Can impact investing solve the world's problems?

by Astrid Zweynert | azweynert | Thomson Reuters Foundation
Monday, 22 October 2012 11:26 GMT
As financial returns from traditional investments limp along at low levels because of the global financial crisis, impact has become an important differentiator among investors

SAN FRANCISCO (TrustLaw) - There may not be enough money to solve the world's increasingly complex problems, but capital is gravitating towards investments that have a positive social or environmental impact.

Delegates at  SOCAP 12, an annual conference dedicated to increasing the flow of capital towards social good, heard this month how the emerging field of "impact investing" is seeking to achieve more than just making a buck.

As financial returns from traditional investments limp along at low levels because of the global economic and financial crisis, impact has become an important differentiator among investors.

"Impact investing is an enormous opportunity for people, not only to get a return on their investment, but to also help make an impact on major societal needs at the same time – the two can go hand in hand," said Jed Emerson, chief impact strategist at ImpactAssets, a non-profit social investment company.

Impact investing has gained traction in the philanthropic community in the past few years, with hundreds of new funds set up. The market could reach $1 trillion in investments in the next 10 years, estimated a report by financial services firm JP Morgan, the Rockefeller Foundation and the Global Impact Investing Network (GIIN) in 2010.

Even though the market is growing, it is fragmented and inefficient, leaving the 'demand side' – the social entrepreneurs seeking funding – struggling to get the money they need to help them grow their businesses.

The flow of capital is dominated by high net worth individuals and family foundations, largely due to the perceived high risk of investing in the social impact sector.

The Rockefeller Foundation was an early explorer of this type of finance, according to its president, Judith Rodin.

"We recognised, if you put a price tag on all the social and environmental needs around the world, it is in the trillions," she told SOCAP12 delegates. "All of the philanthropy in the world is only $590 billion. So the needs far exceed the resources."

Even though there are trillions of dollars in private capital markets, none of the world's richest philanthropists has enough resources alone to tip the balance on the most pressing problems.

Over the past two decades, many large funds have been developed to help roll out proven social enterprise models. Acumen Fund and LGT Venture Philanthropy, for example, are expanding high-impact social ventures in some of the world's least developed economies.

But even though there is pent-up capital waiting to be invested, much-needed smaller-scale investments in fledgling enterprises are still rare. Acumen Fund's investments, for example, range from $300,000 to $2.5 million, and it tends to work with proven social enterprises that have well-established business models.

There are encouraging signs nonetheless. Some investors, such as Global Catalyst Initiative, have begun to focus on providing funding in smaller amounts to early-stage social enterprises, aiming to show that their business models reduce poverty.

"Our goal is to help the most innovative, high-potential ideas to prove themselves in action, and then expand through further access to these larger pools of capital," said Sean Peters, the firm's president.

Global Catalyst Initiative, which works in Africa, Asia and Latin America, typically provides grants of up to $40,000 and guides entrepreneurs in testing their model and being investment-ready in the social capital marketplace.

Social enterprises that Global Catalyst Initiative works with include Taka Taka Solutions, a social enterprise that provides affordable and environmentally friendly waste management services in Kenya's capital Nairobi and Eco-Fuel Africa Limited, a technology company that helps communities in Uganda to convert locally sourced farm and municipal waste into clean cooking fuel and organic fertiliser.

Retail investors can also play a part in creating a more efficient market and bridge the gap between philanthropy and impact investing and big players are forging ahead to reach these customers.

Investment bank Morgan Stanley has launched Investing With Impact, a platform to help retail investors "to start thinking about this space", according to Audrey Choi, its head of global sustainable finance. Throughout the platform, investors have access to a range of investment vehicles, which have been evaluated for their financial return potential and social impact.

Delegates at last week's conference in San Francisco also heard that throwing money at problems through charitable giving has not provided lasting solutions for the world's social ills.

"Everything that non-profits have been trying to fix for the past 30 years or so has become worse – despite new records for philanthropic giving almost every year," according to Majora Carter, founder of Sustainable South Bronx.

"It's not because the people running charitable institutions don't care or are not talented," said Carter, who coined the term 'green the ghetto' in 2003 as she pioneered one of the first US urban 'green collar' job training and placement systems in New York's Bronx district, and spearheaded legislation that fuelled demand for those jobs.

"I believe it has more to do with the position of capital within the relationship between those who need help and those who can help," said Carter.

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