A Small Drop in a Large Bucket: The World Economic Forum’s Abigail Noble, on why impact investing needs to go mainstream
Editor’s note: This is the first post in our Impact Investing Insights series of video interviews with thought leaders in the sector.
Let this sentence sink in for a minute: “So far less than US $40 billion of capital has been committed to impact investments out of tens of trillions in global capital” (emphasis added).
The quote is from the World Economic Forum, explaining the rationale behind the 2012 launch of its Mainstreaming Impact Investing initiative. In light of the underwhelming totals being channeled to impact investments – and the vast amounts currently untapped – the initiative aims to “identify the factors required to accelerate the flow of capital to impact investments from traditional and mainstream investors and progress the industry among investors, intermediaries and policy-makers to ensure it reaches its full potential.”
Abigail Noble leads the World Economic Forum’s impact investing work, and NextBillion Financial Innovation spoke with her at the recent Sustainatopia Impact Conference. Foremost on our agenda was the question of how to bring “$40 billion” a bit closer to “tens of trillions.”
“With the Mainstreaming Impact Investing initiative, we’re looking at the challenges and constraints that mainstream investors, such as pension funds, venture capital and private equity, face in getting engaged in impact investing – and how we can unlock some of those constraints,” Noble said. Among those constraints, she mentioned deal size. “The average private equity deal is about $35-36 million dollars. The average impact private equity deal is about $2 million. So for private equity funds to get engaged in impact investing, it’s going to cost more, because it’s double bottom line, to do the due diligence. And the size of the deal is much smaller, so they need to think about the fee structure.”
However, she said, innovative solutions exist – “whether it’s pooling the capital, thinking about a different approach to due diligence, or crowd-sourcing some of the data. So we’re looking at lots of different opportunities. And some of the things that we’re hearing is that pension funds are more interested in Environmental, Social and Governance criteria, which is putting pressure on the private equity funds to look at more impact deals. University endowments and sovereign wealth funds are also starting to look at the impact investing space. So things are moving on the institutional capital side, and funds are interested in how they can get up to speed on making impact investments.”
But should these investors expect market returns? Or is it necessary to condition them to accept smaller returns in exchange for a social impact?
“One thing to keep in mind is that there’s a range of returns,” Noble said. “Some investments only make a 0-1 percent return. But if you look at impact private equity funds like Leapfrog (Investments), they’re making in the 20 and up percentile in returns. One of the things that I find most encouraging is that we looked at the GIIN ImpactBase survey data, and found that over 70 percent of impact investment funds surveyed target an 11 percent rate of return or higher. And that’s targeted, it’s not actual – it’s going to take a few years for us to see enough exits to know what the actual returns are. But if you compare that to what state and municipal pension funds across the U.S. are looking for, it’s somewhere in the order of 7.5 to 8.5 percent returns. So even if these impact investment funds get a few points lower than what they target, it’s still within the range of what pension funds are looking for. So I think it is feasible to get institutional investors interested in investment deals based purely on returns or expected returns.”
To go mainstream, Noble feels the sector needs to update its image. “I think it’s really important for us to tackle this mindset of trade-off, and that whenever you target a social impact or social return, there’s necessarily going to be a lower financial return,” she said. “I think that’s the case in some situations, and that’s why philanthropic capital and development finance capital is very important. But it’s not the case for all situations. And I think when we start to think about how targeting social and environmental impact and returns can actually boost or make a more long-run stable financial return, then we start to have a more meaningful conversation.”
She mentioned the effects on financial markets of environmental shocks like climate change, or destabilizing events like social unrest related to youth unemployment. “When you have more stable political and social situations, it’s a better business climate, and you have more stable financial returns. Impact investing is a very real way to create a more stable and inclusive market economy, and once we start to adapt that mindset, we can see how you can target both social and financial returns and, over the long run, create the world that we want to see.”
But if investors are encouraged to focus more on financial returns, could less profitable investments with strong social impacts be left behind? What should governments around the world do to move impact investing forward? And how will the millennial generation affect the sector? For Noble’s take on those and other questions, check out our full interview below.