3.2 Impact Investment Ecosystem: The Landscape Today

In order for the impact investment market to reach its potential, the ecosystem will need to progress from the margins and into the mainstream. Some mainstream investors are already making a play in impact investing. To note a few examples, Credit Suisse is raising a US$ 500 million fund of funds that will invest in agricultural opportunities in Africa, Deutsche Bank successfully closed a US$ 15 million “Eye Fund” for ophthalmological treatment in 2010, JP Morgan established a Social Finance unit in 2007 that actively co-invests in impact investment funds, and UBS developed an internal position dedicated to developing impact investment products for its clients. Despite these efforts, the ecosystem is still quite early stage, fragmented and largely comprised of niche players.

Although the impact investment ecosystem is best understood at the country and sector level,²⁴ the Mainstreaming Impact Investing initiative analysed the ecosystem globally to better understand where common gaps and pain points exist. Each segment of the ecosystem, graphically illustrated in Figure 7, is described below.

Capital Providers: As illustrated in Figure 2 in Section 1.3, the capital providers that are most active in the impact investment sector are high-net-worth individuals and family offices. High-net-worth individuals and family offices have flexibility and a high level of discretion when making investment decisions. In many instances, they will have more autonomy than other capital providers; similarly, they often have fewer stakeholders to manage. Often, one or two family members may drive the investment decision as opposed to a formal investment committee. Even larger family offices have experienced increasing demand for impact investment offerings. For example, BSW Wealth Partners, an independent wealth adviser and multifamily office, grew its assets under management from US$ 225 million to US$ 736 million in 10 years after deciding to offer an impact investment alternative in all asset classes.²⁵

Development finance institutions are also leading capital providers in the impact investment market. Generally, they prefer to be catalytic and provide anchor funding, and thus are most active for first-time funds or investments. For example, the African Development Bank (AfDB) Group provided a US$ 100 million anchor investment into Credit Suisse’s $US 500 million Agvance Africa Fund as a means to catalyse investment into the agribusiness sector in Africa.²⁶ Similarly, the Inter-American Development Bank invested $US 25 million in IGNIA to spark investment into business models that serve low-income communities in Latin America and the Caribbean.²⁷ Many impact investment funds experience some resistance raising capital from development finance institutions for second and third funds when their investment is no longer catalytic for a specific sector or geography.

Foundations are a natural fit for impact investing given their concerted focus on addressing key social-sector challenges. Programme-related investments (PRIs) in the United States – investments made that accomplish a charitable purpose and are thus counted towards a foundation’s mandatory giving – were designed with the intention of allowing private foundations to invest a portion of their endowment in investments that align closely with their mission. Similarly, mission-related investments (MRIs) are investments of endowment funds that align with the foundation’s mission and that target market returns. The key distinction is MRIs cannot be counted towards part of the foundation’s mandatory 5% disbursement, while PRIs can. However, adoption of both PRIs and MRIs is limited; only 14% of foundations surveyed in 2011 hold MRIs, and just 7% hold PRIs. A 2013 survey by Indiana University offers one potential reason: PRIs are not widely understood by foundation leaders. Furthermore, there is often a communication and operational barrier between the investment committee and the programme side of most foundations. As a result, even leading proponents of impact investing may not be investing more than 5% to 10% of their endowment in impact investments. As always, notable exceptions exist. The KL Felicitas Foundation allocates over 85% of its portfolio to impact investments, and the F.B. Heron Foundation plans to invest 100% of its endowment to achieve its mission.

Pension funds, insurance companies and other liability-constrained investors are much less active investors in the impact investment sector, especially with respect to those investments that may deliver below-market risk adjusted financial returns. If there is an expected trade-off between profit and purpose, liability-constrained investors will not invest given their fiduciary responsibilities. However, in instances when there is no expected trade-off, certain liability-constrained investors are beginning to allocate capital to impact investments. Section 1 highlighted both PGGM and Zurich Insurance as notable exceptions. TIAA-CREF is a notable US-based exception that actively invests in corporate social real estate (e.g. affordable housing and sustainable development), global microfinance and insurance, and community banks.²⁸ As the constraints that are described in Section 4 are addressed, more liability-constrained investors will potentially consider impact investing as a viable investment approach. The potential for the impact investment sector to scale is contingent upon appealing to these investors in a more compelling way. 

