From budding investors and development practitioners to major financial institutions and G-8 leaders, impact investing — investments made with the intention of generating measurable social and environmental impact along with a financial return — is steadily gaining traction.
However, with increased interest in how to break into this burgeoning industry, there is also a resounding demand to see data, detailed track records and robust evidence that proves that impact investing is, in fact, a viable approach to development finance.
Are you a development practitioner or potential investor still trying to understand what impact investing truly means and why so many are buzzing about this field? Are you an active investor looking for proven methods on how to take your portfolio to the next level while ensuring both financial success and social impact?
Here are seven must-reads that will answer the “what,” “why” and “how:”
“Status of the Social Impact Investing Market: A Primer”
By Dr. Maximilian Martin (Impact Economy, June 2013, 13 pages)
While impact investing is moving into the spotlight in the world of development finance, there is still a cloudy understanding of definitions, approaches, stakeholder roles, the opportunities and challenges faced by this nascent market.
How are socially responsible investments different from impact investments? What is the projected growth of this market throughout the remainder of this decade? What role can impact investing play in the impending global trends? Dr. Maximillian Martin, the founder of Impact Economy, seeks to dispel any doubts through this brief and navigable report.
The primer provides an overview of the social impact investment market by first describing the landscape and defining terms, and then placing impact investing in the broader context of three megatrends:
1. Massive pent-up demand at the bottom of the pyramid: There is still a major opportunity to tap into $5 trillion in latent bottom-of-the-pyramid demand by using innovative, market-based solutions.
2. The need for radical resource efficiency and green growth: A projected world population of 9 billion by 2050, combined with the projected $500 billion per year of funding needed to reduce carbon and limit global warming -— which we currently fall short of by about half — leaves a sizable investment gap that offers opportunities in energy and natural resource efficiency.
3. New approaches to provision of public services: Social impact bonds, a public-private partnership model pioneered by the United Kingdom, is a new social impact investment mechanism where private investors finance services upfront, and the government guarantees a financial return based on the achieved outcomes.
The report is concluded with a concise explanation of actors involved in the impact investor ecosystem.
“From Ideas to Practice, Pilots to Strategy: Practical Solutions and Actionable Insights on How to Do Impact Investing”
By Michael Drexler & Abigail Noble (World Economic Forum, December 2013, 60 pages)
The impact investment sector is still in its embryonic phase, so the most concrete guidance on how to start, or do more, impact investing can only come from experienced investors. Using this idea as the basis to compile this report, Michael Drexler and Abigail Noble curated a collection of 15 short, action-oriented articles written by experienced impact investment practitioners.
Aiming to reach potential new impact investors, active investors, intermediaries and policymakers, the featured thought pieces contain lessons learned and showcase best practices, organizational structures and innovative instruments that have all been successfully implemented.
The 15 articles are divided into four main sections: creating the case for impact investing, building a strategy, innovations for unlocking mainstream capital and next steps for mainstreaming impact investing.
While the report acknowledges that much more trailblazing will be needed before the sector can call itself mature, the primary intent is to show how mainstream investors and intermediaries have overcome the challenges in the impact investment sector, as well as democratize the insights and expertise for anyone and everyone interested in the field.
“Evolution of an Impact Portfolio: From Implementation to Results”
By Justina Lai, Will Morgan, Joshua Newman, Raul Pomares (Sonen Capital, October 2013, 70 pages)
Now that you understand the lexicon, landscape and best practices, you may wonder: What does a successful impact investment portfolio with measurable results look like from beginning to end? According to Sonen Capital, look no further than the KL Felicitas Foundation, an organization that decided in 2004 to begin the process of eventually allocating 100 percent of its capital to impact investments.
This report details the performance of KLF’s return-based impact portfolio and is one of the first comprehensive analyses of a portfoliowide approach to impact investing.
The portfolio’s performance thus far has been compelling. Between 2006 and 2012, KLF has been able to successfully shift the portion of assets allocated to impact from 2 percent to 85 percent while continuing to achieve competitive returns. The success of the portfolio is based on a systematic approach to impact investing: a balance between financial discipline and portfolio diversification from a range of investment opportunities found across the “Impact Investing Spectrum.”
Sonen Capital hopes that by sharing KLF’s journey, asset owners, advisers and other intermediaries will be able to learn from its experiences and feel empowered by the knowledge that it may well be possible to achieve both financial and impact goals in the same portfolio.
“Impact Investing 2.0: The Way Forward”
By Pacific Community Ventures, Impact Assets, and Duke’s Center for the Advancement of Social Entrepreneurship (41 pages)
“It is time for the new 2.0 era to begin, shifting our emphasis from the ‘why’ of the impact investing to the ‘how.’”
This report features lessons learned from 12 successful impact investment funds, and lays the foundation for the more sophisticated 2.0 market by sharing key trends and concrete practices and providing solid evidence of high performance. While designed to be a resource for the broad community interested in the future of impact investing, this read is especially for practitioners, fund managers, investors, entrepreneurs, policymakers and advisers who are creating and managing new and existing funds, and striving to achieve successful social and financial performance.
