It’s encouraging to see that a growing number of financial institutions are beginning to embrace impact investing. But investors, funds and advisors are nonetheless struggling with different elements of impact investing strategies—including the sourcing of investments and building fund portfolios, as well as obtaining adequate financial and impact related data.
That’s why Impact Economy, in collaboration with the Money Management Institute, produced the new special report Serving Client Demand for Impact Investing: A How-to Guide for Financial Advisors and Senior Management. The report explores how the major financial advisors and institutions that are moving toward impact investing could go further and actually align these investments, making impact both commercially viable and socially transformative.
Serving Client Demand for Impact Investing is meant as a follow up to Making Impact Investible, the seminal body of research authored by Maximilian Martin, the founder of Impact Economy. The UK Cabinet Office released a Primer of this report, Status of the Social Impact Investing Market, to participants of the first-ever G8 Social Impact Investment Forum in 2013. These reports provided a status of the impact investing market and recommendations for how policymakers could catalyze its future growth. They were complemented by the recent release of a progress update on the UK Government’s efforts to help foster the social investment market, and discussed at a subsequent meeting of the Social Impact Investment Taskforce.
Impact Economy’s new report takes the discussion further by unpacking the motivations, dimensions, issues and opportunities that investors and firms encounter when creating impact investment programs.
It’s clear that much work remains to build a robust market of impact investment activity. As Kieron Boyle, head of social finance for the UK Cabinet Office, commented at Impact Economy’s Symposium a few days before the release of UK’s progress update, critical areas that need further attention include “making it easier to be an impact investor, opening markets, and building capacity amongst social ventures.”
This final point is of particular concern to the entrepreneurs and enterprises seeking to be on the receiving end of impact investments. On the supply side (i.e., the supply of investment opportunities and financial products), few impact enterprises and nonprofits working to resolve social ills have balance sheets strong enough to support direct investment of the type and size that would interest impact investors. And seemingly insurmountable transaction costs contribute to the failure to attract systematic interest from commercial and philanthropic investors.
As covered in the report, however, the gap between capital providers and seekers is fortunately surmountable, and a promising strategy is coming into view for building viable pipelines of investible deals—what Martin has dubbed “Corporate Impact Venturing” (CIV). Corporate venturing in the traditional sense helps companies harness external factors, trends, or ideas for sustainable business growth by investing in new models for value creation, which can then be tested and cloned, or later transferred into the core business once they are perfected.
Intel Capital, the global investment organization of semi-conductors specialist Intel, is a leading example of a company that has put corporate venturing into action. The company has utilized the classical model by financing start-ups that build an ecosystem for Intel’s flagship products. Other big names like IKEA, Patagonia, Cisco, Starbucks, and Adidas are also utilizing corporate venturing to great effect in generating business growth, but are now doing so with a sustainability bent (See “Driving Innovation through Corporate Impact Venturing: A Primer on Business Transformation” for a more detailed treatment of Corporate Impact Venturing).
In order to optimize both the impact and financial proposition of these kinds of investments for financial institutions, CIV strategies need to consider how to connect and leverage resources, expertise and infrastructure to create high impact and investible opportunities, including:
- The policy context (i.e., are there government incentives that could be leveraged?);
- The market context (i.e., are there investors willing to accept different profiles of profitability and risk as the enterprise or fund develops?);
- The business case (i.e., does the enterprise or fund contain the talent and resources needed for success and scale, and does the investment match client demand?); and
- The investor perspective (i.e., are there more profitable options available?)
A modified CIV strategy for financial institutions serves to maximize the alignment between compliance, philanthropic mandates and client demand. At the end of the day, banks can also take inspiration from the ways in which firms can approach CIV in three distinct ways:
- By setting up an internal corporate venturing group that invests off balance sheet;
- By creating a dedicated external corporate venturing fund; or
- By becoming a limited partner in one or several venture funds that follow investment strategies that are relevant to the firm
In our experience, a CIV strategy can help the financial services industry build a pipeline of investible impact opportunities. Doing so enables financial institutions to move past the bolt-on approaches to impact-related investing, CSR and philanthropy that have come to characterize the efforts of many firms—approaches which are often costly and have proven to generate only narrow advantages. Creating new ventures and investing in existing ones, all through an impact lens, can boost innovation, equip firms for fierce (and growing) competition, and help achieve ambitious impact targets.
Once entrepreneurs, enterprises and investors are all better served by impact investing, we will realize its true commercially viable and socially transformative potential. Only then will we begin to shift the paradigm.
And only then will we actually make impact investible.