Investing for Social and Env Impact Monitor Institute

8/14/2019 Investing for Social and Env Impact Monitor Institute

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Contents

WhAt is impACt investing? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

summAry: promise, periL, And preCision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

An industry emerges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

W a C a t m ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

h w b l a ma k lac : L o i . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

the uture o impACt investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

h w i ac i C l a l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

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An ApproACh or ACCeLerAting progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43t pla ma k lac b l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

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WhAts At stAKe: A CALL to ACtion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

A bLueprint or breAKthrough: desCription o Key initiAtives . . . . . . . . . . . . .61

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pro iLes

o impACtinvestors

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Ja C g l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20i g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25t ba k. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29tiAA-Cre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41g a i ma a Cl a s l s a. . . . . . . . . . . . . . . .52n w y k C Ac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53ha a h a i a al l l Ca al Acc p a. . . . . . . . . . . .56

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orientAtion

tHe Core ArgUMent

DetAiLeD reCoMMenDAtions


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3WhAt is impACt investing?

WhAt is impACt investing?

i n Y C y, a l - c m m h m a a a m la d d l dh a l a m h n Y C y Ac u u d.The Fund, created in 2004, aims

to acilitate the construction o 10,000 units o a ordable housing in a city with rapidlydiminishing a ordable housing stock. The Fund came together when private oundationsmade $32 million in low-interest, subordinated loans and a city-based charitable trust invested$8 million on similar terms, enabling commercial banks to raise and place more than $160million o commercially priced debt into the und.

i u al ta za a, a ud ad a h m y h l h a l c c l h uld y a la a l h m h u h c d m a l cal d u .The

distribution business could reach her village because o an equity and working capitalinvestment made by E+Co, a nonpro t mezzanine und ocused on making debt and equityinvestments in businesses that develop and sell modern energy services.

i Cam d a, a mall u a d h d m a m c a c a .The bankis originating new loans a ter accessing commercial capital markets through a $110 million loan

und structured in 2007 by Blue Orchard, a Swiss micro nance- ocused asset managementcompany, and Morgan Stanley. The loan und, rated by Standard & Poors, was syndicated oncommercial terms among institutional investors, such as pension unds, in Europe and theUnited Kingdom.

The New Yorker moving into her rst home, the student in Tanzania study-ing under electric light, the small-business owner in Cambodia expandingher payrollnone o these people would recognize one another as co-participants in the same emerging industry . Neither, perhaps, would thecommercial banker placing debt in the Acquisition Fund, the high-net- worth individuals investing in E+Co, or the German worker whose pension

und invested in micro nance through Blue Orchard.

Yet these are all examples o the proli eration o activity occurring as anew industry o impact investing emerges. This industry which involvesmaking investments that generate social and environmental value as wellas nancial return, has the potential to complement philanthropy and gov-ernment intervention as a potent orce or addressing global challenges atscale. This document is intended to shed light on the industrys recentemergence and highlight the challenges it aces in achieving its promise.


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5summAry: promise, periL, And preCision

The pressing questiis whether impactinvesting will remaa small, disorganizeunderleveraged nich

or years or evendecades to come.

There are moments in history when the needs o an age promptlasting, positive innovation in nance rom ideas as big as theinvention o money, to the creation o new institutions such asbanks and insurance rms, to the development o new productsand services such as mortgages, pensions, and mutual unds.Evidence suggests that many thousands o people and institutions aroundthe globe believe our era needs a new type o investing. They are already ex-perimenting with it, and many o them continue even in the midst o a

nancial and credit crisis. Thats why the idea o using pro t-seeking investmentto generate social and environmental good is moving rom a periphery o activistinvestors to the core o mainstream nancial institutions.

No one can know or sure how much money has been invested or is seeking invest-ment that generates both social and environmental value as well as nancial return.But a good guess is that the total size o the market could be as big as $500 billion within the next decade.1

These impact investors want to move beyond socially responsible investment, which ocuses primarily on avoiding investments in harm ul companies orencouraging improved corporate practices related to the environment, social per-

ormance, or governance. Instead,they activelyseek to place capital in businessesand unds that can provide solutions at a scale that purely philanthropic interventions usually cannot reach. This capital may be in a range o orms includingequity, debt, working capital lines o credit, and loan guarantees. Examples in re-cent decades include many micro nance, community development nance, andclean technology investments.

Whats most interesting today, though, isnt identi ying this new promise.Rather, we will argue that this moment is a messy transitionmade even messier by 2008s nancial crisisin an evolution o activity that is already several decadesold. How this transition is traversed, and how quickly, will determine the scale andultimate impact that this new domain o investing can and will have.

The pressing question is whether impact investing will remain a small, disor-ganized, underleveraged niche or years or even decades to comeor whether leaders will come together to ul ll the industrys clear promise, making thisnew domain a major complementary orce or providing the capital, talent, andcreativity needed to address pressing social and environmental challenges.

summAry: promise, periL, And preCision


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Two types o peril willneed to be con rontedexplicitly to seize thepromise inherent in thecurrent transition orimpact investing: therisk that investing orimpact will ultimatelybe too hard and therisk that investing orimpact will ultimately

be too easy.

Our premise is that there is only one acceptable answer. It matters a great demore o our eras assets are used to address some o its most troubling cha

Prompted by this question and this premise, in the spring o 2008 we begaplore what the uture o this style o impact investing might be. We speno the yearin close partnership with the Rocke eller Foundation, and sed with additional unding rom the Annie E. Casey Foundation, the JPMChase Foundation, and the W.K. Kellogg Foundationengaging in the interresearch, and dialogues that have resulted in this report. Its been a ascinatinot least because o the backdrop o the global nancial market crisis that over the course o the project.

The point o view expressed here was ormed a ter extensive scouring ostudies and research as well as a convening o 45 investors and intermediarested or engaged in investing or impact. It refects more than 50 original intconducted with a range o investorsincluding private individuals, amiinvestment banks, institutional investors, oundations, and pension undstheir experience with investing or impact, how they think it may evolve, a will best accelerate its evolution. While no one can predict with certainty hglobal economic markets will evolve, we have sought through these dialounderstand the potential implications o 2008s nancial crisis on impact in

Our analysis shows thattwo types o perilwill need to be con ronted explicitly tseize the promise inherent in the current transition or impact investing: The risk that investing or impact will ultimately betoo hard . Here, hype,

poor thinking, and sloppy execution would cause so much disappointmerelatively little capital would wind up in this new style o investing. Theovercome the typical challenges acing a messy, new industry could disas investors simply give up too soon, especially in the ace o strong mnomic head winds.

The risk that investing or impact will ultimately betoo easy . Here, the de ni-tion o social and environmental impact could turn out to be so loose andiluted as to be virtually meaningless. At best, this outcome would turn ttype o investing into a eel good rather than a do good exercise. Ait could actually divert capital away rom philanthropy, decreasing the rededicated to con ronting serious societal challenges.

Success ully con ronting these risks will require leaders and investors toprecisionon sustained rigor and refectionin the midst o genuine exciand good intentions. Such scrutiny would be necessary even without globacial ragility. But the travails triggered by the sub-prime credit crisis are a rthat investing well is hard in any circumstances and wish ul thinking is noegy or con ronting real risks.

