Taking large “bite sizes” in impact investing funds would require investors to be one of few capital providers, thereby limiting the appeal of impact fund investment. The chart above depicts this situation, illustrating that impact investment funds usually seek investment sizes in the range between $3.5 million and $12 million, below the ideal range for most large institutional investors.
The Difficulty of Bringing Impact Investing to the Mainstream
New benchmarking of financial returns for impact investments presented in the previous section has begun to move the industry away from the zero-sum thinking that financial returns have to be traded for social returns. However, many structural constraints still limit the movement’s growth, and new investors to the field are still met with many of the questions posed in the introduction to this report. These difficulties include:
- Preserving fiduciary responsibility while investing for impact
- Small scale of impact investment funds
- Insufficient fund track records
- Lack of fit within existing asset allocation frameworks
- Complexity of measuring social returns
Preserving Fiduciary Responsibility while Investing for Impact
While the sample sizes in the surveys cited previously still remain just a small portion of the entire impact investing industry, they are the first sets of robust data that exist about returns. These figures clearly show that market-rate returns are achievable; in fact, the majority of funds tracked by the GIIN ImpactBase Snapshot target market-rate returns or above for their asset classes. Additionally, the JP Morgan/ GIIN survey of 139 impact investors found that 92% reported their investments either outperformed or were in line with return expectations. Even with these data, many mainstream investors still feel that impact investing is just a noble way to lose money. In a survey of pension funds by Deloitte, only 9% felt that impact investing is a viable investment approach, and only 6% of respondents were making investments in impact funds.32
Small Scale of Many Impact Investment Funds
GIIN’s ImpactBase Snapshot reports a $110 million average target for assets under management from 179 impact investing funds. For comparison, the 705 traditional funds used in the Cambridge Associates/GIIN Impact Investing Benchmark reported average fund assets of $415 million.
The relatively small size of the investments possible in the impact space poses two issues for mainstream investors. First, many large institutional investors require large “bite sizes” for each investment made. Large portfolio investors often will have to put the same amount of due diligence effort into a $1 million investment as they would for a $100 million investment; therefore, they often shy away from smaller deal sizes given the effort required and the minimal dollar amounts involved. Secondly, mainstream investors often do not want to hold a substantial percentage of any investment vehicle. By joining with other investors, investments become more liquid because they can be sold more easily to other holders.
Insufficient Fund Track Records
Institutional investors place much value in a fund manager’s track record. Given the relative age of the impact investing industry, few funds are able to provide investors with detailed information on historical performance.
The depth of fund manager experience that would make traditional investors comfortable enough to move their money into impact funds has not yet been demonstrated, as less than 50% of the more than 300 funds tracked by GIIN’s ImpactBase have track records greater than three years
Lack of Fit in Existing Asset Allocation Frameworks
Most traditional investment practices are organized around asset classes—with groups focusing on investments in equity, fixed income, real estate, and other areas. Institutional investors often find placing impact investing into a specific asset class to be unclear. While impact investing is most often associated with venture capital and private equity, it does span across asset classes.
To become a responsible player in the impact investing field, institutional investors would either need to create an entirely new group to manage these types of investments, which the California Public Employees Retirement System has done through its Targeted Investment Programs unit.33 Alternatively, different asset class teams would need to be educated on the merits of impact investments and their unique financial and social return characteristics. TIAA-CREF provides a useful example of impact investing integration, as it has a team that looks at possible social and environmental returns on a deal-by-deal basis and then partners with asset class managers to execute the transaction in a way that enables tracking of social metrics.34
Complexity of Measuring Social Returns
Institutional investors are accustomed to using widely recognized terms to discuss the performance of their investments. When looking at any investment opportunity, there are certain quantitative metrics that investors will turn to in order to understand the risks and opportunities in any deal. Revenue, operating income, and free cash flow mean the same thing across asset classes. These same types of quantitative metrics do not exist in the impact investing space to measure outcomes. While IRIS reporting does track operating impact metrics (including employee hiring and environmental performance) and product impact metrics (like number of units sold) it is difficult to compare investments across impact areas. For example, is providing affordable education to hundreds of rural African villages a better outcome than selling thousands of water purification devices? Ranking these outcomes is difficult, or impossible, for many impact investors.
With the difficulty in linking impact outcomes to any widely used financial metrics, many impact investment funds will invest only in enterprises in which the business model is fundamentally tied to the social or environmental outcome. If a company that provides solar installations on low-income housing units is performing well financially, it can be inferred that the company is also succeeding in its social mission. However, not all impact investments have this linkage (e.g., sustainable forestry operations may not be profitable while still having impact), making the field a complicated one to navigate for mainstream investors looking to invest in impact.