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03/16/2010

Impact Investing—The Next Big Wave in Socially Responsible Investing


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Impact investing, an emerging subset of socially responsible investing, offers a channel outside of formal public equity markets for investors seeking not only financial returns but social and environmental value. Impact investors are not necessarily targeting companies that engage in the best sustainable business practices in any given sector. Instead they seek out ventures in developing countries or inner city neighborhoods that provide solutions to urgent environmental and social challenges ranging from water and food scarcity to education, clean energy, affordable housing, resource depletion, and health care. IGNIA Partners, a new impact investment venture capital firm co-founded by Michael Chu, a former Kohlberg Kravis Roberts and Pegasus Capital partner, calls it “investing in the base of the pyramid.”

According to the Microfinance Exchange and the Monitor Institute, today’s $50 billion impact investing market is expected to grow to a value of about $500 billion in the next ten years. It is likely to generate a lot more excitement and gain a higher profile later this month when a new NGO, the Global Impact Investing Network, is officially launched in New York at the Clinton Global Initiative on September 25. “The details are embargoed until the launch but we can say that many marquee names including major financial services institutions, leading private foundations and family offices have signed up as founding members and supporters,” says Antony Bugg-Levine, a managing director of the Rockefeller Foundation who leads the Harnessing the Power of Impact Investing initiative for the organization. “The question, ‘is impact investing really going mainstream?’ will be answered in part when those names are announced.” 

A recent study by the Monitor Institute, “Investing for Social and Environmental Impact,” reports that a confluence of events is favoring the impact investing market’s growth. First, impact investments tend not to be closely correlated with the broader market and consequently offer an attractive diversification tool for institutional investors. (Both TIAA-CREF and Prudential Insurance have recently created impact investing divisions.) The faster pace of growth in developing markets also makes related projects to improve infrastructure, education and health services alluring to mainstream investors. The likelihood of greater market regulation and government incentives to protect the environment is also drawing capital to impact projects. Furthermore, the recent rise of a group of young entrepreneurs who have amassed considerable fortunes is creating demand for alternatives to traditional philanthropy.

But considerable challenges face this new market. Critical press about a microfinance “bubble,” a subset of impact investing, suggests that at the moment too much money may be chasing too few viable projects. The need for more robust product development and investment banking services must also be addressed. Meanwhile, a group of investors including the Rockefeller Foundation, Acumen Fund and B Lab has initiated the Impact Reporting and Investment Standards project to more precisely measure the social impact of investments. A “pilot” version of these new standards can be found at www.Iris-standards.org and a new version will be released in January. The Global Impact Investing Rating System (GIIRS) will use IRIS indicators to develop a “social impact rating system.” 

Despite the downturn says Bugg-Levine, the Rockefeller Foundation is enthusiastic about the power of for-profit investing to complement philanthropic efforts on a larger scale. As the capital markets begin to thaw impact investors, he maintains, expect a “big burst of very exciting initiatives.” 

To learn more about impact investing and to keep up-to-date on new reporting standards, visit the Global Impact Investing Network at www.globalimpactinvestingnetwork.org, which will go live on September 9.


--Susan Arterian Chang is a financial writer based in White Plains specializing in sustainable investing and the New Economy. 

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Comments

Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner's control. The difference between speculation and investment can be subtle. It depends on the investment owner's mind whether the purpose is for lending the resource to someone else for economic purpose or not.

A public stock market for social enterprises, social purpose businesses and social instruments such as bonds to list and to allow social impact investors spanning the public and institutions to find companies and deals to invest in for outcomes that blend the financial with the social.

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