We will argue here that the precision most needed in the years ahead recon ronting a paradox:impact investing is both one thing, and many things . This


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iMpACt investing in ACtion

CLeAn teCHnoLogY Once a niche interest o philanthropists, the sector has growntremendously, with $148.4 billion o new investments in clean technology in 2007. Cleantech investments are the destination or more than 10 percent o venture capital unding,although much o this unding is purely pro t-seeking and not motivated by impact. Among

the many unds interested in clean tech are London-basedGeneration Investment Manage-ment , which integrates sustainability into equity analysis and closed a $638 million ClimateSolutions Fund in 2008; and Connecticut-basedMissionPoint Capital Partners , whose $335million und is ocused on solutions or a low-carbon economy. Top venture unds KleinerPerkins Cau eld & Byers and Draper Fisher Jurvetson are also leaders in this space.

MiCro inAnCe Microloan volume has grown rom $4 billion in 2001 to $25 billion in 2006.Successes within this rapidly developing sector includeresponsAbility , a Zurich-based advi-sory services rm ounded in 2003 that is currently channeling more than $600 million in as-sets into micro nance, much o it rom private banking clients and high-net-worth individu-als. The rst collateral debt obligation to be backed by a port olio o loans to micro nanceinstitutions was issued by the Swiss companyBlue Orchard , which sold $87 million worth to

private institutional and individual investors in 2004-5.gLobAL HeALtH TheInternational Finance Facility or Immunization, launched in 2006,raised up to $4 billion in triple A-rated bonds or the provision o vaccines that could save5 million lives in the next 10 years. The bonds, which were 1.75 times oversubscribed, werebacked by eight donor countries and managed by Goldman Sachs and Deutsche Bank. Anumber o newer unds, backed by experienced managers (e.g., senior executives romPutnam and Ox ord Bioscience), have launched in the last 12 months seeking to combine

nancial return and mission impact.

sUpporting job CreAtion AnD sMALL AnD MeDiUM enterprises in DeveLopingCoUntries Successes have been launched using a range o unding sources. The largenongovernmental organization,BRAC , based in Bangladesh, uses enterprise investment-

driven approaches to serve the poor at a massive scale and has created almost 7 million jobs through development interventions in Asia and A rica.Grofn , which was incubated bythe Shell Foundation and has proved to be commercially viable, has more than $100 millioninvested in eight di erent unds, mostly in A rica; in 2008, it launched a new und with $125million o development nance money at its rst und closing. In South A rica,BusinessPartners International was launched as a business providing a ull-service o ering to entre-preneurs, including nancing and technical assistance. It has invested $88 million, with morethan 80 percent o deals in businesses owned by black entrepreneurs or women.

CoMMUnitY DeveLopMent in tHe U.s. The Community Reinvestment Act, originallypassed in 1977, has provided incentives to dramatically increase investment in poor commu-nitiesa total o $26 billion was invested in the U.S. in 2007.Sel -Help, a community devel-

opment lender and real estate developer, has provided more than $5 billion by developinga secondary market or non-con orming mortgages that responsibly nanced low-incomehome purchases. In 2007 alone,Local Initiatives Support Corporation made more than $1.1billion in investments to revitalize low-income communities, andEnterprise Community Partners invested $1 billion in a ordable housing and community development.ShoreBank ,the rst community development and environmental bank holding company, has growndramatically, with $2.4 billion in assets as o the end o 2007.


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moment o transition requires leaders to build the collective will that can onrom seeing the common whole that is emerging rom diverse elements

emerging industry. But at the same time, what is needed to accelerate progthe ability to separate and make distinctions, so that action is meaning ulground.

Our purpose is neither to celebrate nor to simply warn o the dangers ahead.Instead, we hope to lay out what it would mean to set the bar high enoughtoadvance this emerging industry systematically, with demonstrable impact on ur-gent social and environmental issues.

Our ocus on impact investing is in no way a diminution o the criticalphilanthropy or a view that impact investing can and should broadly supp These times remind us how easy it is to slide into market triumphalismwhlapse into the sloppy (and incorrect) thinking that investment and market mnisms are the solutions to all our problems. However, the magnitude and nathe problems humanity aces also require the harnessing o additional invcapital.

This report has been designed as a guide or the innovative leaders who canate the progress o impact investinginvestors, advisors to investors, entrephilanthropists. It summarizes our ndings about: The current state and shape o the industry at a critical moment in its development

so you can locate yoursel in the current landscape, refect on its opportuand challenges, and understand what has catalyzed other industries at thiphase o evolution

How impact investing might evolve so you can develop an understanding o

what the uture may hold, including the promise and tradeo s o pursudi erent strategies An approach or accelerating the growth and impact o this style o investing so

you can assess what you can do to seize the business opportunities inherit and understand what could be achieved by joining with others

A call to actionso you can understand the importance o the moment and develop a concrete sense o what success in building a marketplace or investing might look like in the months and years ahead

We will also try to bring the diversity within impact investing to li e texamples and pro les o people engaged in doing it.

Our purpose is neitherto celebrate nor tosimply warn o thedangers ahead. Instead,we hope to lay out

what it would meanto set the bar highenoughto advancethis emerging industrysystematically, withdemonstrable impacton urgent social andenvironmental issues.


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Despite the substantial disruptions in the general investment community thathave le t many people shell-shocked and others triumphal about capitalisms de-mise, impact investing innovation is proli erating. But only pioneering leaderscan provide the talent, resources, and discipline that will be needed to create acoherent marketplace with high standards o impact. Working in an emergingarea can eel isolating at times. Our hope is that this report will help you see your-

sel as part o something largerand also inspire you to take part in ways you havenot yet imagined.

How big is iMpACt investing? 2

Because this new style o investing is diverse and in a na-

scent stage o development, there is no way to tell exactlyhow big it really is. But the high level o activity and inno-vation in speci c segments and geographies where data isavailable suggests that the industry is poised or growth.

Community investing re ers to the provision o nancialservices to underserved communities and includes banks,credit unions, loan unds, and venture capital unds. It hastaken hold in the U.S. and, more recently, in Europe. In theU.S it has grown to a total o $26 billion invested, witha compound annual growth rate o 22 percent between

2001 and 2007. The micro nance eld globally has growneven aster, with the total volume o microloans growingat a 44 percent annual rate rom 2001 and 2006 to reach$25 billion. Meanwhile, the volume o money coming intoclean technology investments has quickly become a food,growing to $148.4 billion o new investments in 2007, up60 percent rom the year be ore.

How much larger could investing or impact be, i leaders join together to build the marketplace in rastructure weoutline in this report? Given the size o todays screenedsocial investments, it is certainly plausible that in the next

ve to 10 years investing or impact could grow to repre-sent about 1 percent o estimated pro essionally managedglobal assets in 2008. That would create a market o ap-proximately $500 billion. A market that size would createan important supplement to philanthropy, nearly doublingthe amount given away in the U.S. alone today (global

gures are not available).

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Note: Social screening gures include some impact investing as well as negativelscreened assets. Sources: Giving USA, Social Investment Forum, European SustInvestment Forum, and International Financial Services London. All data is basereports issued in 2008 with data rom 2007. Global managed assets adjusted to remarket downturn. See endnote 2 or urther explanation.

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Impact Investing hasthe potentialto grow toabout 1% o total managed assets, whichwould result inabout $500 Bo capitalchanneled toward social and environmentalimpact.


