Money managers have long had multiple options when putting their clients’ funds to work. Traditional asset classes—stocks, bonds, and cash equivalents—are joined by alternative direct investment opportunities in real estate, commodities, and derivatives. More and more, funds are being created that leverage expertise in venture capital and private equity through debt and equity investments. Each of these investment vehicles has a distinct risk profile and investor expectations, and all have one key investment motive: maximizing financial returns.
Over the last decade, the idea of impact investing—marrying financial returns with social returns—has moved from a nascent investment theory employed by a few philanthropic organizations and forward-thinking fund managers to a widely known buzzword in the investment industry. However, while momentum around impact investing has grown, it remains challenged by numerous questions and investor misperceptions that have kept the movement from gaining mainstream support in the investment community. In fact, the Investment Management Summit hosted by The Financial Times in October 2015 yielded the following list of thoughts from financial advisers on impact investing:1
- “I cannot tell what is an impact investment and what is not.”
- “I cannot be sure what impact my investment is really having.”
- “I fear impact investments are not made with the same financial rigor as other investments.”
- “Even when I was persuaded of the idea, I could not find enough opportunities that would have an impact on my client’s chosen problem.”
Thought leaders in the impact investing industry and even traditional asset managers continue to grapple with these issues today, because the idea of what exactly encompasses impact investing remains relatively undefined. While this analysis will not attempt to provide definitive answers and solutions to the concerns listed above, it does seek to provide financial advisers and money managers with a better understanding of an investment vehicle in evolution.
Using data from the fifth annual survey of impact investors compiled by JP Morgan and the Global Impact Investing Network (henceforth written as the “JP Morgan/GIIN survey”), ImpactBase’s catalogue of impact investment funds, and other recent data sources, this paper offers a framework for integrating impact investing into a broader portfolio strategy by detailing trends, strategic opportunities, return potential, and risks. In addition to reviewing the opportunities for impact investing to grow, this paper will challenge several myths that limit its usage and will provide solutions for overcoming perceptual, institutional, and legal barriers.
To provide examples of impact investing in practice, the report uses case studies of Bay Area impact funds and their investments. The Bay Area’s position as a leader in venture capital—in 2015, nearly 50% of all venture capital investments made in U.S. companies were made in the Bay Area (including San Francisco and Silicon Valley)2 —along with its robust innovation ecosystem, has allowed the region to catalyze a broader impact investing movement that now extends across the U.S. and the globe. Throughout the following chapters, this paper will answer the following questions:
1. What education of investors and money managers needs to take place to deploy more assets in an impactful manner?
2. As the impact investing trend grows, where can standards, definitions, and collective understanding be improved so that best practices are captured and improved upon?
3. What barriers to investment can be addressed via changes to perception, institutional practice, and government policy?