If Impact Investing is not yet part of your financial vocabulary, it soon will be. In fact, express it however you want– a tipping point, a sweet spot, a milestone—with an increased number of investors rejecting the idea that “the only way to solve social challenges is through government or charity and that the only purpose of business is to make money”, this “new” asset class has entered the mainstream.
From its philanthropic beginnings 20 years ago, these “virtuous” investments have undoubtedly crossed over into the “big leagues” and now hold the backing of some of the most admired and respected names in finance. KKR & Co, Carlyle Group, Oak Hill Partners are all working with the Environmental Defense Fund to track, report and disclose sustainability results (Huffington Post). Goldman Sachs has gained attention for investing nearly $10 million in the first “social impact bond” to help finance a four-year program aimed at reducing recidivism rate of male prisoners (The Economist). Morgan Stanley made $12.5 million investing in the Bay Area Transit Oriented Affordable Housing Fund (Dealbook). Prudential, Citigroup, JPMorgan— and the list goes on—have all joined the ranks of the feel-good-about-yourself side of investing (Intellecap).
In late 2010, JPMorgan & the Rockefeller foundation released a milestone joint report in which they assessed the expected and realized return of over 1100 impact investments leading them to estimate the size of the industry at somewhere between $400 billion and $1 trillion. In their report they declared “impact investing [would] reveal itself to be one of the most powerful changes within the asset management industry in the years to come.”
In fact, according to Bloomberg CEO and former New York deputy mayor, Daniel Doctoroff, this flood of interest is only the tip of the iceberg. The still-inadequate integration of sustainability data into market information services hides a classic “externality.” And there is nothing like miss-pricing, market failures and potential alpha to attract capital.
From the Ashes of the Financial Crisis
In the beginning, those that started to think more formally about responsibility launched CSR (Corporate Social Responsibility) departments and engaging in a “do no harm” approach. However the vision has evolved from the screening to avoid “bad” or “harmful” companies to seeking more proactive businesses that harness the positive power of enterprise.
According to Antony Bugg-Levine, CEO of Nonprofit Finance Fund and Managing Director of the Rockefeller Foundation, this new way of thinking may have been triggered in part by the financial crisis. During the past few years, what was known as the conventional ideology behind investing suffered a serious blow. This left the door open for new and innovative practices, investors wanted to do things differently, to make headway.
What followed was an unexpected explosion in capital allocated in these funds. Now signs are everywhere that impact investing — although it does share many similarities with the rest of its finance family –is developing it’s own district culture and personality.
Perennial investment firms are adapting such TIAA-CREF with its new Social and Community Investing branch, and J.P. Morgan’s Social Finance unit. While new players and business are emerging to satisfy the growing demand, such as impact investment advisory, including Bamboo Finance in Switzerland and Intellecap in India. Industry associations are rising such as Global Impact Investing Network (GIIN), Toniic, and the International Association of Microfinance Investors (IAMFI). Events such as SoCap, Skoll Forum, and now “The EDGE” are being organized to connect investors and entrepreneurs together.
However if impact investing is ever to attain its full potential some hurdles still remain. New regulations are needed (for instance, to clarify whether pension funds can invest with an explicitly social purpose) and better metrics for social impact assessment are essential (in the current situation Impact is being defined by investors and entrepreneurs instead of beneficiaries).
As Amit Bouri, Director of GIIN, explains, “Impact investing does not suffer from a lack of interest on either the buy or sell side of the market. There is, however, a need for better intermediation—investment advisors, fund managers, product developers—because investors today have trouble identifying the investment opportunities that they are most interested in capitalizing.”
And most of all, impact investment requires patience. As Kevin Starr, director of Mulago Foundation, reminds us, “Coca-Cola while trying to penetrate a particular African region, lost money for 12 years. If arguably one of the most competent companies on Earth required over a decade for to break-even on the sale of a mildly addictive sugary drink that is absurdly cheap to make, imagine what it takes when you’re focused on impact” (Stanford Social Innovation).
It would be an understatement to say that “things have changed” over the last few year in finance as a whole and especially impact investing. The promise of ‘alpha’ returns on the upside and risk-reduction on the downside has drawn many investors. And of course the best time to gain such an edge is when information is not yet fully priced into the market, as sustainability data is not now.
Written by Adam Feller, current Master of Science in Finance student
 Mr. Bugg-Levine convened the 2007 meeting that coined the phrase “impact investing” and is the Board chair of the Global Impact Investing Network (Forbes).
 defined by JPMorgan & the Rockefeller foundation
 Mulago is a private foundation designed and built to carry on the life work of Rainer Arnhold. Rainer’s passion was the prospect of a better life for children in poverty, and so the Foundation’s work is focused on health, poverty, and conservation in the world’s poorest places (Mulago Foundation)
 David Bank, Huffington Post