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11An industry emerges

An industry emerges

A t w ba l:t C l u

Socially Responsible Investing

Blended Value

Impact Investing

Mission-Driven Investing

Mission-Related Investing

Triple-Bottom Line

Social Investing

Values-Based Investing

Program Related Investing

Sustainable and Responsible Investing

Responsible Investing

Ethical Investing

Environmental, Social, and GovernanceScreening

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The style o investing we are addressing here is not new.Pioneers in micro nance, community development nance,and clean energyto name a ew o the arenas already ull o activityhave been hard at work or decades. And some leadersin what is broadly called social investing have longbeen experimenting with going beyond negative screeningto investing in companies actively doing good.Butrecently it has become possible to see the disparate and uncoordinated in-novation in a range o sectors and regions converging to create a new globalindustry, driven by similar orces and with common challenges. This loose collec-tion o investment activitieswhich operate in the largely uncharted area betweenphilanthropy and a singular ocus on pro t-maximizationis still in search o aname. This report names the activity impact investing , recognizing the doublemeaning (investing or social and environmental impact, as well as the impact thatthis new approach could have on investing as a whole).3

Whatever name you give it (see sidebar, A Tower o Babel), its

growth is being ueled in the headlines and behind the scenes by such actors as: Prominent amily o ces or the worlds wealthiest individu-

als that actively seek to source, vet, and execute investmentsto address a range o challenges, rom the perils o climatechange to the su ering o people living in U.S. inner cities,A rican slums, or rural Indian villages.

Clients o leading private banks who call on their investmentmanagers to provide them with more choices than just tradi-

tional investment and pure philanthropy. Private oundations that partner with investment banks,

development nance institutions, and other oundations tomake investments in areas related to their social mission.

Private equity unds that aim to provide growth capital pro -itably to businesses that generate social and environmentalreturns.


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Mutual unds that have dedicated a portion o their assets to emerging cpanies committed to generating social and environmental value or bondport olios nancing housing or low- and moderate-income amilies orcivic improvements.

Pension unds and sovereign wealth unds that are using their substantiaresources to begin identi ying how to deploy capital in ways that bene tcommunities they serve and recognize the power o the capital they inve

Corporations that nd ways to materially improve the lives o the poor wcreating products and services that generate a pro t.

Governments investing in unds that support economic development in areas.

This growing activity is generating excitement that has persisted despite thecial downturn o 2008. The business press is drawing attention to it, conare being convened to discuss it, and even Bill Gates has come up with hcatch-all category, creative capitalism. And it is increasingly important, ginternational private investment has vastly outstripped government and meral aid since the early 1990s.

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An industry emerges 13

Our research indicathat this emergingindustry has reacheda transitional momein its evolution, poito move rom a phao uncoordinatedinnovation and tobuild the marketplarequired or broadimpact.

Our research indicates that this emerging industry has reached a transitionalmoment in its evolution. It is poised to exit its initial phase o uncoordinated in-novation and build the marketplace required or broad impact, as illustrated in thediagram o the prototypical phases o industry evolution.4

Movement through the phases is not linear. At times evolution may be slow; atother times there may be a jump orward or back. Sectors within impact invest-ingsuch as micro nance and community development nancehave movedthrough these phases at di erent paces, o ten taking decades or uncoordinatedinnovation to emerge and a decade or so to build marketplaces.

But or the rst time it is becoming clear that these sectors as parts o a broaderimpact investing industry, using the de nition o industry applied by strategy guru Michael Porter: a group o rms producing products that are close substitutes

or each another.5 Increasingly, investors are looking or the best ways to achievenancial return and impact and are eager to source deals in diverse settings such

as micro nance in rural India or community development in Los Angeles. At thesame time, intermediaries initially developed to serve a speci c sector are proving valuable plat orms across multiple impact investing sectors. Actors who once saw themselves as engaging in di erent businesses are discovering that they are part o a broader emerging industry that is lled with uncoordinated innovation.

With coordinated e ort and su cient investment in in rastructure, investing or impact could move out o the phase o uncoordinated innovation and build

the marketplace required or broad impactpotentially during the next ve to10 years.

The pace o evolution can be accelerated by pulling together the disparate players,creating a common language, and helping all see the opportunities and challengesthey have in common. In the arena o investing or impact, that has been challeng-ing and remains so. A variety o terms have been coined to articulate di erent waysin which nancial capital can be harnessed to achieve a positive social or environ-mental impact. While impact investing overlaps with many o these other practices,the term re ers to a speci c type o activity. Clearly articulating the di erences be-tween impact investing and other practices reveals the speci c types o investmentthat t within its scope (see box, Whats Impact Investing Got To Do With It?).


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wHAts iMpACt investing got to Do witH it?

soCiAL investing Social investing is a term withmany uses, but it generally re ers to investing that con-siders social and environmental issues. Social investingincludes investments made with the intention o havinga positive impact, investments thatexclude harm ulactivities, and investments that are driven by investorsvalues and dont necessarily correspond to having a pos-itive social or environmental impact.Impact investingis a subset o social investing; it re ers only to the socialinvesting that activelyseeks to have a positive impact.

pHiLAntHropY AnD nonpro its Philanthropy hastraditionally ocused on gi ts made by individuals andorganizations to bene t society and the environment.Impact investing, with its requirement o a minimum re-turn o principal, is distinct rom grantmaking activities.Impact investing can however be an important vehicle

or philanthropists to realize their objectives. Similarly,nonproft organizations can act both as impact investorsand as recipients o impact investments to enhance their impact.

Mission-reLAteD investMent (Mri) AnD progrAM-reLAteD investMent (pri) MRI is a term coinedrecently to describe market rate investment by private

oundation endowments that use the tools o social in-vesting, sometimes including shareholder advocacy andpositive and negative screening. PRI is below market rateinvestment by oundations, deeply ocused on impact

and counting toward endowment payout requirementsor oundations in the U.S.Impact investing includes allmission-related investing that actively seeks to have a positive impact (i.e. all MRI except or screening which isnot o ten thought o as MRI). Almost any PRI would beconsidered a orm o impact investing.

bottoM o tHe pYrAMiD BoP re ers to a broad seto business activities ocused on the 4 billion peopleliving on less that $2 per day. Di erent schools o thought within the BoP community advocate that thepoor should be seen as potential consumers, producers,

partners, and/or innovators.Impact investing overlapswith some BoP activities to the extent that they involveinvestments with the intention o having a social or environmental impact or low-income communities. But impact investing does not assume that any investment in a business selling products to poor people inherently creates social impact.

privAte seCtor ACtivitY in poor CoUntries Increasing private sector activity creates economicvalue but it is done with a variety o intentions.Impact investing only includes those investments made with theexplicit intention o having a positive social or envi-ronmental impact, such as job creation or low-income

people. The act that an investment is made in a poor country is not su fcient to quali y it as an impact invest-ment.

CorporAtions Several terms have emerged thatarticulate the role o corporations in addressing so-cial and environmental problems.C a s c alr l y (Csr)is de ned as the integration o business operations and values, where the interestso all stakeholdersincluding investors, customers,employees, the community, and the environmentare

refected in the companys policies and actions.6 Specialattention is given to corporate practices as they relateto environmental, social, and governance (ESG) per or-mance.C a ca al m, a term publicized by BillGates, advocates or a new orm o capitalism in whichcompanies harness market orces to generate pro tswhile addressing social and environmental problems.Nobel Prize winner Muhammad Yunus, the ounder o Grameen Bank in Bangladesh, advocates a proli erationo social businesses that harness corporate capacitiesin a new business orm that seeks sustainable nancialreturns without substantial pro t. These conceptsinclude nancial investments as well as other activities

ocused on shi ting the behavior o corporations.Im- pact investing only includes those activities ocused onthe deployment o capital with the intention o having a

positive social or environmental impact.

inCLUsive bUsiness Inclusive business re ers to sus-tainable business opportunities that are pro table andbene t low-income communities. These companies mayalso be considered social purpose businesses or socialenterprises. Examples include direct employment o the poor, o ten through targeted development o sup-ply chains, and the provision o a ordable goods andservices to them..7 This concept has signi cant overlapwith creative capitalism, CSR, and BoP.Impact investingincludes the subset o inclusive business activities that involve the deployment o capital with the intentiono having a positive social or environmental impact.


