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.

Actors of the Impact Investing Industry

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

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.

While CSR generally differs from impact investing in that there is no financial return motive, it is clear that more institutions are beginning to act with social and environmental ramifications in mind. This is especially true for entities with large cash holdings, including diversified financial institutions, insurance companies, and pension funds. This grouping contributed over 50% of all invested capital in the impact investing field, according to the JP Morgan/GIIN survey of 146 impact investors from 2015.21

Asset Managers

While asset owners began to clamor for impact options, the limited number of advisers and fund options that could incorporate impact investing into profitable portfolios proved to be an initial obstacle. The number of fund options is now growing tremendously—as detailed in the previous section— cutting across geographies, sectors, asset classes, and impact themes.

It is not just small, specialized funds that are being formed. In 2015 alone, investment bank Goldman Sachs acquired Imprint Capital, a brand name in the impact investing field; BlackRock began selling an impact fund to clients; and Bain Capital created a new investment platform focused on social impact. Additionally, the number of new mutual funds that aim to align investments with values has increased to 18 in 2015 from just three in 2014. Assets in these types of responsible investing funds have jumped to $134 billion in September 2015 from $93 billion at the end of 2010, according to Morningstar data.22

A large piece of impact asset management is also accomplished through public sector development finance institutions. For example, the U.S. government’s development finance institution, the Overseas Private Investment Corporation (OPIC), utilized $222 million in federal funding to make impact investments in 2013.23 OPIC direct investments included support for a network of schools throughout rural Kenya and a loan to a microfinance lending institution—both of which will help OPIC drive its impact mission and create financial returns.

Impact Organizations

Social enterprises, which can be for-profit or non-profit organizations that operate with a social mission, are the major recipients of impact investments, and their numbers have been growing. In the UK, close to one-third of all social enterprises identified are three years old or younger.24 However, many of these social enterprises are not prepared for infusions of new capital. Part of the solution to this issue has come through public policy decisions, such as new corporate forms being allowed in the U.S. to give social enterprises room to operate more freely.

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.

Service Providers

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.

Spotlight on Impact:

Better Ventures, LLC

Overview:

Better Ventures, LLC is an impact investing fund using private equity to fund and support early-stage technology companies pursuing social and environmental objectives. Better Ventures is based in Oakland and is a certified B-Corp with 100% of its assets under management targeted toward impact. Typically investing between $100,000 and $250,000 at the seed stage, the firm is actively involved with company founders to help them build successful companies.

Portfolio Impact:

The firm’s investment portfolio currently consists of 15 companies that are building scalable models that address global challenges across three themes:

  • Opportunity: Includes web and mobile technologies that provide individuals with access to life-improving opportunities
  • Health: Includes technologies that improve diagnosis and better preventative health
  • Sustainability: Includes innovations that accelerate the transition to a more sustainable economy

Investment Example:

Eko Devices is a Berkeley-based company that is harnessing the power of the smartphone through a stethoscope attachment that allows physicians to digitally visualize a patient’s cardiovascular data. The Eko Core stethoscope attachment amplifies heartbeat sound and wirelessly streams it to a smartphone or tablet. With an iPhone or iPad app, physicians can record, save, and share patient heart rate data. Eko Devices has also partnered with numerous electronic health record companies, which allows physicians to sync their patients’ heart sound reports directly to a health records management system with one click. The company closed a $2 million funding round in early 2015 and is undergoing a clinical trial with the University of California, San Francisco’s department of cardiology to test Eko Core’s assessments of patients against an echocardiogram.