The Current Landscape in Impact Investing
All of the details surrounding impact investing described previously have come into greater focus over the last few years. As socially motivated enterprises that are ripe for impact investments have increased in number and traditional financial markets have become more volatile, impact investing has piqued interest from investors, policymakers, and business leaders.
Sizing the Impact Investing Market
Given the breadth of investments that make up the impact investing space, estimating the total size of the market has proven difficult. However, JP Morgan and the Global Impact Investment Network (GIIN) have surveyed a group of fund managers, banking institutions, and foundations for each of the last five years in an attempt to better understand trends, investor activity, and performance of impact investments. In 2015, a sample of 146 impact investors showed a total of $60 billion in assets under management, 35% of which is proprietary capital and the remaining 65% is managed on behalf of clients (mainly through funds). Other key findings of the survey include:
- Investments in North America totaled 40% of assets under management, with emerging markets combined making up roughly half of invested funds.
- The housing sector accounted for 27% of respondents’ assets under management. Microfinance and financial services accounted for an identical 27%. The next largest impact sectors were Energy (10%), Healthcare (5%), and Food & Agriculture (5%).
- Nearly three-quarters of total assets under management were invested in private debt and private equity. Publicly traded investments accounted for just 11% of total assets under management.
- Mature companies received over 90% of respondent’s impact investments. Just 9% of funds were committed to start-up companies or seed stage businesses.
While impact investing remains just a small slice of total global financial markets, it has grown from $46 billion in total assets to $60 billion in just one year, according to the JP Morgan/GIIN survey. This number primarily tracks private debt and equity transactions, with most seeking a market-rate financial return. It is also estimated that $59 trillion has been invested in mainstream funds that have publicly committed to incorporate environmental, social, and governance factors into their investment decisions as of April 2015.14 This amount of invested capital with at least some social motivation becomes even larger when philanthropic investments with little or no financial return are included.
If only a small amount of this capital moved further down the spectrum toward generating and measuring social and financial returns, impact investment could expand rapidly. Previous estimates from the Monitor Institute and JP Morgan predicted the impact investment market could reach $400 billion to $500 billion by 2020 (although it now appears those estimates will not be reached).15,16 In 2012, the Calvert Foundation estimated a market potential of $650 billion, a more than 10 times multiple in invested capital from where the industry stands today.17 With these estimates of market size, many stakeholders from multiple sectors have been drawn into the field as a way to simultaneously make profits while addressing global needs.
Impact Investing Stakeholders
Shifts in investor perception and the increasing number of companies that have been created to address an area of global need are major drivers in impact investment’s momentum. Additionally, a diverse and growing set of actors has helped to build an industry infrastructure and networks that are critical in attracting new capital and investable opportunities. The preceding chart depicts four groupings of impact investing stakeholders and the forms of investment employed for impact:
Sources of Impact Capital
Skyrocketing public deficits and increasing social needs have led many individuals to believe that public sector and philanthropic solutions will not be sufficient to meet the world’s many problems going forward. Additionally, a new generation of more altruistic investors and entrepreneurs are beginning to look beyond charitable giving for more marketbased approaches to driving desired outcomes. A poll conducted by Morgan Stanley of high net worth investors found that four in 10 investors age 25 to 54 are now considering investing in funds that focus on positive social and environmental change in the next three years, which falls to 32% among those 55-64, and 25% among those over 65.18 Morgan Stanley has also found that 72% of individual investors believe that companies that score well on ESG criteria can lead to higher profitability and are better long-term investments.19
Attitudinal changes have not just occurred in individual investors. More institutions are focusing on their environmental and social impacts. This movement first came through corporate social responsibility (CSR) programs, as CSR reporting is now a mainstream business practice worldwide, undertaken by 71% of 4,100 companies surveyed by KPMG in 2013.20
Among these new forms are flexible purpose corporations, low-profit limited liability corporations (L3C), and benefit corporations. The most widely adopted form has been the benefit corporation legal designation, which differs from a traditional C-Corporation in that it allows for-profit businesses to operate with consideration of other factors in addition to profit. To date, 31 states have passed legislation that enable benefit corporations, removing legal impediments that otherwise would prevent businesses from having a socially motivated core mission.25
The nonprofit organization B Lab was instrumental in developing model benefit corporation legislation, and it is also building a global community of Certified B Corporations that must achieve a minimum score on a social and environmental impact assessment. The group of 1,550 Certified B Corporations includes Klean Kanteen, Beneficial State Bank, Numi Organic Tea, Patagonia, and Sungevity. This network has allowed impact investors to find for-profit social enterprises more easily, review their annual benefit reports, and greatly reduce due diligence prior to making an investment decision.
One of the key elements of continuing to build the impact investment marketplace is the ability for investors to measure and understand their social returns based on standard industry practices. Multiple initiatives have begun to create platforms that make impact measurement more standardized.
The first was the Impact Reporting and Investment Standards (IRIS), created by the Rockefeller Foundation in 2008, which provides a common reporting language to describe social and environmental performance and ensure uniform measurement and articulation of impact across portfolios. IRIS offers a library of more than 400 widely used social and environmental metrics, such as the number of permanent female employees, amount of charitable donations, and energy conserved. IRIS is a very flexible measurement system, allowing investors to choose the metrics that are most pertinent to their portfolio companies. According to ImpactBase, 96% of tracked funds use performance metrics to quantify their impacts, half of which use IRIS-compatible metrics.26
The Global Impact Investment Rating System (GIIRS) uses IRIS indicators to assess and rate the impact of companies and funds, similar to the way that Morningstar rates mutual funds or Moody’s rates credit risk. GIIRS provides holistic fund rating details that allow investors to benchmark impact performance based on a number of criteria tracked through GIIRS. ImpactBase reports that approximately 18% of the impact funds it has identified are rated by GIIRS.