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wha C a th M m ?Impact investing is being propelled by a power ul set o opportunitiesthat ap-pear likely to continue or even strengthen despite the capital market shocks thatbegan in 2007.But there are also many existing challenges that stand betweenthe promise and the reality or impact investors, and these will need to be tack- led or the industrys development to accelerate. Based on our interviews o morethan 50 impact investors, we have distilled those themes into our opportunitiesand three challenges, each o which is described in more detail below.

The global nancial crisis has the potential to ampli y some o these opportuni-ties and challenges. In the short term and on the downside, it will likely dampeninterest among potential investors not yet engaged, who may retreat to conservativeinvesting. General mistrust o markets and market innovations as a result o thecrisis could also constrain the development o investing or impact.

On the other hand, a macroeconomic slowdown may make impact investing moreattractive or those already engagedparticularly those who are driven primarily by impactbecause it helps diversi cation and assets are relatively cheap a ter themarket drop in 2008. Given how seriously the market has mispriced risk, the ex-pectations o appropriate return or appropriate risk may be changing, and this may render impact investing more attractive ( or example, i relative risks such as poorgovernance are lower). The lack o opportunities in traditional nancial markets will likely increase the ability to recruit high-level talent into investing that has apurpose beyond making money. Moreover, there is tremendous potential upside i the inevitable government regulation that results ends up encouraging investmentthat takes into account other actors besides nancial gain.

The net e ect o the economic climate on investing or impact is impossible topredict. But what is certain is that most o the ollowing opportunities will per-sistand the ollowing challenges will need to be surmounted.

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Investors are seekinga new approach tomoney management

that enables themto also make adi erence.

opportunities

opportUnitY : g w a ca al . Even inthe economic climate in 2008, there was interest in putting capital to The desire or diversi cation is leading investors to look at sectors lcro nance, which tend not to be correlated with the broader market8 Inparticular, much o the interest in impact investing is being driven by aing set o investors who have recently become very wealthy and are a new approach to money management that enables them to also mdi erence. As Charles Ewald o San Francisco-based New Islandpoints out: This is the rst time that so many enormous ortunes havcreated by people so young. They have institutional scale and a longzon. And as Chris Wol e, a private banker at Merrill Lynch, explainsultra-high-net-worth individual category has been a driver and leader itype o investing since they have the capacity, ability, and time to und what impact investing means. Some o these investors are also incrdisenchanted with mainstream investment products (and nancial capiat large). Impact investing can be more appealing to them than convenmodels o philanthropy and investing, and these investors have suscale and fexibility to be early movers in the space.

Interest is also being driven by an increasing ocus on rapidly growinkets such as India, China, and South A rica, where investments tend ta stronger connection to public bene t through opportunities like bubasic in rastructure or spurring economic development constrained cess to capital. There are also investment opportunities ocused on proproducts and services to the poor, in emerging markets and in devecountries as well (e.g., in inner cities). A subset o these opportunities potential to create material social or environmental bene t.

Increasingly, consumers are incorporating values-driven consideratiotheir purchasing and investment decisions, leading to investment oppnities in areas with increased demand such as organic, air trade, andproducts. And like consumers, investors are also seeking to make investhat are aligned with their values. As Scott Budde, head o social andmunity investing at the U.S. pension und TIAA-CREF, explains, Cdemand is a key driver behind TIAA-CREFs socially motivated inv

strategies. The act that both social screening and proactive investingrams continue to yield competitive returns allows these strategies to t

At the same time, interest in impact investing in some regions and sectoalso been pushed by regulatory incentives and mandates, such as the munity Reinvestment Act in the U.S. and the Dutch Green Funds Sch There is also great interest in impact investing coming rom investoanticipate uture changes like carbon pricing and want to take advantag


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snApsHothoW it begAn : The ounders o Intellecap wanted to har-

ness interest in market-based solutions to social problems andto combine the rigor o investors with the passion o socialentrepreneurs. They ounded Intellecap in 2002 as a pioneer-ing social investment bank to bridge the gap between capitaland social businesses. Intellecaps initial capital outlay was just$2,500 and it was ocused on supporting the growth and in-termediation o investment in micro nance. Intellecap nowhas a global team o more than 55 pro essionals ocused ondeveloping the intellectual in rastructure to build and nurtureemerging businesses across sectors that generate nancial re-turns as well as social and environmental impact.

seCtors : Micro nance, energy, nancial services, agriculture,technology, banking or nancial inclusion, education, andhealth

geogrAphiC oCus : South Asia, Southeast Asia, Middle East,and A rica

bAsed in : India, Europe, and the U.S.

yeAr : 2002

CApitAL depLoyed : More than $100 million in deals closed

business thesis : To intermediate social capital in order to

catalyze the growth o or-pro t social businesses and toprovide a nurturing ecosystem or leading or-pro t social en-trepreneurs worldwide.

perspeCtiveFrom Vineet Rai, Pawan Mehra, and Upendra Bhatt, co- ounders

optimism : While we continue to meet a lot o skeptics, weare optimistic because o the changing landscape in the de-velopment sector, with donor capital being replaced by socialcapital and in ormation being replaced by useable knowledge.The combination o the talent and innovation is spurring the

discovery o new vistas o intervention and new ways o creat-ing common interaction points, resulting in wider outreach andmore e ective outcomes.

potentiAL or LeAdership : We believe one can take mon-ey much urther by providing large oundations and investorsquicker outreach to more e ective social entrepreneurs. Intel-

lecaps uniqueness emerges rom its ability to understand ane ectively work with both ends o the spectrumthe buy sithrough to the sell side.

need or intermediAtion : Knowledge leads capital. Capi-tal needs to nd the right opportunities and receive the rightadvice to take advantage o the opportunities. We help createuseable knowledge in the development sector to help socialinvestors make right choices. We engage over the long termwith closure o a deal marking the beginning o a relationsh

time horizon : Patience is our virtue. We believe develop-ment investing and intermediation is not an opportunisticintervention but needs patience or impact to materializeimpact cant be achieved in two or three years. This is a long-ha

game and we shouldnt expect results soon. We must staycommitted to learning and making progress.

ChALLenges ::Talent is a critical need. You need talent o a much higher order than what is needed or mainstream investing because thspace is much more complex and it demands creative solutions. You must retain talent or a long period o time to buiscale and sustainability in development.

Investors pre er ollowing over leading. Social investingabout leadership and being in the ront seat. Un ortunatel

even social investors are not willing to accept ailure and thethus reduce the ability o social entrepreneurs to experimenwith risky solutions that have the potential or being more e

ective. There is too much ear o ailure.

i impACt investing Were A mAture industry . . . Inves-tors would appreciate its complexity. Scale would incorporatethe impact and not just the amount o money invested, impacwould be de ned by considerations beyond the number opeople a ected, solutions would not be banished rom dicussion, and partnerships amongst diverse investors and actorwould emerge to bring optimal solutions to the needs o the

worlds poorest.

