Leveraging impact investing to achieve the SDGs

SAN FRANCISCO — All the aid and philanthropy in the world combined leaves a $2.5 trillion a year gap in the money needed to finance the United Nations Sustainable Development Goals.

Across panels and side conversations at this year’s Social Capital Markets conference in San Francisco, participants evaluated how impact investing might help bridge that gap. Sessions discussed how to evaluate progress; how to measure its growth in both dollar terms and impact; and how the sector can realize its full potential.

Some $115 billion worldwide is invested in deep impact investments — in private companies seeking to create impact as well as financial returns, according to the Global Impact Investing Network.

“The capital is flowing,” Fran Seegull, executive director of the U.S. Impact Investing Alliance, told Devex. “But it begs the question, what about the impact? We speak so much about the supply of capital in impact investing because the investment doesn’t get started without the money. But the whole reason we are here is for the impact.”

Measuring impact is now among the major questions in impact investing. Advocates like Seegull see metrics as a vital piece of keeping the focus on impact, particularly as more investors get involved in the field. Impact investors need to “put our attention and focus and talent and in fact capital toward getting to a standard around metrics, measurement, and reporting, as well as impact measurement throughout the process,” Seegull told Devex.

Even as the metrics are in flux, investors and the private sector are showing broad interest in aligning their work with the SDGs.
“What I’ve been most astonished about is how people in the private sector world and the investor world are beginning to look at these Sustainable Development Goals as a real opportunity,” Achim Steiner, administrator of the United Nations Development Programme, said at SOCAP. “We live in a world where many people are looking to invest their money and can’t find the right place to do it and yet much of the world is actually looking for money to invest in solving problems.”

Metrics for impact

Creating a framework for impact measurement presents a collective action dilemma, in which everyone assumes someone else will step in, said Sara Olsen, founder of the impact management firm SVT Group. She recently co-authored a report making the case for a more widely accepted and rigorous definition of impact.

There is a technical challenge to measuring impact; Impact returns are very heterogeneous whereas financial returns are homogeneous, Seegull said.

Among the efforts to build impact metrics is the Impact Management Project, a group that includes the United Kingdom’s Department for International Development, the Silicon Valley based philanthropic investment firm the Omidyar Network, and the multinational food company Mars.

Short of a widely accepted framework, it is easy for organizations to say they use the SDGs as a guide to measure their impact, said Mathu Jeyaloganathan, portfolio manager for impact investing at World Vision Canada.

“When an organization says they are aligning their impact measurements with the SDGs, my reaction is, what metrics are you tracking?” she said. Her team, for example, is focused on SDG 9 — building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation — and tracks its progress not only around the top line goal but also around its targets and indicators.

Blended finance

Among the impact investment tools discussed at SOCAP was blended finance, which leverages public and private philanthropy to unlock private sector money. Unless or until impact investing becomes so mainstream that it is no longer is a separate field, blended finance is a tool to help impact investors connect with the larger investment community effectively, so that it does not isolate itself, said Joan Larrea, CEO of Convergence, which supports investors to make blended finance transactions in emerging markets.

“If we achieve what impact investing was set out to do, it merges with the mainstream,” said Larrea. Convergence announced funding for the structuring and launch of a Syrian refugee employment impact bond at SOCAP.

“It’s a consciousness that pervades all investors’ mindset. You move from quarterly results to ‘How do I have a long-term license to operate and consider all impacts of my company on the planet and on society, so I do have a long-term license to operate and so I de-risk my operations?’”

One of the challenges of blended finance is bringing different working cultures together in a single deal. “The parties talk past each other because they’re speaking different languages,” she said. “So it’s really important to break things down and dodge the jargon.”

Larrea, for example, said she cringes when she hears development professionals ask how they can engage the private sector “in development.” The private sector has a fiduciary duty to do things that make financial sense, she said, so it is not in the business of doing development.

Cathy Clark, faculty director and professor of the Center for Advancement of Social Entrepreneurship at Duke University, explained the complexity of organizing an impact capital market.

“What we have is a marketplace where the handoffs between the asset managers, the intermediaries who organize the capital, the entrepreneurs who take that capital and create impact, and the beneficiaries and customers on ground are sloppy and imprecise,” Clark said. “It’s like a game of telephone.”

Clark who was at SOCAP promoting Smart Impact Capital, a new set of tools to help impact entrepreneurs to be more effective in raising investment capital, said stakeholders need to agree on risk and return and impact before money changes hands. The impact on the ground has to be translated back up the chain, she said.

One example of a tool to bridge the divide between various parties is the Global Impact Investment Rating System, or GIIRS, which links capital sources, such as high net worth individuals, and capital channels and intermediaries such as wealth managers and investment funds.

The political case

The U.S. Impact Investing Alliance is working to make the case for development finance in Washington, D.C., arguing that organizations such as the Overseas Private Investment Corporation advance the business objectives of U.S. companies abroad and create investment opportunities for U.S. based impact investors.

“We think we can create a better case for more private capital to invest to create stability and economic prosperity in emerging and frontier markets and use OPIC as a development finance institution to de-risk those investments and encourage the flow of private capital in a way that’s commensurate with State Department objectives,” Seegull told Devex.

SOCAP made the case for how the private sector can help the global development community move from “billions to trillions” to achieve the SDGs, and impact investing could be an important part of that equation — so long as this emerging industry measures its impact as well as its dollars in the decade ahead.

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