7 Lessons from 7 Years of Impact Investing
The Rockefeller Foundation has been a pioneer in Impact Investing, since first coining the term in 2007. After seven years actively investing in social enterprises they have identified their seven lessons from impact investing. Here is their summary:
1. Impact investing is incredibly diverse. While all impact investing is united by a dual intent to generate both financial and social returns, the opportunities within the umbrella are vast. They include microfinance, affordable housing development, conservation and renewable energy finance and social impact bonds, to name just a few. And it varies by asset class, the investor’s risk tolerance and expectation of return, sector and geographical scope. Impact investments can take the form of equity, debt, cash deposits or another hybrid form. Investors are as diverse as impact investing itself—ranging from private bankers, institutional investors, board members of nonprofits, or the smaller-scale crowd-funders who represent an array of goals, appetite for risk, amount of capital to spare and time horizon. There is something for everyone.
2. Impact enterprises are at the heart of impact investing. Impact enterprises—more traditionally referred to as social enterprises—combine passion with good ideas. They are creating jobs, providing critical goods and services, and creating social and environmental benefits. Without these enterprises and other, non-enterprise destinations for capital—such community facilities and sustainably managed natural resources—impact investors could not translate their dollars into their desired impacts. For example, an impact investor who wanted to help improve sanitation in Africa could not do so much without enterprises, such as Ecotact, which developed a waterless toilet that is funded through modest user fees and local advertising. More work is needed to build a robust pipeline of impact enterprises to absorb the incoming capital.
3. Of all the support mechanisms needed for successful impact investing, impact rating and measurement systems are among the most critical. These systems not only help mission-focused investors and fund managers assess the social and environmental performance of their investments, but also enable impact enterprises to measure and improve their operations and services. Today, effective measurement systems such as the Global Impact Investing Rating System (GIIRS) and theImpact Reporting and Investment Standards (IRIS) are leading the pack, but continued refinement of these tools will only increase investors’ confidence and enterprises’ performance.
4. Data on investments that fail are as valuable as positive track records. Many investments—even mainstream investments—have the potential to fail, and often do. Understandably, investors are often hesitant to share this kind of data. But the open sharing of information and lessons learned will help both investors and companies spend more time on scaling up models that work.
5. The universe for impact investing is global, as both a destination and source for impact capital. In its early years, impact investing gained its greatest momentum in North America and in parts of Europe, such as the United Kingdom. But recently, impact investing is gaining traction in South and Southeast Asia, India, Africa, Latin America and the Middle East where it can play a critical role in the continent’s continued economic and social development.
6. Governments play a critical role in the decisions of impact investors. It might not be immediately obvious to the average investor, but governments can make their lives easier or harder, depending on the kind of environment they create for impact investing. Some of the ways that governments can enable impact investing include introducing benefit corporation legislation, providing lower corporate income taxes for high-impact businesses, funding incubators, and making equity investments.
7. If impact investing becomes “business as usual,” the future will be a much different place. As far as impact investing has come in seven years, there is still more to do to make it the norm, and give everyday investors access to a range of investment products. But if we do, aspirational estimates suggest that impact investments could one day represent 1 percent of professionally managed global assets, channeling up to hundreds of billions of dollars towards solutions that can address some of our biggest problems, from poor health to climate change.