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These daunting socialand environmental

challenges are leadingsome investors toseek new approachesand investmentopportunities that canhelp provide solutions.

underpriced opportunity. As David Chen o the investment rm EquiliCapital sees it, The policy environment in Europe has created awararound topics that the U.S. is just beginning to catch up to.

opportUnitY: g a c l c al a al c all. Social and envi-

ronmental issues and growing inequity are increasingly urgent and o te visible. More than a billion people around the world still live in extremerty, and millions more are barely pulling themselves out.9 In urban centersaround the world, dramatic inequity is barely screened by the securitythat separate the estates o the very wealthy rom the shantytowns opoor. The melting Arctic provides a salient reminder that carbon emisare threatening the very ecosystem that humans depend upon. Headmake these issues harder to ignore, whether theyre about poverty in th(Hurricane Katrina in 2005) or the gradual mainstreaming o micro

or the poor (the Nobel Prize won by Grameen Bank ounder Muha

Yunus in 2006). Similarly, growing publicity about climate change haspurred in part by Al Gores book and movie, An Inconvenient Truththe Nobel Prize awarded to him and the UN Intergovernmental PaneClimate Change in 2007. These daunting challenges are leading som vestors to seek new approaches and investment opportunities that canprovide solutions.

opportUnitY: A a l l ack c w a l c . Early successes in community development, micro nance, andtech are attracting positive and extensive popular press and broader inte

impact investing. Lucrative impact investments have attracted signi c vestor interest in the space. The Compartamos initial public o ering 2007 yielded original investors an internal rate o return o 100 percencompounded over eight years; return on equity in 2007 was more than 4cent.10 A board director at Banco Compartamos, lvaro Rodrguez Arrhas now partnered with Michael Chu, ormerly o Kohlberg Kravis Rand ormer president and CEO o micro nance leader ACCION Inttional, to launch IGNIA Partners, a venture capital rm ocused on hhousing, and education companies that serve the poor in Latin AmericKyle Johnson, an investment advisor at Cambridge Associates, explaincess stories such as the micro nance industry have led to people re-evahow commercial markets can be used or social good. Several clean ogy investments have also demonstrated that impact investments can

nancial returns and impact simultaneously.

opportUnitY: A f ck al . Young pro essionals are increasingly interested in impact investing and in creating businesses that have sociaor environmental impact. For example, when J.P. Morgan launched its


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Search and transacticosts are high,with ragmenteddemand and supply,complex deals, andunderdevelopednetworks.

sector nance unit in 2007, its leader Christina Leijonhu vud reports, Wereceived about 1,000 rsums rom employees in other units who were inter-ested in positions with our group or contributing their time to our e orts.Net Impact, an international network o MBAs and other graduate studentsand pro essionals interested in social enterprises, now has more than 10,000members. At Harvard Business School, more than 20 percent o students in

2008 were members o the student-led Social Enterprise Club. The rise o the concept o social entrepreneurship refects signi cant interest in workingin this arena and has, in turn, created greater institutionalization o academicand pro essional resources or those pursuing related activities. This in usiono talent will lead to higher-quality investment opportunities as well as moree ective intermediaries and service providers over time.

While these opportunities are supporting an increase in impact investing, thereare also signi cant barriers constraining the level o investment. These challengesrelate to the rigidity o the investment industry as well as the weakness o marketin rastructure or impact investing.

ChALLenges

CHALLenge: Lack c a. The lack o mechanismsto connect capital and impact investment opportunities is caused in large partby an investment industry structured around the historical binary o philan-thropy ( or impact) and investment ( or returns), with optimization aroundeach independently. As a result, the market or impact investing activity thatintegrates doing well and doing good lacks su cient intermediationwheth-er it is clearinghouses, syndication acilities, independent third-party sourceso in ormation, or investment consultants. As a result, search and transactioncosts are high, with ragmented demand and supply, complex deals, and un-derdeveloped networks.

Few institutions exist that can o er advice to people looking to do somethingdi erent. Some und managers are reluctant to seek more than just nan-cial return since, as one o them put it, people dont want hippies managingtheir money. Conservative investment advisors lack incentives to take risks intheir investment approach and are concerned that incorporating social and/orenvironmental considerations might violate their duciary responsibility. AsSteve Schueth o the U.S. investment advisory rm First A rmative Finan-cial Network describes it: The real issue is not about products or markets;its about attitudes in the board room and among advisors. . . . Theres plenty o quality product on one end o the hourglass and lots o prospective clientson the other end. In the middle, theres a bottleneck and that bottleneck isthe investment pro essionals in this country. A nancial services providerin Europe made a similar point be ore the nancial markets plummeted in


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snApsHothoW it begAn : In late 2001, several personal experiences led

Jay and his wi e to rethink how they managed their money. Ini-tially they chose to go beyond their philanthropic activity byinvesting the unds in their charitable oundation in an activelymanaged socially responsible investment port olio. In 2003,they placed approximately 5 percent o the oundation corpusinto mission-related investments. Their rst impact investmentwas a private equity investment in a air trade, shade-grownorganic co ee company which also donates 100 percent o pro ts to support the communities rom which they sourcedtheir beans. A ter a amily sabbatical, they decided to ocus allo their assets on alleviating poverty, hoping 20 percent wouldalso have environmental impact. In 2006, they moved 100 per-cent o their assets out o conventional investments and theyare now active impact investors.

seCtors : Poverty alleviation (across various sectors)

geogrAphiC oCus : Global

bAsed in : U.S.

yeAr : 2003

size o und : $510 million

investment thesis : Maximizing impact while preserving real

capital

perspeCtiveopportunity in CommuniCAting the impACt : Impact andsocial change have emotional resonance in a way that nancialreturns do not. As a result, through the individual experienceand shared stories o success ul impact investing, people willbecome more engaged with their money and its potential enduse, and over time will apply a greater portion o their time,talent, and relationships toward activities whose central pur-pose is to achieve social impact.

potentiAL or LeAdership : Networks are beginning to llgaps. Investors Circle has been success ul at catalyzing somecapital and many ideas but has been limited in its e ectiveness

in building in rastructure that can drive the eld. The GlobImpact Investing Network initially had the eel o an invement club but is now developing into a plat orm that can helpadvance the industrys evolution through, among other thingsthe creation and adoption o standards.

ChALLenges :: I have heard rom many individual investors that they neea way to quanti y the non- nancial impact o their monePeople nd it di cult to justi y even the possibility o a smarket rate o return without more clarity about the impacto the investments.

Metrics are spotty or a given intermediary they are o tinternally incomplete, and or the eld they are inconsistenamong intermediaries. We need to nd a path toward trans-parency and comparability that preserves each investorfexibility at driving toward their individual impact investmenobjectives.

There are very ew advisors or high-net-worth individuwho are really specialized and experienced in this space, sit is hard to get advice on high-quality unds and investmenopportunities. With our advisor we had to invest a lot o timlearning rom scratch; it was a haphazard process.

Investments have been more opportunistic than strategic be-

cause we had to work to nd good product. There was noplace we could go to nd a breadth o options rom which wcould just construct a port olio.

i impACt investing Were A mAture industry . . . Investorscould approach their advisors and say I want to accomplish impact objective and the advisor could develop a comprehensive investment strategy that t their objectives. Furthermorethe impact could be quanti ed with the same level o rigor ancredibility as conventional investing.

pro iLe: jAY Coen giLbertH h-n -w h i d dual i All a p y


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Without a mechanisor aggregation,

individual investorsstruggle to ndinvestmentopportunities that arat su cient scale to justi y the xed cosincurred or sourcinthe investmentsand conducting duediligence.

2008: Trustees are extremely conservative and are more prepared to invest ina hedge und they dont understand than to invest in a mission-driven undthey dont understand.

The bi urcation o nancial return and impact inhibits the integration inher-ent to impact investing. I history is part o the barrier, youth may be oneelement o the change. As one asset manager notes, We need a new genera-tion o money managers who are open-minded to the possibility that valuesand returns are not bi urcated.

