Authored Article: The Momentum – And Need for Clarity – in Impact Investing

By William Burckart

This piece is based on Mr. Burckart’s three-part blog series in Next Billion. You can read parts onetwo, and three here.

In many ways, impact investing is on a winning streak. Consider a few recent milestones that illustrate the sector’s growing momentum:

  • In March, Unilever announced a $416 million bond, the proceeds of which will be invested into projects like new and retrofitted factories that will result in reductions of 50 percent in CO2 emissions from energy, water used, and waste generation.
  • In early September, LeapFrog Investments, a private equity firm backed by George Soros and J.P. Morgan, announced it had raised $400 million for impact investments in Asia and Africa.
  • That same week, nearly a dozen wealthy families announced that they have committed to invest a combined $300 million over five years in commercial ventures in the areas of climate, energy, health, food and sustainability.

Meanwhile, financial advisors are increasingly being asked to design investment strategies that go beyond clients’ personal financial goals to serve a new set of social and environmental objectives. A 2013 study by the World Economic Forum found that next-generation investors consistently ranked impact performance as their primary investment criterion, ahead of return. A more recent 2014 survey of high net worth individuals by RBC Wealth Management indicates that achieving social impact is also high on the list for 92 percent of the respondents—with investment ranked as the leading mechanism for meeting these goals.

As the sector evolves, initial perspectives and efforts are giving way to new thinking and approaches. The Rockefeller Foundation, long the leading funder of impact investing architecture and infrastructure development, is already starting to think about the next big thing by attempting to broaden the shelf of innovative financing tools beyond social impact bonds to include new mechanisms and models that align disparate interests and actors to collaborate and share risk, and increase leverage.

Trouble beneath the surface
But in spite of this progress, closer inspection reveals cause for serious concern.

Though foundations, nonprofits and social enterprises, policy makers, and investors have jumped on the bandwagon, the investments themselves – which are happening across sectors – are still occurring largely in silos, and without the benefit of commonly accepted standards or systems (despite the best efforts of many). Few social 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 investors (and the gatekeepers managing their money) for this approach to investing.

Enthusiasm notwithstanding, making and managing investments that aim to build communities, enable empowerment, preserve the environment, or achieve any number of other impact goals while still generating an appropriate financial return presents a complicated proposition for the financial services industry, and progress has been slow. If impact investing is the “crazy uncle in the attic,” to use a memorable term from Mark Sloss of UBS Wealth Management Americas in the Money Management Institute’s special report on impact investing, the broader industry is struggling to find a way to set him free.

Unfortunately, a surge of research and thought leadership arising from government and academia threatens to muddy the waters further, even as it attempts to create an enabling environment. Clarity has been sorely lacking on the defining features, major variations, scope and scale, rationale for existing, operational challenges, track record and overall assessment of the developments underway. Indeed, agreement on even the basic terminology in this sphere has been hard to come by. Christa Velasquez, the former director of social investing at the Annie E. Casey Foundation, famously quipped in 2011 at an event for the Federal Reserve Board of Governors, “We started investing in this space in 2002. I started as a [program-related investment] maker, then I became a social investor; mission investor was in there and now I’m an impact investor. So, lots of changes but lots of things stay the same.”

Bringing clarity to the sector
The fragmentation of thought and action that Velasquez alluded to helped serve as the initial spark behind the recently released book New Frontiers of Philanthropy: A Guide to the New Actors and Tools Reshaping Global Philanthropy and Social Investing. Edited by Lester Salamon, director of theJohns Hopkins Center for Civil Society Studies, the book (whose production I managed) is an attempt to bring more coherence to the changes underway.

Recognizing the reality of mounting social, economic, and environmental problems, declining government funding, and barely growing philanthropic resources, the book provides a common understanding of the reinvention underway in how we mobilize resources for public purposes, why it is happening, and how to engage.

While seemingly distinct, the resulting issues and opportunities facing investors, nonprofits executives, philanthropists, community developers, and business leaders as they explore the new frontiers are actually quite similar and are more often than not obscured by needless fragmentation. The New Frontiers of Philanthropy represents an important initial step in addressing this.

William Burckart is an independent strategy advisor who works with investors, foundations, corporations, and non-profit organizations to integrate their investment and philanthropic goals. He co-founded Impact Economy, and is a member of the Global Advisory Council of Cornerstone Capital Group. Check out his overview of the impact investing market at the forthcoming Emerging Issues Forum here.