University endowments, although representing only a very small portion of global assets under management, are not active in impact investing. This is likely driven by the misperception regarding the returns that impact investments generate and because the primary objective of the investment committee is to preserve and grow the endowment to fund future generations of education (indeed an impactful cause). However, university endowments may begin to incorporate socially responsible investment strategies into their investment process when the right impetus emerges, perhaps indicating that with the right impetus, university endowments might begin to allocate capital towards impact investments. For example, in 2013 the Harvard Management Company appointed a vice-president for sustainable investing who is directed to overseeing the ESG-aspects of Harvard University’s endowment investments. The position was potentially created in part as a response to student and alumni demand for the Harvard Management Company to manage the Harvard endowment with greater sensitivity to social and environmental considerations.²⁹

Sovereign wealth funds, in general, focus on local and national development and invest to ensure that long-term growth prospects are achieved. In addition, many sovereign wealth funds establish clear social or environmental objectives. For example, the Mubadala Development Company, established in 2002 and owned by the Government of Abu Dhabi, seeks to “create socio-economic benefits for citizens of Abu Dhabi”.³⁰ Khazanah Nasional Berhad, the Government of Malaysia’s investment fund, is committed to supporting “important social and developmental issues such as poverty alleviation and humanitarian support in local communities”.³¹ However, despite one-off examples, sovereign wealth funds infrequently allocate capital to impact investment funds and products given the constraints and challenges addressed in Section 4.

Investment Funds: A common way for mainstream investors to invest in impact enterprises is through impact investment funds. These funds are differentiated by their institutional context, target sector or geography, use of subsidy and return expectations. Certain funds, such as Bridges Ventures and Bamboo Finance, make small to mid-cap growth equity investments across various impact sectors and are not affiliated with larger institutions. Other funds are affiliated with large banks or development institutions, such as Prudential Social Investments’ US$ 300 million fund focused on affordable housing, access to quality education and community development³² and UBS’s US$ 100 million impact investment fund focused on small enterprises in developing countries.³³ Similarly, certain funds focus on specific sectors, such as LeapFrog Investments’ focus on financial services, while other funds focus on a certain theme in a specific region, such as Vital Capital’s focus on integrated community building in sub-Saharan Africa via investments in affordable housing, collaborative agriculture, infrastructure, healthcare and education. Generally these funds target market returns, although many are structured as non-profit organizations and make a mix of grants, subsidized loans and equity investments typically into undercapitalized sectors in frontier markets. They also often provide pioneer funding and seed capital. Select examples of such organizations include: Acumen, Calvert Foundation, LGT Venture Philanthropy and Root Capital.

Impact investment fund-of-fund structures have also emerged in recent years that may appeal to larger institutional investors given their relative size and opportunity for diversification. For example, Sarona Asset Management, a boutique investment firm based in Canada, invests in private equity funds in high-impact sectors in frontier and emerging markets.³⁴ It has gained traction raising funds from small UK-based pension funds given Sarona’s financing structures which include governmental guarantees on a certain portion of the portfolio.

Although aggregate data on these funds is largely unavailable, JP Morgan and the Global Impact Investing Network (GIIN) conduct an annual survey of impact investment organizations and captured responses from 99 organizations in 2013, over half of which were fund managers.³⁵ In terms of geographical focus, the majority invests in sub-Saharan Africa, Latin America and the Caribbean, and the United States and Canada (see Figure 8). Regarding sector investment focus, the majority of funds invest in food and agriculture impact enterprises, while the investment focus of other sectors is fairly evenly distributed (see Figure 9). In terms of stage of company development that impact investment funds prefer, the majority invest in growth stage companies (see Figure 10). 