The lack o intermediation also makes the technical complexity o deals moreo a challenge. Some investors are discouraged by impact investing because o the di culty involved in trying to have a positive social and environmentalimpact and to structure deals with di erent types o capital and investors.

Well-developed in ormal networks could compensate or this lack o or-mal intermediation. But those networks are underdeveloped because actorsdo not identi y as part o an industry and there ore have di culty trying to

nd peers. As Stephen DeBerry at Kapor Enterprises notes, relevant interestgroups need to be developed urther: We need to orm meaning ul categorieso interest so that existing and new impact investors can e ectively nd theirrelevant peers. Silicon Valley venture investors have done this organically ande ectively. We should do the same.

Without a mechanism or aggregation, individual investors struggle to ndinvestment opportunities that are at su cient scale to justi y the xed costsincurred or sourcing the investments and conducting due diligence. Pools o capital are o ten large and investors must write big checks, while individualdeals are relatively small. This makes impact investing less attractive to inves-tors who are unable or unwilling to invest the additional e ort required tosource what may be relatively smaller deals.

CHALLenge: Lack a l a c. Still an emerging indus-try, impact investing lacks the models, theories, policies, protocols, standards,and established language that would enable it to fourish. Many investors andintermediaries do not understand the implications o social and environmen-tal considerations on the underlying risk o an investment opportunityandthere is a preconception that there must be a undamental tradeo between

nancial returns and impact. But there are no metrics or ratings agencies tohelp make relative nancial risk and social or environmental impact moretransparent. Furthermore, the nancial per ormance o many impact invest-ments is uncertain, even though these investments might meet or beat returnbenchmarks. These actors all make valuation quite challenging.

The market environment and in rastructure (e.g., regulatory, legal, tax) ishighly structured around conventional investing, which constrains actors whoare trying to engage in impact investing. For example, contracts or charters


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Distribution channelsand custodialarrangementsine ect, the plumbingo the securitiesindustryo tenpreclude interested

investors rompurchasing and clearinginvestments.

may require modi cations in order to allow investors to consider socenvironmental outcomes. Furthermore, the distribution channels that syndicate rated deals that are on approved buy lists do not help this newo investment, which may not con orm to standard channels. Distrchannels and custodial arrangementsin e ect, the plumbing o the sindustryo ten preclude interested investors rom purchasing and

investments and custodians may be unwilling to hold such nonstandard The absence o coherent identi cation as part o an industry results ino varied terminology and diverse approaches causing di culty in cocating. The lack o universally accepted vocabulary and market segmmakes it di cult or impact investing actors to communicate abouttunities. The diversity o approaches and ways o describing them mdi cult or actors to locate themselves in the impact investing ecosyto identi y potential partners. As Preston Pinkett, the director o PrudSocial Investment, which had $400 million in investment commitmen

ore the 2008 market downturn, explains: It takes consistency in langcreate a business. The biggest challenge is to have a coherent set o terphrases that are clearly de ned and have clear meaning.

CHALLenge: Lack c a ca ac ca. Insome sectors and regions there are plenty o deals in which to place But even in those places an imminent challenge will be whether there icient deal fow, particularly large, bankable opportunities into which invcan place signi cant amounts o capital. Based on our interviews, alsu cient absorbtive capacity or capital is not the initial barrier in mes, it will soon become one; it is already a challenge in such markets a where lots o capital is seeking deals. Some investors are nding thaare ew businesses with proven investable business models and that tstopping at the same 50 doors as other investors.

One layer down there may be many homegrown seed opportunities doped by entrepreneurs and nongovernmental organizations that need commercialized (as happened with micro nance), but they tend to number o challenges. Serving the poor is typically relatively expensthere is o ten a need to invent new and disruptive business models, existing players lack an incentive to do. The banking system does n

ectively serve small and medium enterprises, where many impact ininnovations are taking place. And these organizations o ten need sombination o working capital, debt, and equity. They may also lack an eand scalable business model. Funds such as GroFin and the Small Eprise Assistance Funds, which aim to invest in sustainable developmsupporting medium-scale businesses in developing countries, have neebuild substantial capacity to support entrepreneurs be ore and a ter ment with basic business training and strategic advice.11


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In some places, businesses that serve the poor are starting to draw atten-tion, especially as opportunities to serve more a fuent populations becomecrowded with competitors and entrepreneurs start to head down market ( orexample, in India, moving rom developing malls to the high-volume oppor-tunities in low-income housing).12 But the runway or development o theseinvestment opportunities is long, and some businesses will take several years

be ore they can be investable, and about 10 to 15 years be ore they are able tooperate at broad scale.13

H bu ld a Ma lac :L m o h i duAs a result o this mixture o opportunities and challenges, a transition is under- wayimpact investing has achieved a critical mass o innovation and now has thepotential to move toward the next phase o its evolution. For this transition to hap-pen, the barriers that keep the old patterns entrenched must be removed.

These types o barriers are common challenges in emerging industries, particularly the related elds o micro nance, community development nance, and venturecapital/private equity. Experience in these industries suggests that the challengescannot be overcome unless industry leaders work individually and collectively toremove the barriers that keep the old patterns entrenched. Only then can an in-dustry move more quickly rom a phase o innovation to a phase o value capture.Policy change has also been a critical ingredient in the development o many o these other industries. At the same time, there are also cautionary tales about thechallenge o this transition in examples o innovations that never took o .

Some o the most relevant lessons can be drawn rommicro nance, an industry that has only recently reached this transition. A subset o impact investing, micro-

nance became more mainstream in the mid-2000s and started to move out o themarketplace building phase. Its success has been characterized by initiatives thatbuilt critical elements o the in rastructure to attract a broader set o actors andcapital to the table.

The rst micro nance institutions were ounded in the 1970smost o them by nongovernmental organizationsand over the course o more than a decade theseinstitutions began to demonstrate the viability o the sector. Although there weredecades o innovation and a proli eration o models, the industry did not start toachieve nonlinear growth until it solved some o the in rastructure issues that arepart o building a marketplacethereby attracting the large, power ul traditional

nance industry players who have helped dramatically grow the market.

In the 1990s,more sophisticated measurements o per ormance and impact emerged,with a greater emphasis on standardization.14 These e orts were partly a result o the increased strength o industry associations, including the Small Enterprise Educa-tion and Promotion (SEEP) Network, a membership organization o international

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The history o theevolution o otherindustries suggeststhat these challengescannot be overcomeunless industry leaderswork individually andcollectively to removethe barriers that keepthe old patternsentrenched.

nonpro ts with micro nance programs, and the Consultative Group to the Poor (CGAP), an independent membership body housed at the World consisting o development agencies, nancial institutions, and oundatio15 Ina positive, rein orcing cycle, increased interest in micro nance led to thgence o market-building in rastructure. In 1996, MicroRate, one o tdedicated micro nance rating services, was launched. Around that same ti

MicroBanking Bulletin developed a robust data set that made possible the try standards and norms necessary or the ormation o per ormance benAnd in 1997, the rst Microcredit Summit was held to share knowledge anpractices and to work toward reaching 100 million o the worlds poorest 16

The results o these activities have, in turn,attracted mainstream fnancial service providers. In 2008, Standard & Poors announced plans to ormulate globaratings or micro nance institutions.17 Micro nance has gained the attention andsupport o return-oriented investors, and the microloan volume has grown billion in 2001 to $25 billion in 2006.18Butwith this wave o capital has come concernabout the social impact actually being achieved with proft-maximizing capital in termso how clients are selected (seen by some as skimming o the least pooand the interest rates at which loans are made (seen by some as predatory le

