Almost grown: Where now for impact investment?
Billions of dollars are now invested worldwide to create social impact as well as financial return. But with powerful new players such as Goldman Sachs and the Ford Foundation striding into this maturing market, will the sector’s original values be lost? María Raurell, a consultant with social value experts Stone Soup Consulting, considers the way forward.
The impact investment sector as we know it was born in the second half of the 20th century, fathered by traditional financial investment and mothered by the emerging social consciousness that marked these decades. The sector was then almost exclusively driven by a handful of philanthropic organisations, foundations and the like, which had collectively an undeniable energy and pushed to redirect traditional financing towards the fulfilling world of doing good.
The first steps lacked formal organisation, those institutions tended to be quite shy to reach outside their standard market of operations, and managed volumes so small that they did not garner much attention within the highly numbers-driven commercial financial sphere. The term “impact investment” didn’t even exist.
The sector gained good traction during the following decades leading up to the 21st century. Impact investors, as teenagers, progressively scaled up their range of motion and operations, diversified into other sectors, and, more importantly, grouped together. Slowly but surely, social-oriented investment learned a lot, project after project. Only then the term impact investment appeared, to refer to those investments seeking social outcomes and not only financial return.
In the second decade of the 2000s the sector has become an independent and self-sufficient entity, but it has also started having a big influence on the world around it
A cornerstone in this constant evolution, the Global Impact Investment Network (GIIN) was launched in 2009. This worldwide group of impact investors and leaders is a good example of the maturity gained by the sector: building a structure and joining forces was then seen as key before aiming towards bigger and better things.
And wishes seem to have come true, at least in terms of volumes. In the past ten years the sector has received tremendous attention from the commercial sphere which has instilled in turn a lot of energy and money into sustainable social projects. It is tough to measure how fast impact investment has grown since 2010, but a study sampled some of GIIN’s members and showed an increase in their assets from USD 25.4 billion to USD 35.5 billion in just two years (2013-2015), which gives a good idea of the healthy growth curve of the sector.
Even more symptomatic of the impact investment sector’s growth is that new impact investment funds have been continuously emerging, increasingly specialised in specific sectors such as green energy, women-owned SMEs and forestry.
Today the sector is a young adult. Latest GIIN data reports USD 114bn in impact investing assets by 208 impact investors. We are in the second decade of the 2000s and not only has the sector become an independent and self-sufficient entity, but it has also started having a big influence on the world around it.
Multiple newcomers have joined the impact scene, some even in partnership with commercial and corporate entities. A good example is the famous Acumen organisation, which aims to catalyses entrepreneurship to tackle poverty on a big scale. It was founded in 2001 with financial backing from the Rockefeller Foundation and IT giant Cisco Systems. More notably, traditional investment top guns have also progressively directed their attention towards the social investment scene – for example, Goldman Sachs bought San Francisco-based impact investment firm Imprint Capital in summer 2015. In addition, several of the largest pension funds in the world (for example TIAA in the US) are now proud contributors to the impact cause. Mingling and cross-pathing between old and new practitioners is in the sector’s daily agenda.
At a crossroads
All these newfound energies, volumes and involvement are taking us to the first big crossroads in the young life of impact investment. On one side, today there is a lot more wealth to create impact with. Indeed, the financial volumes allocated by many of these newcomers are often more significant than the ones drawn by established and expert impact investors. Compare, for example, mainstream firm Goldman Sachs’ impact fund portfolio of USD 5bn with dedicated impact investor LeapFrog’s portfolio of USD 1bn.
On the other side of the spectrum, renowned foundations such as the Bill & Melinda Gates Foundation and the Ford Foundation have decided to allocate increased amounts of their endowments through impact investment funds (USD 1 billion in case of the Ford Foundation).
Moreover, the fact that the impact investment sector has been able to show almost the same level of financial returns as its peers in the commercial sphere might have been one of the reasons that these new actors were attracted to it.
Impact investment is still in its early twenties – it’s barely an adult – and, as such, the learning curve is still being drawn
These facts thus raise key questions for the future: with these new players coming in, do we see a disrupting effect towards investment into social ventures? Could the values of impact investment be hindered by purely commercial motives of traditional investors? Is there a critical mass to the impact investment sector?
For some of these questions we do not have an answer yet, this is simply too early to tell. But we need to keep an eye open and stay aware of the potential drift of impact investors or even social ventures towards purely marketing routines in order to achieve objectives in terms of volume and return.
However, I believe the opposite. The sector is still in its early twenties – it’s barely an adult – and, as such, the learning curve is still being drawn. I expect that in the upcoming years the non-profit and for-profit sector boundaries will slowly fade, as one learns best practices from the other. Platforms such as the European Venture Philanthropy Association help to promote common understanding as well as best practices in the sector. Through this common understanding we gain a clear definition of what an impact investor is: an investor that will seek the tangible social return before financial return.
In the upcoming years the non-profit and for-profit sector boundaries will slowly fade as one learns best practices from the other
And as such, impact investors are also becoming aware of the need to be more and more transparent about the social outcome that their activities generate. The Ford Foundation’s President Darren Walker mentions in his blog “over the past few years the tools available to measure social impact have become increasingly precise, thanks in large part to the work of several leading institutions”.
Among those, the EVPA guide on impact measurement (which we at Stone Soup helped to develop) has become the standard for impact measurement for many venture philanthropists. Some voices, however, argue that measuring social impact is not sufficiently prioritised by impact investors, and, of the ones that do collect and analyse the outcome of their activities, many keep that information internal, hence the very limited sector shared-knowledge and learnings. Not only is the integration of a social impact measurement tool becoming more and more a MUST for all impact investors, but sharing their findings with others should be another MUST to be addressed. These two aspects are key to ensure that the sector grows healthily, and remains aligned to its original values and goals.