Nearly two years ago, at its Annual Meeting in Davos in January 2012, the World Economic Forum convened a discussion among mainstream investors and social entrepreneurs on how to harness the hype of Impact Investing. While the list of reasons why impact investing would remain niche seemed overwhelming, bringing it into the mainstream was too important an opportunity not to pursue.

With this in mind, the Forum launched the Mainstreaming Impact Investing Initiative. The first milestone – From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors– was released in September 2013 and 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.

From Ideas to Practice, Pilots to Strategy is the second publication in the Forum’s Mainstreaming Impact Investing Initiative. The report takes a deeper look at why and how asset owners began to include impact investing in their portfolios and continue to do so today, and how they overcame operational and cultural constraints affecting capital flow. Given that impact investing expertise is spread among dozens if not hundreds of practitioners and academics, the report is a curation of some –but certainly not all –of those leading voices. The 15 articles are meant to provide investors, intermediaries and policy-makers with actionable insights on how to incorporate impact investing into their work. 

Target Audience for Ideas to Practice, Pilots to Strategy 

This publication’s target audience includes three key groups: (1) investors looking to start impact investing; 2) active impact investors looking to expand impact investing from a limited part of their work to a full-fledged strategy; and (3) intermediaries, policy-makers and development finance institutions whose support is vital for the sector’s growth. Since large investors often have a proportionally large influence on a sector, a key focus is on highlighting best practices or frameworks from large asset owners and asset managers.

Motivation and Scope of Ideas to Practice, Pilots to Strategy

The report’s goals are to show how mainstream investors and intermediaries have overcome the challenges in the impact investment sector, and to democratize the insights and expertise for anyone and everyone interested in the field. Divided into four main sections, the report contains lessons learned from practitioner’s experience, and showcases best practices, organizational structures and innovative instruments that asset owners, asset managers, financial institutions and impact investors have successfully implemented.

The strategic case for impact investing from the mainstream investor’s perspective is the focus of “More than an Idea: Creating the Case for Impact Investing”. This section includes the following key messages:

• Reflecting environmental, social and governance (ESG) standards in the investment process, across asset classes and alongside traditional financial metrics and competent risk management practices, can generate superior risk-adjusted, long-term investment returns. Moreover, inadequate ESG capability can lead to poor financial performance.
• Institutional investors can shape markets and encourage managers to design products with social impact. Recent data indicates that many institutional investors look to incorporate ESG standards into their investment decision-making. However, so that impact investment strategy becomes an institutional priority, decisions must come from top leadership. Institutions that have a commitment from top leadership for impact investing (or a similar mission) find it easier to implement the strategy as well as collaborate for shared successes.
• Reviewing past successes, those intended or not, can help investors evaluate potential strategy within their institutions. Large investors can conduct a rigorous review and retroactively tag their investments as “impactful” (i.e. those with a measurable social and financial return, but without clear intent). By sharing this knowledge, such investors help to set a reassuring climate for future impact investment strategy that would include explicit intention to generate measurable social and financial returns.
• Traditional investors are seeing the benefits of diversifying portfolios by working with socially minded investment managers who generate reasonable returns that are somewhat uncorrelated.
• Conventional interpretations of fiduciary duty can lead to herding, which while providing safety of numbers, can produce investment decisions that are not in investors’ long-term interests. For impact investing to engage pension funds, there must be a clear account of how impact investing is congruent with fiduciary duty, and active engagement with asset owners on why impact investments may require funds to reassess their own attitudes towards what constitutes “conventional” investment. 

The section on “Building a Strategy” provides examples of organizational structures, processes and strategies employed by large asset owners and asset managers to implement impact investing, while generating risk-adjusted financial returns and meeting the fiduciary responsibilities of institutional investors. Depending on the organizational structure, the frameworks may include impact investing as an investment approach across various asset classes; or, focusing and developing expertise in a particular sector. This section’s key messages include the following:

• Impact Investing can be done within a large institution through a variety of operational approaches: a stand-alone team, a hub-and-spoke structure, an outsourced adviser or an institution-wide commitment and strategy. Whatever the approach, the impact investment thesis and criteria for selecting and evaluating impact should be clear from the outset. In addition to diversifying across asset classes, impact investors can increasingly diversify across impact sectors as markets deepen
• Investors need to ensure that impact investing is well-integrated into an organization’s decision-making processes and has buy-in from major internal stakeholders. If impact investing has received support from top leadership, integration of it throughout the organization is a matter of communication and coordination. In other circumstances, it is up to the teams to open communication channels laterally and collaborate across teams for shared objectives such as diversified portfolios and reduced costs of entering new markets. Impact investors can diversify not only across asset classes, but also and increasingly across impact sectors, as markets deepen and the choice of investment opportunities grows.
• Given impact investing is a nascent sector, focusing due diligence on fund managers’ track records may hold the industry back. Investors should rather seek to understand the factors determining a fund manager’s decision-making process. 
• Partnership is critical for success. Successful impact investing fund managers share four qualities: partnering effectively with the public sector, using catalytic capital, providing “multilingual” (i.e. cross-sector) leadership, and placing financial and social objectives on equal standing. Moreover, treating investors (LPs) as partners from the outset on governance structures, financial and development goals, as well as including impact objectives early in the investment process, is important to ensuring mission alignment among key players. 
• Impact investing does not have to be “finance-first” or “impact-first”, but can be “professional-first”. Asset managers can apply the same degree of professionalism to investment decision-making as to traditional investing, and so comply with the fiduciary responsibility of institutional investors. Investors can use a methodical approach to building an impact investment portfolio based on the risk, return and impact profile of individual investments and the portfolio as a whole.

“Innovations for Unlocking Mainstream Capital” looks at innovative impact investing solutions that can meet the needs of multiple stakeholders, including commercial investors, philanthropic organizations, governments and retail investors. The section’s key messages include the following:

• Commingling funds serve as innovative forms of partnership among previously isolated capital providers. Set up correctly, they can multiply the impact of capital while preserving their contributors’ interests.
• The Social Stock Exchange is a mechanism for opening up impact investing to retail investors, as well as making it more attractive to mainstream investment. A conducive environment for issuers and investors, along with an ecosystem within which they can interact, are important requirements for creating a vibrant public impact investing market.
• Social impact bonds (SIBs) are a novel way of finding economic solutions to social problems and, as such, have tremendous potential for channelling resources to programmes that work. Development of a mature, well-organized SIB market based on solid infrastructure is still very much a work in progress; a robust pipeline of SIB-ready projects, an ecosystem and a blended-value investor pool are and will be key factors for success

Definitional Alignment 

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 as an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured. 

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 being an impact investment is less certain. For example, an investment made into 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 recovery of principal to above-market rates of return. In addition to financial return, the investment’s social or environmental value must be measured in order for the investment to be considered an impact investment.