The Changing Landscape of  Social and Impact Investment

The Changing Landscape of Social and Impact Investment

In the late 19th century, many U.S. industrialists such as Andrew Carnegie, John Pierpont Morgan, and John D. Rockefeller, who, as a result of their exploitation and degradation of workers (including children), began to establish philanthropic trusts and foundations, with Rockefeller describing this social mission as a divinely inspired “business of benevolence.” As such, philanthropists of this time directed charitable gifts to civil society and organizations charged with facilitating the cultural reproduction of American values that sustained U.S. capitalism: individualism, self-reliance, and hard work. Fast forward to the 1990’s, “venture philanthropy” emerged, which shifted the social mission of philanthropy to focus on neoliberal structural adjustment programs, which was more in service of elite financial investors. As such, in the 21st century venture philanthropists began focusing their efforts on constructing new financial markets through what is referred to as “mission investing,” “social impact investing,” or just “impact investing.” 

Many would argue that impact investing is a continuation of the sixty-year mission of the IMF, World Bank, World Trade Organization, and the United States government; yet with a “friendlier” sounding approach and methodology. Today, the growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

In effect, impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact and target a range of returns from below market to market rate, depending on investors’ strategic goals. Another way to look at it is that impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.

Within the field of impact investing, there is a wide range of investors seeking out different opportunities based on various types of desired impact and financial goals. Impact investing is commonly categorized as either “financial first” or “impact first,” which simply refers to the primary goal of the investment. Impact investing that puts “impact first” is first and foremost trying to solve a particular economic, social or environmental problem, and are willing to sacrifice some level of financial return to achieve that primary objective.

Those who practice impact investment understand the potential to drive new resources and new thinking to organizations that are driving social change. In an era where communities are struggling and programs to support them are less and less effective, the need to engage all players - philanthropy, government, and the private sector - to find new and more sustainable solutions to old problems is growing with full force.

There is no doubt that the private sector can be a force for good, and impact investing represents a significant opportunity to bring the innovation, incentives, and resources from business to the social sector, but there is a need for a clear framework for impact investing.

Some would also contend that to practice impact investment, the following characteristics would need to be applied. The first would be that an investor’s intention would need to have positive social or environmental impact through investments. The second would entail that these kinds of investments are expected to generate a financial return on capital. Another variable would be that impact investments target financial returns that range from below market to risk-adjusted market rate, and can be made across asset classes including fixed income, venture capital and private equity. Finally, a hallmark of impact investment is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

Impact investing has certainly come a long way in the intervening ten years. According to the Global Impact Investing Network (GIIN), $60 billion went into impact investing worldwide in 2015. Many types of investors are entering the growing impact investing market.

Some of the few common investor motivations include:

• Banks, pension funds, financial advisors, and wealth managers can provide client investment opportunities to both individuals and institutions with an interest in general or specific social and/or environmental causes;

• Institutional and family foundations can leverage significantly greater assets to advance their core social and/or environmental goals, while maintaining or growing their overall endowment;

• Government investors and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals.

The rapid growth of impact investing has been countered by concerns about simultaneously achieving social impact and market-rate returns. A benchmark study published by Cambridge Associates found that impact investing can capitalize on long-term social or environmental trends to compete with, and at times outperform, traditional asset class strategies. Indeed, the positive impact approach itself favors companies that are trying to do good and run their businesses in a sustainable manner. Such companies avoid fines and other penalties; they have stronger relationships with their customers, suppliers and employees. Furthermore, they tend to operate in emerging sectors with high-growth potential.

 

SDG and the Responsibility of the Financial Sector

The Sustainable Development Goals (SDGs) outline the 17 goals that the UN adopted at the end of 2015. These include the elimination of poverty, clean energy for all and world peace. The UN member states call explicitly on the financial sector to make an active contribution to the implementation of the SDGs by means of impact and other socially responsible investments.

For years, impact investors around the world have been demonstrating the full potential of the private sector to drive progress in areas such as affordable housing, access to financial services, and sustainable energy - impact areas that very clearly line up with SDGs. While it is still early days for the SDGs, but recent trends have shown that some investors are already actively leveraging the SDG goals as a framework for their investments.
In the fall of 2016, the CEO of GIIN, Amir Bouri, made a clear appeal to investors urging the financial sector that if they do not focus on redirecting at least part of its assets to impact investments, the SDGs will be at risk of failing and time is of the essence. Bouri closed his article with words that resonate: “This investment is not just for profit – but for survival.”

Many reports and articles predict a bright future for the impact investing industry, as investors seek to create something greater than a financial return from their invested assets. Hope Consulting has predicted that there is approximately $120 billion in current demand for such investments, and found that this demand is likely to grow as investors become more comfortable with the emerging asset class.

As impact investing develops, an even greater variety of funds targeting the different risk, return and impact profiles of individual investors will likely appear. For the businesses that they fund, and the communities and environments that those businesses improve, the growth of impact investing is a very welcome trend.

 

Author: Responsible Business - Beirut

Source: Responsible Business

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All, 2017

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