What will it take to get institutional investors on board?

BUENOS AIRES — Institutional investors are seen as a critical part of the growth of the impact investing industry, but getting them on board isn’t easy and may require pressure from those whose money they are investing, several experts told Devex.

“The truth is it is a young industry, to do it at scale institutional players need to be at the table,” said Amit Bhatia, CEO at the Global Steering Group for Impact Investing, in an interview with Devex.

Institutional investors used to look at these types of investments as something potentially nice to have on the side but they’re increasingly seeing it as an interesting opportunity, said Yvonne Bakkum, managing director and CEO of FMO Investment Management.

FMO, the Dutch development finance institution, was spun out FMO Investment Management several years ago, after engaging with institutional investors since 2007. FMO Investment Management, which manages about $700 million in two funds that raised money from institutional investors, is in discussions with an insurance company that may double the amount of money they manage, Bakkum said.

“We need visionary investors to be the first movers,” she said, adding that high-level support and leadership are essential to engaging pension funds.

In a number of countries, regulatory burdens are holding investors back. Bakkum is helping launch the Dutch national advisory board on impact investing, and one of its first priorities will be to lobby regulators for less prohibitive capital charges on these types of investments.

“It’s such a real impediment that it should at least be tried, at least be brought to their attention,” she said.

Others don’t believe that the push to get institutional investors involved will come from government, including Ronald Cohen, chair of GSG, who told Devex that the change will be motivated by people contributing money to pension funds.

“That’s the sleeping elephant in the room,” Cohen said. “If we can wake up people making pension contributions to influence the investment policy of the portfolios to which they're contributing. That will be the tipping point.”

Growing awareness about impact and issues such as climate change is driving consumer behavior. Eventually, those paying into pensions will be increasingly aware and will ask where their money is being invested, said Michele Giddens, co-CEO at Bridges Fund Management, in an interview with Devex.

That should drive the fund managers to consider changing how they invest.

One of the challenges in the past has been that even if people working in pension investments are interested in investing in values, it has been difficult to define those values. But the SDGs can help to solve that problem, and efforts to better harmonize impact measurement and management can help provide track records and standardization.

Pension fund managers and some in the impact investing industry have identified a number of constraints to getting more institutional investors on board: the right opportunities don't exist today, there aren't enough projects or there isn't enough scale to provide the large size of investments they need to make.

But Cohen said he doesn’t think a lack of deals is a problem, and that there can be trillions of dollars of investable opportunities once there is demand, much like the venture capital market, which started at nothing and now is about a $7 trillion pool of money.

“The supply of money creates its own demand, lets billions of pension fund, trillions of pension fund money become available,” he said.