October 02, 2014

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Making Impact Investible: Cutting Through the Hype of Impact Investing

Part One of a new series on growing the impact investment market introduces the concept and the key dimensions influencing progress.

Impact-economy-series-authors

By Dr. Maximilian Martin & William Burckart

We’ve got a great idea here that can transform our societies by using the power of finance to tackle the most difficult social problems ... the potential for social investment is that big.” — David Cameron, U.K. Prime Minister 

Much has been said about the potential of impact investment—the practice of investing with the intention to generate measurable social and environmental impact alongside a financial return—and how it holds the promise to address skyrocketing deficits, uncertain financial markets, and staggering need. 

Tremendous Potential, Yet Lackadaisical Progress

Researchers at JP Morgan predict that the market has the potential over the next 10 years for invested capital of $ 400 billion to $1 trillion and a profit of $183 billion to $667 billion. These predictions have been widely echoed across the field since the report was published in 2010.

While all of this is encouraging from a branding perspective, the reality is that a credible track record of success has struggled to materialize in the ensuing years. And this is just the tip of the proverbial iceberg. Terminology and definitions, best practices, deal volume, return expectations, enabling policies, and measurement—you name the issue, and experts and practitioners alike are probably still trying to figure it out.

All of this fragmentation has made it challenging to address market gaps and engage players, resources, and expertise that are still on the sidelines.

Perhaps in response to growing scrutiny however, the U.K. government used the occasion of its presidency of the G8 to begin cutting through the hype of impact investment by convening the first ever G8 Social Impact investment Forum in June. The event started the process of taking stock of the field, the barriers to scale, and the opportunities to ignite market growth. As part of this effort, the unit of analysisgovernment also commissioned Dr. Martin of Impact Economy to produce a report on the status of the impact investment market, which built off of a larger body of research recently released, titled Making Impact Investible.

Investing in Impact: Key Findings

Depending on your familiarity with the space, and how deep a dive you want to take, the reports offer varying treatments on similar topics and provide a number of key takeaways for growing the impact investment market, including: 

1. The unit of analysis (i.e., impact investing) is still not broadly or consistently understood, nor is its true potential.

The report begins with a basic clarification about how impact investment is defined and what the true potential is of the nascent field. There were over $600 trillion in financial assets globally in 2010, and there will be an estimated $900 trillion in financial assets in 2020. And, if JP Morgan’s estimates about the potential market size of impact investment are correct, impact investing might grow to only 0.1 percent of all financial assets by the end of the decade.

Should we shelve our impact ambitions? Absolutely not: the impact of impact investment has the potential be far greater than this figure would suggest.

2. There are four growing megatrends that are driving the scale of opportunity in sustainable value creation.

These megatrends include massive pent-up demand at the “Bottom of the Pyramid”, the need for increased resource efficiency and green growth, new approaches to the provision of public goods involving private capital to update the welfare state, and the rise of the Lifestyles of Health and Sustainability (LOHAS) consumers and virtuous consumption.

3. Government can help grow the supply and demand sides of the impact investing industry through a number of policy tools at its disposal.

Government can help the field overcome fragmentation and sub-scale activity and actually begin to reach its full potential by setting framework conditions. The tools at its disposal include capital supply, capital demand, and capital use policies, which can help to stimulate activity in the industry.

4. A high-functioning ecosystem of impact investment will need to include a number of players operating synergistically, many of which are not yet fully engaged.

Included here are philanthropic investors, angel and early stage investors, professional investors, institutional investors, corporations, and financial services. Each has a key role to play in helping the market reach its potential and they will all need a corresponding shelf of financial products.

5. Moving impact investment from “niche” to “mega” will require overcoming certain barriers, with a lack of transparency perhaps being the most critical of these challenges.

This is particularly important both for bringing coherence to the field, but also for bringing consensus to the way in which impact is actually measured. Disclosure of reliable, credible, and comparable impact investingperformance data is, unsurprisingly, as critical to impact investment as it is to traditional investment.

Making Impact Investible also sheds light on another dimension of impact investing: “corporate impact venturing,” or the linkage between impact investing and CSR, and how impact investment can be a powerful new source of innovation and growth for corporations. Corporations currently practice corporate venturing—harnessing external factors, trends, or ideas for business growth—by investing in, copying, or cloning value creation models. 

Intel Capital, for example, has utilized corporate venturing to great effect by financing startups that build an ecosystem for its flagship products. When focused on impact, this approach can create new approaches to sustainability and serve to build a bridge between CSR and impact investment, broadening and deepening how the private sector can create value across the board—driving business innovation and social impact all at once.

We need to start cutting through the hype if we are to have any shot at unlocking the full potential of impact investment. The opportunity to leverage entrepreneurship, trillions in public and private money, and innovative finance in order to harness the megatrends reshaping the world is great.

But so is the risk.

The challenge of improving the market so that it can come close to realizing its potential starts with us. And it starts now. 

About the Authors:

William Burckart is the Managing Director of Impact Economy (North America) LLC.  Bill guided special initiatives for the Johns Hopkins Center for Civil Society Studies, including the New Frontiers of Philanthropy where he is also a lead author of the forthcoming book, Philanthropication thru Privatization, and Nonprofit Value Proposition projects—mobilized $1 million in support for this portfolio, and managed a global team of researchers and practitioners spread across multiple countries and continents.

Dr Maximilian Martin is the Founder and Global Managing Director of Impact Economy. He also serves as Founding Faculty in Residence at Ashoka U and Lecturer in Social Entrepreneurship at the University of St. Gallen. He previously served as founding global head and managing director of UBS Philanthropy Services, head of research at the Schwab Foundation, senior consultant with McKinsey & Company, instructor at Harvard’s Economics Department, and fellow at the Center for Public Leadership, Harvard Kennedy School. He holds an MA in anthropology from Indiana University, a MPA from Harvard University, and a Ph.D. in economic anthropology from the University of Hamburg.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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