Investment Targets: The investment targets or “impact enterprises” within the impact investment ecosystem span multiple geographies and sectors. Figure 11 and Table 3 outline the geographical and sector affiliation of the organizations that contributed data to the Global Impact Investing Network’s IRIS initiative.³⁶

Table 3

Impact enterprises may employ a for-profit or not-for-profit business model,³⁷ consider themselves to be a social enterprise or traditional business with a social mission, and serve the destitute working poor at the base of the economic pyramid or the aspiring middle class. Despite these differentiating factors, impact enterprises all commonly seek social or environmental objectives and aggressively measure and report their progress on meeting these objectives. In many instances, the social or environmental objective is intrinsic to the business model and there is no conflict between the social and financial returns. In these instances, the business indicators are the same as the social indicators (e.g. an insurer that serves people living with HIV/AIDs). However, for other impact enterprises, the social or environmental objectives may complement the business model but are intentionally integrated in (e.g. a subsidization model in which the profits from a for-profit private school subsidize the educational expenses for low-income students). In both cases, the economic activity drives the social or environmental impact.

To view examples of impact enterprises or social entrepreneurs, several organizations maintain databases, including Ashoka,³⁸ Echoing Green,³⁹ Global Impact Investing Rating System,⁴⁰ the Schwab Foundation for Social Entrepreneurship,⁴¹ Skoll Foundation,⁴² Unreasonable Institute,⁴³ among others.

Intermediaries: Effective intermediaries can help to create liquidity, reduce risk, lower transaction and information costs, and facilitate payment mechanisms (see Figure 12). Intermediaries play a pivotal role in creating products, vehicles and investment structures that meet the needs of mainstream investors. In mainstream finance, financial intermediaries are traditionally the middlemen in transactions and usually include investment banks, advisers, brokers and exchanges. In the impact investment sector, the current landscape of intermediaries largely comprises small and specialized players. As described earlier, many investment banks are making a play in impact investing – Goldman Sachs’ Urban Investment Group, JP Morgan’s Social Finance Group and Morgan Stanley’s Global Sustainable Finance Group are just a few examples – but few banks structure the impact investment transactions within their existing commercial banking operations for reasons described in Section 4. Following are the categories of impact investment intermediaries in the impact investment ecosystem today.

Exchanges/Platforms: Exchanges and investment platforms help address the challenge that many investors face when seeking to invest in impact enterprises: identifying investable opportunities. While stock exchanges have been facilitating transactions for centuries, the first Social Stock Exchange was officially launched in London in 2013; it showcases publically listed impact enterprises that trade on the London Stock Exchange.⁴⁴ Other stock exchanges are expected to follow suit in 2013; the Impact Investment Exchange (IIX), which trades out of Mauritius, will “support listing, trading, clearing and settlement of securities issued by social enterprises” across Africa and Asia.”⁴⁵ While social stock exchanges will likely not result in rapid acceleration of mainstream capital into impact investments, they have the potential to offer value to retail and institutional investors by providing access to liquid securities of impact enterprises. In addition to exchanges, there are many platforms that serve as information resources, aggregating investment data, reporting leading impact investment funds and providing databases that are searchable by sector, geography and asset classes. For example, ImpactBase, a database managed by GIIN, provides an opportunity for accredited investors to search funds, view profiles and contact fund managers. Platforms like this are playing a crucial role in facilitating transactions as the impact investment sector grows.

Advisers: Impact investment advisers provide consulting and structuring services to asset managers and asset owners and help establish impact investing programmes, build impact investment portfolios and develop impact investment strategies across asset classes. Certain advisers will also structure products, facilitate transactions and create financial innovation in the sector. Although most advisers are niche players and specialize in servicing certain segments of the market (e.g. private foundations), there are notable instances where leading financial innovations have emerged from these intermediaries. For example, Social Finance UK, a leading impact investment intermediary, launched the first ever social impact bond in 2010, an innovation that has since been adopted in the United States, Canada, Australia and the United Kingdom.⁴⁶

Networks: Networks provide resources and services to grow the entire impact investment ecosystem. These may be organizations that convene other organizations in the sector to help promote best practices, create partnerships and increase the scale of the sector (e.g. GIIN, ANDE, etc.). In addition to convening, many networks’ members co-invest in impact investment opportunities in an effort to pool capital and spread risk (e.g. Toniic, Investors’ Circle, etc.).

