5.1 Role of Impact Investment Funds
5.1 Role of Impact Investment Funds
Impact investment funds play a critical role in making it easier for institutional investors to allocate more capital to impact investments. Three key recommendations for impact investment funds are outlined below that will help move the impact investment sector into the mainstream.83
Recommendation 1: Be clear and transparent about the financial returns that are generated and report the results to a third-party. This recommendation is important for three reasons. First, institutional investors need to be able to compare, rank and classify different investments. Through accurate and consistent reporting of financial performance to an aggregator, such as ImpactBase, investors are able to make more informed decisions regarding investment allocation. Second, misrepresentation in the sector is hindering many funds from raising capital. Some funds are promoting market returns and not achieving them; this is a disservice to the sector. Those funds that make investments that result in a trade-off between financial and social returns should articulate clearly their investment thesis and expected returns to promote the growth of the entire sector. And third, there is still confusion regarding the opaque definition of impact investing and the financial returns generated. In order for products to emerge at scale, investors will need clarity about what different funds actually achieve across sectors and geographies.
Recommendation 2: Create a system for measuring and reporting the social and environmental impact that is achieved. There are funds and organizations that are trying to re-explain their business model in terms of “impact” given the excitement associated with the sector. Until funds demonstrate consistent clarity around the social and environmental impact that is actually achieved as a result of their investments, the term “impact investing” will continue to be misunderstood. One idea that emerged during the Mainstreaming Impact Investing initiative is an industry association of impact investment funds that adhere to a common set of values and principles around impact reporting and measurement. This would serve to bring credibility to funds when actively raising capital from institutional investors.84 Furthermore, impact investment funds that introduce increased sophistication into their impact measurement and reporting processes (e.g. randomized control trials) will help to bring discipline and accountability to the sector.
Recommendation 3: Consider creative and innovative strategies to attract capital from large-scale limited partners. To address the constraint of deal size, impact investment funds could consider pooling funds that have similar investment and impact objectives. One obvious challenge with such an arrangement is the potentially higher fee structure (as in the case with fund of funds). But, in order for more institutional investors to enter the sector at this early stage, the economics may not make sense without this level of collaboration and partnership between impact investment funds. Similarly, impact investment funds may need to adopt innovative or new approaches to fund management to ease limited partners’ concerns about the early stage of the ecosystem. For example, some funds have found success raising capital when the fund is co-managed by someone with a strong financial background (and fund management experience) and another with deep experience managing an impact enterprise.