The Philanthropy World is Embracing Impact Investing
In 2015, the United Nations laid out its Sustainable Development Goals to track global progress against massive social and environmental challenges like extreme poverty, inequality, and climate change. But hitting those goals will take more than creative public and private partnerships: it will cost money. All told, the estimate is in the trillions, which neither governments nor traditional philanthropists can cover outright.
The good news is that, in just a year and a half since the call came out, the impact investing industry is picking up the slack. In 2016, investors looking for financial returns that demonstrate social good improvement committed $22.1 billion to 8,000 investments. All told, the emerging industry, which is less than a decade old, has at least $114 billion in assets under management, according to a recent report by the Global Impact Investing Network, a nonprofit organization to increase the scale and effectiveness of impact investing.
That’s not trillions exactly, but as startups grow up into global powerhouses that generate their own revenue and bigger impact, it may not need to be. The results show that more than half of the impact investing industry is intent on tracking returns directly against SDG-related targets. (Per the fine print: 26% do that now, with 30% posed to do so.) “We feel that the SDGs will act as a global framework that more and more impact investors will align with going forward,” says GIIN’s Research Director Abhilash Mudaliar, who notes that the U.N. guidelines have acted as a “clarion call” for the burgeoning industry.
Such a global focus is certainly helping share the wealth. The 209 groups surveyed by GIIN are made up of mainly fund managers and foundations–but also includes banks, development financial institutions, family groups, and pension funds. Those are based in both traditional markets like the U.S. and Europe, as well as developing ones like Latin America, sub-Saharan Africa, and South Asian. Their money is spreading geographically and ideologically into business-driven solutions for better financial services access, renewable energy, affordable housing and healthcare, and protective forestry and timber plans.
So far, everyone seems happy with the returns, too: “The overwhelming majority of respondents reported that their investments have either met or exceeded their expectations for both impact (98%) and financial performance (91%),” notes the report. Plus, the annual cash flow is expected to jump another 17%, to around $26 billion next year.
While carefully structured impact investing has proven it can generate profits comparable to standard investments, some groups–including many chasing SDG-alignment–aren’t necessarily using it that way. Roughly one-third of funders are comfortable taking below-market rate returns or break-even paybacks (so-called “capital preservation”) to grow the both field and slower rolling startups that might eventually make a bigger dent in these problems.
For philanthropists who might have traditionally given out non-refilling grants and donations, that’s actually still an enticing proposition. “It’s offering foundations and others . . . new tools,” says Mudaliar. “And this is a tool that allows them to potentially scale the approaches in which they seek to address social and environmental challenges in a way that’s also more sustainable because the capital is returned and then can be recycled into other projects or other investments that further their impact.”
The Omidyar Network, a philanthropic investing group pioneered by eBay founder Pierre Omidyar and his wife, Pam, has certainly taken that approach “In some cases—perhaps even most—a strong positive correlation does exist between financial return and social impact. In other cases, a company can generate significant social impact even if its financial return is modest,” writes a team of Omidyar-affiliated authors tasked with explaining the new rules of this economy in a recent Stanford Social Innovation Review report.
To that end, Ford Foundation recently announced it’s committing $1 billion toward more cause-aligned investments. As SSIR reported, Ford, Robin Hood, The MacArthur Foundation, Rockefeller Foundation, and Starr Foundation are all pretty comfortable with concessionary tactics.
Shifting norms toward SGD alignment, in particular in a way that focuses on long term impact over short term gains may help set the standard for what’s expected as more traditional investors move into the space. After all, the entire goal is to fund solutions that can actually improve the world. “I think what that shows is that impact investors demand a pretty high bar for impact integrity,” adds Mudaliar.