Opinion O
than US$300 billion, growing at more than 10% a year.
• Business is increasingly stepping up to help solve social and environmental challenges. This is creating opportunities for private investors.
• Banking customers around the world are demanding a paradigm shift in the way institutions do business. And this requires the banking industry to engage in more innovative financing models, which use impact investing as a tool.
• Impact investors are looking to social enterprises that have appropriate capital across the risk-return spectrum and suitable exit options.
• Impact investors have diverse financial return expectations, but most pursue competitive, market-rate returns.
• Banks need to educate themselves and investors, and to include impact investing in their advisory processes.
Sustainable and scalable social and environmental ventures have risen to the challenge in recent years, but it has become evident that innovative ways of financing these initiatives are needed to see them really succeed.
With many governments in the developed world turning to austerity and cutting expenditure on social projects, and with emerging market economies battling social issues and ever- stretched budgets, there is a feeling that business simply has to come to the party. Business, for many, has much to answer for after years of unbridled capitalism, often at the expense of human welfare; so the call for business to stand at the forefront of helping to prevent and solve problems is growing. This offers an opportunity for private investors to fill the void.
As a result of this shift in thinking, corporates – as well as foundations and aid agencies – are increasingly drawing on new financing models. This approach is largely being incentivised by customers demanding a more thoughtful approach from business. Consumers want their products to reflect their personal values and new, socially-focused generations increasingly aspire to influence society positively with their purchases, be it food, fashion, real estate or transportation. According to McKinsey & Co, consumers in the United States have built this market to more
In a 2017 statement, the Bank of America cited a recent US Trust study which found that 38% of wealthy individuals have or are interested in impact investments today. Said the bank: “Seventy-four percent of investors say they’d be more likely to work with an advisor who could offer investment strategies that result in both competitive returns and a positive impact on society.” This requires the investment industry to engage in more innovative financing models, which use impact investing as a tool.
What is impact investing?
Impact investing, according to the CEO Force for Good definition, refers to the corporate practice of investing capital and in-kind resources in a social enterprise with the expectation of financial, social and strategic returns. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare and education.
Not too dissimilar from other investments, impact investors are looking to social enterprises that have appropriate capital across the risk-return spectrum and suitable exit options. They are drawn in by offerings with a professional team boasting the relevant skills and track record. Yes, there is sometimes complexity in meeting both investor and investee needs in the realm of impact investing, but this requires innovative deal structures.
In addition to the deal-making expertise needed, the enterprise should be able to evidence strong research into the market and have rigorous data on need, product and performance, that shows a level of sophistication in terms of measurement.
Investors, impact and objectives
Impact investors have diverse financial return expectations. Some invest strategically, happy with below-market returns, but most pursue returns that are competitive and consistent with market benchmarks, as established by the non-profit Global Impact Investment Network (GIIN) in 2016.
International development agencies and business and world leaders are paying attention to this funding mechanism for impact, so much so that in 2017 the World Economic Forum cited it as a key objective. In line with this move, the GIIN has noted
Banks need to educate both themselves and investors and include impact investing in their advisory processes.
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an upward trajectory in funding of this nature, noting that respondents committed more than US$22 billion to impact investments in 2016 and planned to commit 17% more capital than that in 2017.
Still largely thought of as the playing field of philanthropy, the types of stakeholders are changing. The CEO Force for Good notes that fund managers are (at 60%) the most active players in terms of impact investing, with foundations the next-largest category, at 13%.
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