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snApsHothoW it begAn : Investing or Good was ounded by individuals

who, a ter years working in the nancial services sector, cameto believe that poverty, destitution, and environmental dam-age are not inherently the problemthey are symptoms o capital markets that systematically disregard long-term down-stream consequences. They became inspired by the new breedo entrepreneurial organizations that directly tackle the worldsmost pressing problems but realized that nancial advisors, -nancial intermediaries, and asset managers lack the capacityto advise appropriately on deals in the impact investing space.They developed a business to provide investment advice andmarket in ormation to support investment advisors o eringtheir customers access to the world o social investing.

seCtors : Moving toward developing unds with a primarysocial and/or environmental impact ocus across a range o sectors.

geogrAphy : Global

bAsed in : U.K.

yeAr : 2004

CApitAL depLoyed : Total amount is expected to grow rom $15million in 2008 to $50 million annually. Clients typically invest$100,000 or more, and deal size ranges rom $100,000 to $100million.

business thesis : Investing or Goods investment philosophyis grounded in a belie that the management o all investmentport olios should be more aligned with investors core valuesand the opportunity to make a positive impact through invest-ing. They target investments that emphasize social impact withsome nancial return. Investing or Good researches and tracksthese investments and has developed a unique rating crite-ria based on con dence, nancial return, and social metrics,with the goal o providing o -the-shel products or advisors.Most port olios are built around debt instruments or unds and

typically pay out 4 to 6 percent.

perspeCtiveFrom Geo Burnand, chie executive

need or soCiAL metriCs : As the impact investing marketbecomes more popular, there is going to be a demand or sociametrics to justi y one investment over another. Capital markeactivity will ollow i the data and metrics piece evolves.

need or in rAstruCture : There is a need or consistentlanguage and appropriate mainstream investment products toenable the wealth management community to understand theinterrelationship between impact, nancial return, and investment risk.

ChALLenges ::The evolution o the U.K. market was initially hampered the lack o interest on the supply side. Now, the constraint hashi ted toward demand-side issues and nding sophisticateproducts and high-quality deals.

Although movement is taking place in the impact investinsector, we need critical mass to interest markets. We also needthose already in this sector to not look toward themselves orall the answers and or uture growth.

i impACt investing Were A mAture industry . . . Invest-ment advisors would have the capacity, tools, and in ormatio

needed to support their clients impact investing interests aseasily as they support conventional investing.

pro iLe: investing or gooDm H l eu a w al h Ad C c Cl im ac i m


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By comparison,community development nance in the U.S., another subset o impact investing, was catalyzed largely by many years o grassroots advopolicy change. Central to the industrys evolution wasa coalition that represented the collective interests o the industry, especially around policy and the development o products that enable broader access.

While community development nance is not yet a ully mature industry,long history, beginning in the early 1900s with the proli eration o communidepository institutions. However, it was not until 1977, when the Communiinvestment Act (CRA) was passed, that the movement progressed signi cathe U.S. Created to encourage banks to serve poor communities better, partithrough the provision o credit to support small businesses and a ordabing in low-income communities, the CRA exists because o signi cant grpressure.19 In the early years though, CRA resulted in only marginal changthe practices o some banks as en orcement was relatively limited. This change, however, with the increasing number o bank mergers and acquisithe early 1990s.20 The desire or regulatory approval or these mergers and actions gave banks an incentive to improve their CRA ratings.Although the CRA was a result o strong grassroots activism responding tocant disinvestment by the nancial sector in low-income and/or communcolor, additional policy changes were realized with the 1992 ounding o tmunity Development Finance Institution (CDFI) Coalition. This was theorganization that brought together di erent community development nastitutions rom all over the country to enhance their national pro le througdevelopment and advocacy. One signi cant result o the Coalitions workestablishment o the CDFI Fund in 1994. This U.S. Department o Treasugram has become the largest source o both debt and equity capital or CDplays an important role in attracting and securing private dollars or commu vestment. As o 2006, cumulative Fund awards were $800 million and the leverage on the CDFI Funds required dollar or dollar match is even greaexample, in 2005, the CDFI Fund awards leveraged $27 o private-sector ments or every $1 o ederal investment.21

As the eld has grown, other regulatory changes and products have emergcluding tax credits that create incentives or investments in a ordable hoeconomically distressed areas, CRA-related mutual unds, and a secondary

or community development nance originated loans. Also, major nanc

tutions have developed CDFI subsidiaries and other nancial sector entitiecreated products that invest assets in community development nancial itions. These policies and nancial products have supported the developmthe eld that in 2006 held more than $23 billion in assets and invested mor$4 billion annually to create economic opportunity.22 (Although some opponentso CRA have tried to use the subprime crisis as justi cation to attack the Aconsensus is that the crisis is completely unrelated to CRA. Subprime loan

A coalitionrepresenting thecollective interestso the industryhelped acceleratethe evolutiono communitydevelopment nance.


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Government policyand tax incentivesplayed a signi cantrole in driving asupply o capitalthat acceleratedthe evolution o the venture capitaland private equityindustries.

generally originated by institutions not subject to CRA, CRA loans were not se-curitized, and CRA loans and securities are, in act, per orming reasonably well.)23

Today, there is evidence that with the merging o CDFIs, the industry is movingout o the marketplace building phase and into the value capture phase. Thus, thelessons or impact investingcreating a coalition that represents the collective in-terests o the industry especially around policy and developing products that enablebroader accessmay be power ul approaches to developing the marketplace.A more mature industry to mine or lessons is venture capital and private equity . The rst private equity company, American Research & Development Corpora-tion, was ounded in 1946. In the 1950s, U.S. government legislation gave rise tospecialized, privately unded investment rms that provide capital to early-stagecompanies. While both types o rms had underwhelming results and ailed togenerate excitement rom mainstream investors, they ultimately produced capa-ble investment advisors who ormed partnerships that achieved enormous successlater. The pioneering e orts o early adopters provided a orum in which venturecapital entrepreneurs gained valuable experienceand impact investorsmay need toweather a similar cycle o learning be ore the success ul ormula is worked out .

Government policyandtax incentivesalso played a signi cant role in driving supply o capital or investment. An increase in the capital gains tax in 1969 restrictedthe infow o unding into private equities in the 1970s. But in 1978, the ederalgovernment changed the Employee Retirement Income Security Act, enablingpension unds to invest in venture unds and thereby dramatically increasing thesupply o available capital. In addition, Congress lowered the capital gains tax ratesigni cantly.

This confuence o actors contributed to strong growth; venture capital invest-ments grew rom $600 million in 1980 to $3 billion in 1984. In the mid-1980s,much-publicized successessuch as Apple Computers $1.3 billion initial public o er-ing helped attract more capital rom previously unconvinced investors.24 At thesame time,market innovationssuch as leveraged buyouts and mezzanine undingcreated other types o nancing that would later grow to be six times that o the venture capital industry in assets under management.

Although micro nance, community development nance, and venture capital/private equity developed in di erent ways and at di erent speeds, they are allmodels o success ul evolution.But there is also a risk that, like a di erent set

o products and industries, impact investing could fame out while in the phaseo uncoordinated innovation. The catalogue o product classes or industries thatare launched but never take o is long. Impact investing could be a prematureidea, like the videophone, which ailed to take hold in the marketplace at least

our times. Or the bubble o hype may burst i impact investing proves to be theright concept but the wrong ideamuch like the Segway, which was designed torevolutionize personal transportation but proved too dangerous or sidewalks andtoo slow or streets.25


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There is a risk thatlike other industries,impact investingcould fame outwhile in the phaseo uncoordinatedinnovation.