Rating and Certification Organizations: Rating and certification organizations help verify the social and environmental performance of impact enterprises or impact funds, thereby reducing risk by providing objective certification and rating for impact investors. For example, B Lab – a non-profit organization based in the United States – certifies businesses if they meet “rigorous standards of social and environmental performance, accountability and transparency”. Currently, there are approximately 760 Certified “B Corps” from 27 countries and 60 industries.⁴⁷ Similarly, the GIIRS reviews and evaluates the social and environmental impact of companies and funds, and assigns them a score based on certain criteria across 15 categories. The standardized scoring system allows investors to benchmark and compare the social and environmental performance of various funds and companies. Currently, there are approximately 450 GIIRS-rated companies in 40 countries and 52 GIIRS-rated funds with a combined US$ 2.7 billion in assets under management⁴⁸ Many organizations track social and environmental performance independently, through working with a subject-matter expert or by developing internal proprietary standards and software solutions. For example, Pacific Community Ventures (PCV) works with the California Public Employees’ Retirement System on the California Initiative and the California Endowment to track the social and environmental impact of the US$ 250 million California FreshWorks Funds. Similarly, Abraaj Capital built a sustainability index to measure performance year over year and to compare companies in different sectors across markets, in a consistent manner. The index covers six areas of sustainable private sector development, and tracks more than 70 quantitative and qualitative data points for over 90% of investments that the group makes.

Accelerators: Accelerators help early-stage impact enterprises by providing mentorship, incubation and technical assistance. Many accelerators also provide seed capital or growth equity to help the enterprise become self-sustaining. For example, Echoing Green provides competitive fellowships to select social entrepreneurs of up to US$ 90,000 over two years to support the launch of their organization. In addition, fellowship recipients receive access to strategic and financial support from Echoing Green’s diverse community and advisory board.⁴⁹

Wealth Advisers: Wealth advisers provide high-net-worth individuals and family offices with information about investment strategies, products and portfolio structures, leveraging the investment platforms described above. However, relatively few advisers are knowledgeable about the impact investment funds and products available on the market today. In a survey conducted of over 4,000 US-based high-net-worth individuals, 50% of respondents claimed that their advisers do not recommend impact investment products; however, 48% of respondents claimed that they are interested in these opportunities.⁵⁰ This interest is expected to increase as mainstream investors begin to build platforms that advisers can use for assessing impact investment opportunities. For example, Morgan Stanley launched its Investing with Impact platform in 2012, which provides access to a suite of investment vehicles that have been evaluated for both financial return potential and social impact.⁵¹ As client demand grows for impact investment products, other mainstream financial institutions will likely follow suit, driving more capital into impact investments. 

Depository Institutions: Depository Institutions provide debt capital to impact enterprises. Similar to other banks, depository institutions specializing in impact investing receive retail deposits and administer loans; however, the differentiating factor is they typically lend to impact enterprises and the loan sizes are typically smaller than traditional commercial loans. A few European lenders are pioneers in the impact investment sector. Charity Bank, headquartered in England, has lent £165 million to over 1,000 charities since 2002.⁵² Similarly, Triodos Bank, headquartered in the Netherlands and with over €8 billion in assets under management, seeks “to enable individuals, institutions, and businesses, to use money more consciously in ways that benefit people and the environment, and promote sustainable development”.⁵³ Although anecdotal examples, these banks exist in a broader ecosystem of banks committed to lending to organizations that seek to achieve social and environmental objectives. For example, the Global Alliance for Banking on Values (GABV) is a membership organization comprising banks that comply with sustainable banking principles.⁵⁴ However, like other intermediaries, depository institutions in the impact investment sector are still small, niche players relative to large, multinational commercial banks.