Impact Investing: Building the industry

September 13, 2012

Although investments for social and environmental impact have been made for decades, the field of impact investing has really taken off over the last decade, and since 2007 in particular. This evolution has been covered in a new report titled “Accelerating Impact: Achievements, Challenges and What’s Next in Building the Impact Investing Industry,” which was written by E.T. Jackson and Associates Ltd. on behalf of the Rockefeller Foundation. This report places impact investing in context and examines recent progress in building the global industry, followed by recommendations to accelerate the rate of growth.

As the authors state: “The past four years have seen accelerated growth in, among other things, the number of organizations in the field, the quantum of capital mobilized, the variety of financial products offered, the number of participants in key networks, the number and depth of research outputs by the industry, and the range of methods and tools for measuring impact. There is both a need and an opportunity for industry leaders to join together to catalyze a powerful further acceleration—a surge in the rate of growth—across a wider range of dimensions, in order for the field to reach maturity, scale and sustainability.”

The report is worth reading for anyone who wonders how we can bring together the resources required to address deep social and environmental challenges. At a high level, it really shows how much work there is still left to be done and illustrates that there is little room for complacency (while acknowledging that progress is critical).

This candour is refreshing since the field of impact investing has often been criticized for featuring excessively optimistic conversations. However, as the experiences of the microfinance industry have shown, unrealistic expectations can cast doubts on and even derail genuine progress.

To be certain, impact investing has made important strides in the last few years. The “Accelerating Impact” report examines many of these and identifies a number of challenges as well. The following challenges are worth special consideration.

There is more need for patience in general. In this nascent industry, it will take years for a sustainable pipeline of investment opportunities to develop, and even more for evidence of proven returns. Those who are waiting to deploy capital (at least, those hoping for above-market returns combined with proven impact) will likely have to wait a little longer. There are many unanswered questions as we step into the unknown.

In particular, more risk-tolerant and grant capital is needed. Financial managers and investment advisors have yet to figure out the best way to structure investments for blended returns, especially when the recipients are often non-traditional businesses. In addition, as the authors note, most of the demand is in the global south (low-income, developing and emerging economies). Given the challenges facing entrepreneurial activity in such contexts, failures will be as common as successes in the first few years.

To deal with these challenges, it may be more useful (albeit more capital intensive) to learn through pilot investments and a process of iteration as opposed to conducting more research. One of the recommendations of the report is to sponsor “new action research on emerging hybrid, scalable enterprise models.” A few of these models are listed in Section 3.3 of the report, and include smallholder farmer aggregators, mobile money and microcredit.

In dynamic environments, however, the assumptions underlying certain business models may crumble at any time. No one wants to repeat the experience of Andhra Pradesh in 2010, when the microcredit market collapsed after the state government changed regulations.

Research needs to be funded in the form of “public goods infrastructure,” publicly available research supported by leadership networks like the Global Impact Investing Network to help identify investment opportunities or due diligence models. Currently the market relies on individual actors collaborating as opposed to a body of knowledge that is widely accessible.

Indeed, one of the main agenda items identified by the report for market-building is greater collaboration in and of itself—not just talking at conferences, but sharing best practices, deal syndication and co-investment.

Finally, and this is also emphasized by the authors, there is a need to support emerging talent (Section 3.3.3). Clearly there’s a lot to do, and there’s no shortage of interested people, so creating (paid) opportunities to contribute is going to help build the expertise that will be needed to take the industry forward. There is also a lack of targeted training for interested professionals. One particular gap is in training to develop financial skills, as well as an understanding of public economics and social needs.

Leadership doesn’t always come from the constant pursuit of innovation. At this stage of market development it arises from placing capital and working hands-on with entrepreneurs—the hard work required to build the field and accelerate impact.

The 2012 Social Finance Forum: Measuring up, which will be held November 8 and 9, and hosted by the MaRS Centre for Impact Investing, will support this movement. The forum will delve deeply into the opportunities and challenges surrounding impact measurement, while also exploring the other critical elements of what makes a good deal and how existing market opportunities measure up. Since 2008, the Social Finance Forum has been the place to convene Canadian and global leaders and new actors across the private, public and community sectors under one roof, curating diverse perspectives and insights into the ever-changing dialogue of social finance.

This year, attendees of the Social Finance Forum will hear from Gordon M. Nixon and Arlene Dickinson representing mainstream financial interest in the sector. Other featured presenters include Jeremy Nicholls (The SROI Network Intl.), Bart Houlahan (B Lab) and Andy Broderick (Vancity). They will lead conversations around valuing outcomes, the early mover experience, collaborative approaches to impact measurement and community development financing.