Impact investing has grown much in the past ten years, to the point where JP Morgan declared it a new asset class on November 29. To paraphrase JP Morgan, impact investments refer to debt or equity investment for small yet scalable businesses with an explicit social intent–mainly to include the poor as contracted suppliers, employees, or final consumers and to account for environmental and ethical responsibility. As impact investors continue to further define and standardize what ‘impact’ means exactly, and how to measure it, at least one outcome matters dearly to strengthening democracy: impact investments disperse economic power, and in so doing intentionally or unintentionally disperse political power.
Though still just barely a drop in the estimated $55 trillion global investment bucket, and still small even compared to microfinance investment, impact investors have emerged over the past ten years to channel investment into sectors and markets previously thought to be too risky or too small. India’s Financial Express recently reported that capital invested in social ventures grew from $150.36 million in 2009 to $404.58 million in 2010, with a growing percentage from mainstream private equity and venture capital.
As a way to channel capital and business expertise to populations alienated from traditional financial entities, impact investing differs from microfinance in two key ways: first, the impact investing field is populated mostly by venture capitalists and other financial professionals looking for a higher cause, rather than global development workers; second, it largely targets the “missing middle” of job-creating SMEs in the formal sector rather than informal sector consumers and micro-entrepreneurs.
On December 13, the Center for Global Development (CGD) hosted a launch event for “More than Money: Impact Investing for Development,” a new report outlining basic and approachable recommendations to realize the goals of impact investing. While building a competitive new financial asset market, impact investors also expect to account for the broader social impact of their activities. CGD visiting fellow John Simon and Julia Barmier co-authored the report.
Simon delivered keynote remarks at the launch event. “Impact investment does bring something new to the table,” Simon said. “While emerging markets private equity typically goes into established sectors like mining, energy, and infrastructure, impact investing is concerned with new and underinvested sectors like affordable housing, low-cost education, and renewable energy.”
Though the terminology of ‘impact investing’ is only about a decade old, Simon did cite Development Finance Institutions as having a much longer and respectable track record of financing similar or identical activities. The challenge before the impact investing movement now is how to scale up such activities by industrializing the sector globally, attracting more mainstream commercial capital while remaining steadfast in measuring social impact, not just financial returns.
Transparency and information sharing are imperative; particularly when it comes to information about exits. Few impact investors have robust data on realized returns, and very few of those that do have been willing to disclose them. Standardizing measures and terminology for social impact is also a priority in order to make the sector more approachable to outsiders and potential new entrants.
A panel discussion on impact investing followed Simon’s remarks, featuring Simon as well as Wendy Abt, USAID deputy assistant administrator for Economic Growth, Agriculture, and Trade; and Randall Kempner, director of the Aspen Network of Development Entrepreneurs (ANDE).
Abt was keen on keeping focus on industrializing impact investment. “If you’re an impact investor, you are by definition ambitious,” She said. “If you’re not trying down the road to make a lot of money that bothers me.” Concerned about undercutting developing country investors and causing market distortions into possibly sub-prime markets, Abt emphatically called on impact investors to wean themselves off of subsidized or specialized impact investor capital. “We don’t want to become a sort of insulated boutique,” Abt added. “The intention has always been to become mainstream.”
Kempner did not stray far from Abt’s message. “Today we are small, growing, and important; tomorrow we want to be large, institutionalized, and impactful,” Kempner said, also noting that ANDE does plan on increasing its efforts to convince members to disclose information on exits. He also spotlighted ANDE’s broader ambition as a worldwide, membership-based impact investor association. “We don’t want to just have our members invest in small and growing businesses,” he said. “We want full-fledged financial sectors that can support all small and growing businesses on the ground in developing countries.”
Beyond the event the impact investment journey to mainstream reached a major milestone thanks to the JP Morgan report, which used four indicators to define impact investment as a new asset class: the unique skill set required for impact investing; new organizational structures to accommodate new skill sets; the emergence of supporting organizations, associations, and educational facilities; and the accelerating trend toward standardized metrics, benchmarks and ratings. The report estimates impact investment profit opportunities to be between $183 billion and $667 billion over the next decade in five sectors – housing, water, health, education, and financial services – serving the global market consisting of households earning less than $3,000 annually.
As impact investee businesses continue to emerge and expand, the populations they encounter will gain access to new products and services, new jobs, and – assuming these are well-governed companies – they may also gain a renewed insistence upon transparent, responsible, and accountable public sector leadership, having experienced it from the private sector first – a sort of ‘governance spillover‘ effect from private to public sectors. In her new book The Case for Business in Development, South African civil society leader Ann Bernstein calls it “invisible corporate citizenship.”
In addition to invisible ‘governance spillovers’, impact investing also has corresponding tangible spillovers. The new industries impact investment hopes to create by becoming mainstream would also contribute to an expanding tax-base for developing country governments, helping to wean governments from foreign aid while also turning subjects and victims of poor governance into citizens and stakeholders in democratic governance.
Creating stakeholders in democratic, accountable, responsible government just may be the ultimate social impact.
Published Date: December 16, 2010