4 growth trends in impact investing

As impact investing continues to show strong growth as a sector, the Sustainable Development Goals are fast emerging as a reference for an ever-diversifying range of actors seeking guidelines on how to invest for impact. “Impact investment is coalescing around the SDGs as being a way of almost articulating and branding what impact investment is all about,” Nick O’Donohoe, senior adviser at the Bill & Melinda Gates Foundation, told Devex at the investor forum organized by the Global Impact Investing Network drew to a close last Thursday. The two-day forum, which took place in Amsterdam, was marked by a strong sense of urgency for addressing the emerging social, economic and environmental challenges. The SDGs will likely play a guiding role. “It is a critical time for investors to look around them, at the challenges facing their communities and the environment, and to consider how capital can be leveraged to generate long-term solutions,” said GIIN CEO Amit Bouri. Here are four key takeaways about where impact investing is headed. 1. Climate takes front and center — and goes beyond renewable energy. Climate and the environment appear to lead the way, both as a priority for investors and as a sector that can provide examples as to how the SDGs can translate into an actionable framework for investments. Among projects featured during the forum was MoMo, or Mobilising More, a challenge supported by the Dutch Ministry of Foreign Affairs to help diversify investment opportunities in the climate area. The two challenge winners, OPIN Foundation and Royal IHC, have been awarded 30,000 euros each ($31,900) to develop their projects — a bio-based alternative to wood charcoal in Ghana and a pilot for seaweed farming in Indonesia, respectively. The competition was intended to demonstrate the vast range of opportunities that exist within the climate finance space beyond the typical investments in renewable energy. “The renewable energy space has attracted a lot of financing. I think that it’s distorting the market a little bit in developing countries, because there are so many development banks and donors coming with blended funding,” said Paul van de Logt, senior adviser on climate finance at the Dutch Ministry of Foreign Affairs, in an interview with Devex. 2. The sector is growing — and diversifying. Impact investing has gone mainstream. A wide range of actors, from niche investment funds to traditional finance institutions, are now at the table. Participants at GIIN told Devex that attendance was more diversified than ever, with pension funds among notable attendees. This echoes a new report launched by the GIIN last Thursday, which shows the sector is attracting new investor profiles and is expanding throughout the world, with strong growth in India, as well as countries in Latin America and sub-Saharan Africa. The GIIN report, which draws on data from 62 respondents to the network’s 2013-2015 Annual Investor Impact Surveys, paints a picture of a growing, healthy industry. Respondents reported a steady pace of activity and overall satisfaction with their impact and financial performance. Yet for participants committed to reaching the SDGs, steady growth may not be enough. “Impact investing has been growing very linearly over the past years. If we really want to address these challenges, we have to start growing exponentially,” Jennifer Pryce, president and CEO of Calvert Foundation, told Devex. 3. Partnerships are a way forward. Van de Logt said he expects to see more partnerships being formed as the sector grows, so as to increase, diversify and scale investment opportunities. One such partnership is the Water Financing Facility, a new international instrument vehicle that could mobilize $1.2 billion per year for climate resilient projects in the form of local bonds. The facility is currently being piloted in Kenya with support from the Dutch government. Insurance companies are to also expected play an increasing role in climate finance, van de Logt said. The sector brings strong expertise in risk modeling and an ability to develop tools to measure resilience and adaptation. At the GIIN forum, a consortium of 18 Dutch financial institutions, including banks, investment firms and pension funds, with support from the government and the central bank, presented its SDG Investing Agenda. The strategy outlines concrete measures for its signatories to support the 2030 agenda at home and abroad. It identifies potential growth areas as well as barriers to investment. The initiative, thought by its creators to be the world’s first, seeks to catalyze the 2.8 trillion euros ($2.98 trillion) in assets collectively managed by its participants. Partnerships may also be a way to scale quickly, according to Pryce. Without collaboration, small boutique investment firms, she said, cannot grow fast enough to accommodate the amount of capital carried by large investors. For example, Calvert Foundation recently closed the first Environmental Impact Bond in the United States together with Goldman Sachs. The bond was issued by the DC Water and Sewer Authority to fund a$2.6 billion water quality program. Pioneer funds such as Calvert Foundation have a responsibility to support the development of innovative structures like this one, Pryce said. “To me it’s not about creating new products, it’s about innovating around existing tools of finance,” she explained. 4. Watch for developments in de-risking and speedy deployment. Among developments to watch for will be how pioneer funds, public finance institutions and development agencies will position themselves in the sector as helping de-risk these newer products. The private sector could also take on some of this responsibility, van de Logt said, citing Bank of America’s commitment of $125 billion by 2025 toward an initiative helping low-carbon businesses through investments and financial services. As new players come on board, the SDGs and the outcomes of the Paris agreement may provide just the right amount of guidance sought by investors to move quickly. “It’s more important to execute and act than get tangled up in theory right now,” Pryce explained. But as more mainstream investors start aiming for impact, the sector will need to stay mindful of what its priorities truly are. “It’s not just enough to show up and put money on the table,” she said. “We need to solve for market demand, not investor preference.” Check out more practical business and development advice online, and subscribe to Money Matters to receive the latest contract award and shortlist announcements, and procurement and fundraising news.