NB Financial Innovation

Monday
April 4
2016

James Militzer

The Evolution of Impact Investing – An Interview with Amit Bouri

The Global Impact Investing Network (GIIN) has been at the front lines of impact investing since the sector’s early days. It was conceived after the Rockefeller Foundation convened a small group of investors to discuss the needs of the nascent industry in October 2007. In June of the next year, a broader group of investors from around the world met to discuss how the sector could maximize its effectiveness. They called for three main initiatives: a global network of leading impact investors, a standardized framework for assessing social and environmental impact, and a working group of investors focused on sustainable agriculture in sub-Saharan Africa. About a year later, the GIIN was formally founded, with these three initiatives forming its first projects.

Since then, the organization has become a standard bearer for the industry, providing everything from specialized training to fund managers and a searchable database of funds and products, to an active Career Center and the influential IRIS catalog of performance metrics. We spoke with Amit Bouri, the chief executive officer and co-founder of the GIIN, about his views on the sector’s challenges and future.

 

James Militzer: Could you outline the main issues and priorities GIIN member organizations have shared with you, regarding the continued evolution of impact investing?

Amit Bouri: There are a variety of factors that will play a role in the continued evolution of impact investing. One thing that we’ve heard loud and clear is that there is tremendous opportunity and unprecedented interest in impact investing. Over the past several years, the market has developed strong traction, which we can build on; however, we’re also experiencing some of the growing pains of a young market.

The market is still quite opaque. Many people who are active in the market are getting more sophisticated about navigating it, but they’re very much trying to learn how to do an even better job as impact investors. One of the ways we’re helping is by providing opportunities for GIIN members to learn from one another, so as a collective we can be more effective.

Another area we hear about is the need to make impact investing more accessible to new investors. We need more capital in this market. There are now more investors than ever before, but we can make a tremendous difference by really helping them become even more active, and build their practices.

Impact measurement is a very important issue. The market now has more and more investors who are committed to measuring their impact, and who have become more thoughtful and sophisticated about understanding it. The GIIN has seen tremendous take-up of IRIS, our catalogue of metrics for social and environmental performance, and with the recent release of the latest version, we anticipate even further engagement with investors in this area of impact measurement. But we’re always thinking about how we can better support the actual practice of impact measurement, which includes the usage of metrics, but also goes much deeper.

 

JM: What are the obstacles to bringing more capital into impact investing? Does change have to happen primarily on the investor side – for instance, more tolerance for risk? Or does more have to happen on the investee side? Or both?

Amit Bouri, Chief Executive Officer and co-founder of the GIIN.

Amit Bouri, chief executive officer and co-founder of the GIIN.

AB: I think there’s work to do on both sides –for both investors and investees. We focus primarily on the investors and their intermediaries, and the investing process. The GIIN sees a few main obstacles that we need to address.

The first is awareness of impact investing: Many investors still don’t know that they can invest their money in a way that has a financial return and a social or environmental impact. As we continue to draw new investors in, the first step is making them aware that this is a possibility. It’s important to help build the credibility of impact investing, helping investors understand how it works, how it fits into their portfolios, and how it performs financially. A lot of our research is helping to address that barrier. For instance, the GIIN published a report in partnership with Cambridge Associates which focused on the financial performance of private equity funds that are targeting a market rate of return, both in developed and emerging markets. We wanted to bring credibility to the financial performance side, by partnering with a well-known and well-respected authority on financial performance and benchmarking.

We also do a lot of work on impact measurement, to make sure there’s credibility and consistency in terms of how people measure the impact of their investments. We find that many new investors have even less experience with impact measurement and management, so that’s a critical barrier for us to address.

Lastly, beyond awareness and credibility, it’s important to help investors become more active. There’s a role for education, but also for helping them understand the various options for impact investing. That’s why the GIIN has an online platform called ImpactBase, which is a directory of impact investment funds and products that now includes over 375 different impact investment funds and products around the world. It’s a really effective starting point for larger investors that are trying to figure out where they can find investment vehicles and products, such as debt funds or venture capital funds, in their preferred sector, with the returns they are seeking.

 

JM: Do you have a sense of how important it is to a typical impact investor that they get competitive returns vs. how important it is that they see demonstrated social impact results?

AB: In our community, there are many impact investors who are seeking market rates of return. These investors need their impact investments to produce financial returns that are appropriate for the degree of risk that they’re taking on, often for legal or policy reasons.

There are other investors who are comfortable accepting lower rates of return, but even for them, it’s still important that these are rigorous investments. If investors are projecting that these investments will produce less-than-market-rate returns, it’s important that they still have the confidence that the money will be invested wisely, with a strong likelihood of performing to expectations. The rigor around financial returns is critical, but the actual expectations vary by investor.

In terms of social and environmental performance, I think this is something that really drives people to become impact investors in the first place. It is absolutely fundamental and critical. The field still has a long way to go to fully understand and clarify what people expect in terms of the impact of the investment and how to better understand and improve it. Impact investing will continue to evolve as a market, and the understanding and sophistication of impact measurement will be critical to understanding social and environmental performance.

 

JM: How has the relationship between impact investing and philanthropy evolved as impact investing has grown? Do you see them in competition for investor/donor money, and if so, how can they better work together?

AB: There is a tremendous opportunity for impact investing to complement philanthropy, and vice-versa. Philanthropic dollars are a scarce resource, and there’s much more demand for them than supply, unfortunately. This raises the question, at a macro level, which initiatives can best be supported by investment dollars, and which can be better addressed with philanthropic support?

A couple of years ago, the GIIN produced a report that focused on catalytic first-loss capital, which is just one model where a philanthropist (or investor that can take lower returns) can use their funds to reduce the risk for other investors and bring in much more capital. I think this model has been underutilized. There needs to be more conversation about how philanthropists and impact investors can work together to channel even more capital to issues where they have aligned interests.

 

JM: Can you give a big-picture view of the current trends that you think will shape the sector’s future?

AB: I think the industry has changed significantly since I’ve been involved. We have many more people who are active impact investors, and many more who are interested in becoming active investors, which is very promising for the future.

We also have people who are exploring how impact investing can be applied to a broad range of sectors such as access to independent media in a broad range of markets, creating access to financing for smallholder farmers, and the application of technology to address needs in agriculture, financial services and education. The rate of innovation and adaptation is quite phenomenal, and really inspiring. If you forecast that trend forward, I think we’ll see many creative new ways in which investment is used to increase the livelihoods of people around the world.

In addition to the emergence of new models and sectors for impact investing, the market’s future will also take shape as we get larger investors involved to complement the activities of the pioneering, trailblazing, smaller investors who are experimenting with these new models. We may see some of the larger institutions investing more in steadier, longer-term investments, things like debt funds, which provide more predictable returns and operate at a greater scale. These may be less exciting than the more innovative types of investments and products, but can still have a tremendous impact. It will be important when we think about the growth of the market, to recognize we need those who are pushing the frontier, but also those who are scaling what works.

Ultimately what motivates people to become impact investors is the impact that they can have, so I think that as we build more of a track record around financial and social performance, we will continue to motivate and energize more people to get off the sidelines and become active as impact investors. This will increase our likelihood of realizing the true potential of impact investment: to address the needs of the poor and the health of the planet.

 

Photo credit: Alan Cleaver, via Flickr

 

James Militzer

 

Categories
Impact Assessment, Investing
Tags
Impact Assessment, impact investing, investors, social business, social enterprise, social impact