tools and services, such as auditors, will fill gaps in the market and help to make impact investing more efficient and effective.
NextBillion.net: What are the financial expectations of impact investors you work with? Social impact expectations?
Bouri: Financial and social impact expectations among impact investors vary greatly. For example, in the GIIN Investors’ Council, Root Capital, which invests in sustainable agriculture in emerging countries, will target and track different social and environmental outcomes than the Annie E. Casey Foundation, which invests in projects that enable family economic success in the United States. Similarly, the variability of financial expectations was recently highlighted in a report by J.P. Morgan and The Rockefeller Foundation which included an analysis of 1,100 impact investments, from which investors expected financial returns ranging from concessionary to market-beating.
Because of this appetite among impact investors for diverse financial returns, investors are forming partnerships that benefit both investors and social enterprises with similar social and environmental goals. In these partnerships, impact investors willing to sacrifice financial returns for greater impact, such as foundations making program-related investments, take subordinated positions within impact investment deals in order to attract larger sums of co-investment capital from more financially-oriented investors. These deals often require unconventional partnerships – for example, between a foundation and an investment bank – but they can achieve tremendous positive impact by blending business knowledge and development expertise to support the enterprise with more capital and better aligned social and environmental expectations.
NextBillion.net: What are your sector’s challenges over the next few years?
Bouri: When the GIIN launched in 2009, a large part of our work was focused on getting the word out about this emerging industry and gaining credibility for investments that aim to have positive impact while returning a profit to investors. Though we will continue to reach new audiences of potential impact investors, we have seen increased awareness and interest in impact investing over the last two years.
As I mentioned earlier, the industry’s current challenge is to translate new interest into successful impact investments. This will require a collective commitment across the industry to develop an ecosystem that includes impact measurement systems, platforms for learning and collaboration, and support mechanisms, so that the most effective enterprises receive the capital they need to grow.
Undoubtedly, there will be more challenges as the impact investing industry grows. Nonetheless, we are overall encouraged and enthusiastic about the recent growing interest in impact investment because we see the potential for this industry to open a new and vast pool of capital to the innovative enterprises working to solve the world’s most pressing social and environmental problems.
Rob Katz is a Portfolio Manager in Acumen Fund’s India office.