These lessons help us understand how other industries have developed anit will take to build a success ul marketplace. But how might these experiapplied to impact investing? Who would be involved? And what are the pevolutionary paths this emerging industry might take?


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snApsHothoW it begAn : In 1968, a study group began to explore how

money could be managed sustainably. The Triodos Foundationormed in 1971 to support innovative projects and companies,

and in 1980 Triodos Bank was ounded as a licensed bank in theNetherlands. The bank has continued to expand to other Eu-ropean countries and launched a variety o nancial products.

seCtors : Renewable energy, micro nance, organic arming, na-ture conservation, sustainable housing, air trade, and culture

geogrAphiC oCus : Western Europe and emerging econo-mies

bAsed in : Netherlands, Belgium, the U.K., and Spain, with an

agency in GermanyyeAr : 1980

size o und : EUR 900 million across several impact investingunds with an additional EUR 400 million in traditional socially

responsible investment unds.

investment thesis : To nance companies, institutions, andprojects that add cultural value and bene t people and theenvironment, with the support o depositors and investorswho want to encourage corporate social responsibility anda sustainable society. With the exception o speci c unds

developed or NGO partners, all unds o er a market-rate -nancial return.

perspeCtiveFrom Bas Ruter, managing director, Triodos Fund Management

investment opportunities : Up until one to two years agowe had an excess o supply. Now the number o investmentopportunities is growing much aster than the supply o invest-ment capital in sectors like renewable energy, real estate, andmicro nance. We are expanding our marketing department tohelp raise capital or all o our unds.

visibiLity : The climate change debate has driven up thenumber o projects in recent years. Simultaneously, the brandequity o banks like Triodos has gone up and now the press ismuch more interested in impact investing.

investor interest : On the institutional side, the wholedebate o being a responsible investor is shi ting rom netive screening toward an increased interest in alternative asseclasses with sustainable development in a competitive risk/return pro le.

ChALLenges ::The most important challenge is that the investment processis much more intensive. It is like building up a new port oliotakes a lot o time and is labor-intensive. We charge compettive management ees to our customers, but we have a lowemargin than typical unds.

There is a risk o the hype driving people to bad producwhich will hurt the eld. Investors need to understand the di

erence in quality and impact o the products being o erWe will have to develop criteria or investing and we will neemore transparency. Certi cation schemes and legislation cahelp maintain standards.

i impACt investing Were A mAture industry . . . In all o our sectors, the scale will be higher. There will be more pro

essionalism as it becomes more mainstream. Competition wbe much more erce and many opportunistic players will bentering the eld, just as what we have seen happen in environmental, social, and governance (ESG) investing. There wbe more transparency, which will be needed or investors tanalyze the food o product that will be in the eld.

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31the uture o impACt investing

Impact investors cabe classi ed into tw

groups based on theprimary objective:Impact rst investowho seek to optimizsocial or environmereturns with a nanfoor and nancial investors, who seekto optimize nanciareturns with a foor social or environmeimpact.

the uture oimpACt investing

The growing, global cadre o leaders who are committingthemselves and their institutions to this new style o investinghave one belie in common: they insist that some level o

nancial return and social/environmental impact can beachieved together. Beneath this shared conviction, however,many di erences must be con ronted. We dealt with these di erences in our research by experimenting with many kindso segmentation, testing alternatives in conversations with investors. The mostpromising approach, we believe, looks at how investors start rom di erent placesand pursue di erent strategies because o the way they are oriented and trained.

Impact investors can there ore be broadly classi ed into two groups based on theirprimary objective: Impact rst investors, who seek to optimize social or environmental impact

with a foor or nancial returns. These investors primarily aim to generatesocial or environmental good, and are o ten willing to give up some nancialreturn i they have to. Impact rst investors are typically experimenting withdiversi ying their social change approach, seeking to harness market mecha-nisms to create impact.

Financial rst investors, who seek to optimize nancial returns with a foor or social or environmental impact. They are typically commercial investors

who seek out subsectors that o er market-rate returns while achieving somesocial or environmental good. They may do this by integrating social andenvironmental value drivers into investment decisions, by looking or outsizedreturns in a way that leads them to create some social value (e.g., clean technol-ogy), or in response to regulations or tax policy (e.g., the Green Funds Schemein the Netherlands or a ordable housing in the U.S.).

We chose to segment the emerging industry in this way because ultimately mo-tivation determines the types o investments any particular actor will consider,regardless o the sector or geography in which they invest. Although investors who are solely maximizing pro t can unintentionally make an impact investment(because what maximizes pro t sometimes also happens to yield impact), only investors interested in some impact will be motivated to actively seek out theseopportunities and place their capital. Moreover, in theory at least, a motivation


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We chose to segmentthe emerging industryin this way becauseultimately motivationdetermines the typeso investments any

particular actor willconsider, regardlesso the sector orgeography in whichthey invest.

toward impact should make a set o activities more likely to actually resuimpact aspired toor to raise questions i it does not.

No segmentation can capture the dynamism o a marketplace per ectly, oBut we have tested this one and ound it help ul to many people, with theing three caveats:

Some investors may have wide-ranging port olios that touch on di ereproaches in di erent investments. In other words, the same investor madeals that all into di erent segments, based on their primary motivatiothat particular deal.

The size and importance o the segments will di er depending on the sand geography involved.

Many investors in both segments aspire to maximize both objectives depin the area where these two segments overlap in the uppermost right-hancorner o the graph above. (Although it is not clear today exactly how mo these have-your-cake-and-eat-it-too deals exist, one o the best watest how many can be created is to try the recommendations suggested inreport.)

Once the industry is segmented in this way, it becomes possible to see triguingand very promisingpossibility with which many pioneers areexperimenting. Sometimes the two types o investors work together in wcallyin-yang dealsthat is, deals that combine capital rom impact rst and

nancial rst investors and sometimes add in philanthropy as well (see the Ex-

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33

Sometimes these twtypes o investors w

together in yin-yangdeals that combinecapital rom impac

rst and nancial investors, occasionaadding in philanthroas well.

the uture o impACt investing

amples o Yin-Yang Deals table on the ollowing page or a ew sample cases). This name is derived rom the term in Chinese philosophy describing two elementsthat are di erent and yet complementary when put together.

Yin-yang deal structures can enable deals that could not happen without the blend-ing o types o capital with di erent requirements and motivations. It can alsoenable the deals that any individual segment would pursue alone to be much moresuccess ul. Much more capital can fow to deals that otherwise only impact rstinvestors would pursue. And much more impact can occur through deals that -nancial rst investors would pursue but where they might not be willing to investmore to ensure the impact.

Today, organizing these types o deals e ciently is di cult, requiring un amiliarinstitutions and individuals to work together by overcoming the distrust typically

elt between, or example, private oundations and investment bankers. In the u-ture, this yin-yang approach could developout o necessity and synergywith ablending o the two types o capital and philanthropy through seamless networksinto sophisticated investment structures that create the highest leverage o socialand nancial return. Increasing the scale and regularity with which these dealsoccur will require mechanisms or capturing learning and institutionalizing rela-tionships, so that the e ort put into creating one syndicate or deal structure canenable the next one, ve, or 10 similar deals to be executed more seamlessly. More yin-yang deals may result rom the success ul development o impact and nancial

rst investor markets.

Yin-YAng DeALs

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Investing for Social and Env Impact Monitor Institute

Documents