Many constraints keep institutional investors from allocating capital towards impact investments; most of these can be attributed to one of the four broad overarching challenges described below: early-stage ecosystem, small average deal size, fit within asset allocation framework and double bottom line.
Before these challenges are analysed, a few caveats should first be noted. First, the challenges are not specified by geography. Challenges will likely vary based on the investment practices, regulatory environment and culture of different geographies. For example, Dutch pension funds appear to be more active in impact investing than North American pension funds. The challenges that Dutch pension funds face will differ slightly from those challenges experienced in the United States.
Second, challenges will vary based on the different types of institutional investors. For example, insurance companies typically allocate a significant portion of their balance sheets to fixed income; thus the unique challenges around fixed income in impact investing will be much more acute for insurance companies than for other institutional investors.
Third, some institutional investors and impact investment funds have started to overcome certain challenges. During select interviews conducted as part of the Mainstreaming Impact Investing initiative, it became clear that some organizations have begun to develop leading practices and strategies to address the challenges presented below. Although Section 3.3 highlighted two examples, additional work needs to be done in order for other institutional investors to better understand these strategies and learn from leading institutional investors.