William Burckart

Rational Exuberance: The momentum in impact investing is real – but so is the need for clarity about the changes (and challenges) underway

In many ways, impact investing is on a winning streak. Consider a few recent milestones that illustrate the sector’s growing momentum:

  • In March, Unilever announced a $416 million bond, the proceeds of which will be invested into projects like new and retrofitted factories that will result in reductions of 50 percent in CO2 emissions from energy, water used, and waste generation.
  • In early September, LeapFrog Investments, a private equity firm backed by George Soros and J.P. Morgan, announced it had raised $400 million for impact investments in Asia and Africa.
  • That same week, nearly a dozen wealthy families announced that they have committed to invest a combined $300 million over five years in commercial ventures in the areas of climate, energy, health, food and sustainability.

Meanwhile, financial advisors are increasingly being asked to design investment strategies that go beyond clients’ personal financial goals to serve a new set of social and environmental objectives. A 2013 study by the World Economic Forum found that next-generation investors consistently ranked impact performance as their primary investment criterion, ahead of return. A more recent 2014 survey of high net worth individuals by RBC Wealth Management indicates that achieving social impact is also high on the list for 92 percent of the respondents—with investment ranked as the leading mechanism for meeting these goals.

In response, big names in the financial services industry have taken major steps to re-orient themselves around the newly progressive goals of investors. Social Finance was launched at JPMorgan Chase in 2007, bridging the firm’s corporate responsibility department, which includes global philanthropy and sustainability initiatives, and the investment bank. Citigroup Inc., though not adopting the impact investment label, has nonetheless mobilized resources along similar lines, with a focus on inclusive finance, via the Citi Microfinance business group and Citi Community Capital. Goldman Sachs’ impact-related investing activities are split into two departments: the Urban Investment Group and the Goldman Sachs Foundation. In 2013, Deutsche Bank AG created a head office for environmental, social, and governance investing to further drive ESG integration in the asset and wealth management areas of the firm. Even BlackRock, the world’s largest asset manager with assets under management of $4.3 trillion, is exploring the integration of impact investing. The company is focusing on social impact within the confines of its product management unit, which is responsible for the launching and seeding of new fund strategies, as well as the on-going management of its existing product lines.

As the sector evolves, initial perspectives and efforts are giving way to new thinking and approaches. The Rockefeller Foundation, long the leading funder of impact investing architecture and infrastructure development, is already starting to think about the next big thing by attempting to broaden the shelf of innovative financing tools beyond social impact bonds to include new mechanisms and models that align disparate interests and actors to collaborate and share risk, and increase leverage.

Trouble beneath the surface

But in spite of this progress — and the staggering exuberance associated with impact investing since it first burst onto the stage — closer inspection reveals cause for serious concern.

Though foundations, nonprofits and social enterprises, policy makers, and investors have jumped on the bandwagon, the investments themselves – which are happening across sectors – are still occurring largely in siloes, and without the benefit of commonly accepted standards or systems (despite the best efforts of many). Few social enterprises and nonprofits working to resolve social ills have balance sheets strong enough to support direct investment of the type and size that would interest impact investors. And seemingly insurmountable transaction costs contribute to the failure to attract systematic interest from investors (and the gatekeepers managing their money) for this approach to investing.

Enthusiasm notwithstanding, making and managing investments that aim to build communities, enable empowerment, preserve the environment, or achieve any number of other impact goals while still generating an appropriate financial return presents a complicated proposition for the financial services industry, and progress has been slow. If impact investing is the “crazy uncle in the attic,” to use a memorable term from Mark Sloss of UBS Wealth Management Americas in the Money Management Institute’s special report on impact investing, the broader industry is struggling to find a way to set him free.

Unfortunately, a surge of research and thought leadership arising from government and academia threatens to muddy the waters further, even as it attempts to create an enabling environment. Clarity has been sorely lacking on the defining features, major variations, scope and scale, rationale for existing, operational challenges, track record and overall assessment of the developments underway. Indeed, agreement on even the basic terminology in this sphere has been hard to come by. Christa Velasquez, the former director of social investing at the Annie E. Casey Foundation, famously quipped in 2011 at an event for the Federal Reserve Board of Governors, “We started investing in this space in 2002. I started as a [program-related investment] maker, then I became a social investor; mission investor was in there and now I’m an impact investor. So, lots of changes but lots of things stay the same.”

Bringing clarity to the sector

The fragmentation of thought and action that Velasquez alluded to helped serve as the initial spark behind the recently released book New Frontiers of Philanthropy: A Guide to the New Actors and Tools Reshaping Global Philanthropy and Social Investing. Edited by Lester Salamon, director of the Johns Hopkins Center for Civil Society Studies, the book (whose production I managed) is an attempt to bring far more coherence to the changes underway.

By focusing on the distant borders of philanthropy, Salamon set out to capture what is fast becoming a new era of social purpose finance. Recognizing the reality of mounting social, economic and environmental problems, declining government funding, and barely growing philanthropic resources, he saw that the emerging age of philanthropy would be different from its 20th century counterpart in at least four distinct ways: it would be more entrepreneurial, more diverse, more global, and more collaborative.

But for these new approaches to philanthropy and social investing to fulfill their potential, Salamon and the other scholars and practitioners who joined him—including leaders from The Economist, Harvard University, the Center for American Progress, the Global Impact Investing Network, Venture Philanthropy Partners, and ACCION International, to name just a few—saw the need for a clear and accessible roadmap. Only then could more players be brought into the field, and only then could current players reach beyond their specializations for new collaborations and greater impact.

New Frontiers of Philanthropy attempts to provide that roadmap. It represents the culmination of six years of painstaking work to map how philanthropy is being reinvented for the 21st century, charting the striking array of new actors and tools taking their places on the frontiers of philanthropy and social investing. It also includes an examination of some of the key crosscutting issues and challenges these developments pose.

In the remainder of this three-part series, I’ll explore some of the core insights from the book. The next post will cover the opportunities and challenges facing nonprofits and foundations as they seek to engage in impact investing.

William Burckart is an independent impact investment advisor.

Education, Impact Assessment, Social Enterprise
academia, impact investing, philanthropy, social enterprise