The 12 funds detailed in this report were selected from an initial list of 350 due to their “exceptional performance” in meeting or exceeding their promised financial and social returns. Based on the analysis of commonalities between all 12 funds, four key elements of successful impact investing were identified and outlined in detail:
1. Policy symbiosis: Despite the widely held belief that a successful capital market is one with little government involvement, the 12 funds demonstrate the opposite: “Impact investment is grounded in deep cross-sector partnership that benefits from the government’s engagement.”
2. Catalytic capital: Catalytic investments — such as grants, guarantees or philanthropic capital — have proven to be transformative to the 12 funds by triggering billions of dollars of further investments that may not have otherwise been available or possible.
3. Multilingual leadership: Successful fund leadership must be experienced in multiple areas, for instance finance/business, policy and impact/philanthropy, in order to successfully engage with a diverse range of stakeholders.
4. Mission first and last: This section challenges the dichotomous “financial-first” or “impact-first” approach to investing, and instead suggests focusing on establishing funds with a clearly embedded strategy and maintaining accountability for sticking to the intended financial and social objectives.
Read more on impact investing:
“Investing In Social Outcomes: Development Impact Bonds”
By Center for Global Development (October 2013, 120 pages)
The Center for Global Development introduces a new model of impact investing based on the principles of the Social Impact Bonds that have been implemented by the United Kingdom, the United States and other industrialized countries. Development Impact Bonds use the same outcomes-based approach, yet are applied to finance challenges in developing countries. DIBs create a contract between a private investor and donors or governments that have agreed upon a shared development goal. Investors pay in advance for interventions to reach the goals and receive returns linked to verified progress if the interventions succeed.
The report explains how DIBs can contribute to the efficiency and effectiveness of development funding. It also outlines the advantages and recommendations, and features six case studies that serve as examples of the social issues that can benefit from this approach.
A few of the advantages of DIBs listed in the report are:
● DIBs transform social problems into investable opportunities.
● DIBs create incentives for investors to put in place the necessary data collection, feedback loops, performance monitoring and a more efficient approach to service delivery.
● As investors provide funding and assume risk, DIBs may attract donor agency interventions that they may not have otherwise been able or willing to fund.
Early in the report, the CGD also provides recommendations for the actors and stakeholders involved in the impact investment sector. Donors, for example, are advised to build a consortium of donors to set up a DIB Outcomes Fund to pool risk and share lessons learned. Another suggestion is to take advantage of platforms such as the U.S. Agency for International Development and the U.K. Department for International Development’s joint venture Global Development Innovation Ventures to test innovative interventions under DIB models.
Here are two more must-reads on impact investing that we’ve featured before:
“Priming the Pump: The Case for a Sector-Based Approach to Impact Investing”
By Matt Bannick and Paula Goldman (Omidyar Network, September 2012, 27 pages)
This is the first article in a six-part series on impact investing. Matt Bannick and Paula Goodman of the Omidyar Network make the case that impact investing needs a “shift in focus.”
The shift they advocate for in this report is for impact investors to move away from a focus on individual social enterprises and toward financing the creation and scaling of entire sectors. To do so will not be easy, and entail taking more diverse risks as well as using more types of capital to both fund innovators early and support an infrastructure that will speed their success.
This requires an evaluation of social impact not only at the individual level but also at the sector level. Omidyar has determined that firms or organizations typically fall into three categories — market innovators, market scalers and market infrastructure, all of which require investment in order to improve an entire sector.
The report also discusses the importance of effective, supportive legislation that allows competition, protects consumers and promotes entrepreneurship.
“From Blueprint to Scale: The Case for Philanthropy in Impact Investing”
By Harvey Koh, Ashish Karamchandani and Robert Katz (Monitor, April 2012, 64 pages)
In this report by the Monitor Group, the authors make the case for the importance of philanthropic support for impact investing in order to realize the goal of reaching the bottom of the pyramid. Philanthropic investment, they argue, is central to achieving the full potential of any inclusive business, which aims to benefit the poor by engaging them as consumers. The authors propose a four-step business model for nascent social entrepreneurs:
1. Blueprint: Understand the needs of the consumer and develop an initial customer proposition, a business plan and core technologies.
2. Validate: Conduct market trials and test any model assumptions, while also refining the business model.
3. Prepare: Create consumer awareness and demand, develop supply chains and create an organization to reach scale.
4. Scale: Invest in assets, enhance processes and respond to competitors.
The authors realize that most inclusive businesses do not move beyond the “prepare” stage of their model. This is because most of these inclusive businesses do not become “investable.” The authors offer a solution, which they dub “enterprise philanthropy,” or grant support from large companies or foundations that will create models for return-seeking capital to be invested to scale.
These are many more influential reports and interesting reads about impact investing. Check out J.P. Morgan Social Finance and the Global Impact Investing Network’s recent report “Spotlight on the Market: The Impact Investor Survey” and “The Power of Impact Investing: Putting Markets to Work for Profit and Global Good,” a book by Judith Rodin and Margot Brandenburg. You can read an excerpt here. Did we miss any key reports? Tweet us @DevexImpact and let us know.
Join Devex, the largest online community for international development, to network with peers, discover talent and forge new partnerships — it’s free. Then sign up for the Devex Impact newsletter to receive cutting-edge news and analysis every month on the intersection of business and development.