2. Introduction to the Mainstreaming Impact Investing Initiative
In January 2012, at the World Economic Forum Annual Meeting 2012 in Davos-Klosters, the Forum convened a meeting among mainstream investors and social entrepreneurs to discuss how to harness the hype of impact investing. While the reasons impact investing would remain a niche seemed overwhelming, the opportunity to bring it into the mainstream was too important not to pursue. With this in mind, the Forum launched the Mainstreaming Impact Investing Initiative.
The first milestone – the publication of From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors in September 2013 – provided an overview of the sector, identified challenges constraining the flow of capital, and laid the groundwork for mainstream investors to begin a meaningful discussion on impact investment. Most of the constraints identified fit into one of four broad, overarching challenges: an early-stage ecosystem; small average deal size; the fit within an asset allocation framework; and double bottom line.
In December 2013, the second publication in the Forum’s Mainstreaming Impact Investing Initiative was launched – the first volume of From Ideas to Practice, Pilots to Strategy. Comprised of 15 articles, it is a compendium of actionable best practices for diverse stakeholders working in impact investing. The publication attempts to build the strategic case for impact investing for mainstream investors and showcase concrete organizational structures, processes and strategies employed by large asset owners and asset managers to implement impact investing. It also explores innovative impact investing solutions – comingled funds, social impact bonds and social stock exchanges – that can meet the needs of multiple stakeholders, including commercial investors, philanthropic organizations, governments and retail investors.
The eight articles in this second edition of From Ideas to Practice, Pilots to Strategy are meant to expand on the topics covered in the first edition. This publication includes information on innovative products that have been designed to engage retail investors as well as frameworks to build an impact investing strategy for asset managers. It also looks at the role academic institutions can play in building the field of impact investing.
Given that impact investing is a rapidly growing sector and expertise is spread among dozens if not hundreds of practitioners and academics, the report curates some – but certainly not all – of those leading voices.
Target Audience for Ideas to Practice, Pilots to Strategy II
This publication’s target audience includes three key groups: (1) traditional investors (both institutions and individuals) who want to start impact investing; 2) investors who are already engaged with impact investing but want to either expand it into a full-fledged strategy or continue within their current scope by learning and incorporating the best practices; and (3) intermediaries, foundations, development finance institutions, financial advisers, members of academia and policy-makers whose support is vital for the sector’s growth.
Motivation and Scope of Ideas to Practice, Pilots to Strategy II
Divided into three main sections, this report contains lessons learned from practitioners’ experience and attempts to showcase best practices and innovative instruments that asset owners, asset managers and academic institutions have successfully implemented to advance the impact investing sector.
The first main section, “Building a Strategy”, explores how impact investing can be incorporated within an institutional investor and provides an example of a strategy employed by an insurance company. It also offers a framework to access impact risk and return. This section’s key messages include the following:
- Private debt instruments, which offer predictable financial returns and greater control over social benefits while facilitating larger capital allocations, can be a suitable impact investment option for institutional investors.
- Understanding impact risk and return profiles on both the investment and portfolio levels is essential to making informed investing decisions and monitoring impact portfolios. Bridges Ventures developed a scoring guide to assess impact risk and return based on four criteria: target outcomes – the investment’s potential societal impact; ESG – managing environmental, societal and governance factors to protect and enhance value; alignment – between an investment’s ability to generate impact and its ability to deliver competitive risk-adjusted financial returns; additionality – whether target outcomes will occur anyway, without the investment.
The second section, “Democratizing Impact Investing”, explores the business case for engaging “main-street” investors and approaches for how impact investing can be made more accessible to them. This section includes the following key messages:
- For impact investing to become mainstream, the participation of retail investors must be increased. The US retail market counts 75 million individuals who collectively control in excess of $17 trillion investable assets. Evidence is growing that millennials and women prefer investments that generate social impact in addition to financial returns. Financial advisers who are mindful of the evolving preferences of their clients are best able to retain and grow their client base.
- Impact investing products that are structured to reach the average main-street investor – both matching their risk/return profile and distributed through financial adviser channels familiar to them – have the potential to meet client demand and tap into a growing market opportunity. Yet, currently, few products are available for non-accredited investors.
- Using traditional sales channels (brokerage firms and financial advisers) in addition to online sales channels, managers of impact funds can tap into an entirely new market of socially-conscious retail investors and also engage traditional investors. This requires a methodical approach to educating financial advisers so they could offer impact investing products to their clients.
- Raising capital from retail investors requires the administrative capacity to carry out extensive marketing and customer service. It is important that industry players specialize in their core competencies and structure effective partnerships to foster innovation and efficiency.
The third section explores the role academic institutions can play in the evolving impact investing sector. Universities play several important roles, including as originators of leading research and disseminators of skills and knowledge through teaching and collaboration hubs where the cross-pollination of ideas and cross-disciplinary innovation are encouraged. The section’s key messages include the following:
- When setting up impact investing programmes, it is important to clearly identify the goals of the programme based on the university’s theory of change and core capabilities and assets. Possible areas of focus may include developing a curriculum to engage students, doing research to advance the field and addressing local challenges for impact investing.
- Universities have a key role to play in educating the next generation of practitioners and professionals. This can come in many forms, including in-classroom teaching, career chats and hands-on projects, collaborations with corporations interested in developing impact investment skill sets among their traditionally trained employees, and conferences and webinars to disseminate the expertise more broadly.
- Universities can create safe spaces for experimentation through student-led initiatives or faculty-led centres that receive funding or action-oriented course work. In some cases, business schools and public policy schools can create labs and advisory services in the same way that law schools have public interest clinics.
Realizing that a definitional discussion of impact investing can lead to more questions than answers, this section is devoted to clarifying common areas of confusion.
Impact investing is an investment approach that intentionally seeks to create both financial returns and positive social or environmental impacts that are actively measured.1
First, it is an investment approach and not an asset class. Impact investing is an investment approach across asset classes, or a lens through which investment decisions are made, and not a stand-alone asset class. Certain impact investments (e.g. public equity security of an impact enterprise) may behave similarly to certain asset classes (e.g. public equities), while other impact investments (e.g. social impact bond) may not behave similarly to other asset classes (e.g. corporate bond).
Second, intentionality matters. Investments that are motivated by the intention to create a social or environmental good are impact investments. However, if the intention is solely financial gain, even if the investment unintentionally creates social or environmental value, the designation of the investment as an impact investment is less certain. For example, an investment in a pharmaceutical company that manufactures life-saving medications solely for the purpose of generating financial returns without the intention for social impact is not an impact investment. That said, the investment may certainly be impactful, but not an “impact investment” by definition.
Third, the outcomes of impact investing, including both the financial return and the social and environmental impact, are actively measured. The degree of financial return may vary widely from the recovery of principal to above-market rates of return. In addition to financial returns, the investment’s social or environmental value must be measured in order for the investment to be considered an impact investment.