Impact Investing: How Do We Harness the Hype?

There is a lot of hype about impact investing. Investors speak of a $1 trillion USD sized market. Social enterprises reposition their business model and restructure their financial model to attract, absorb and grow through investor capital. Despite the enthusiasm, the actual volume of impact investment transactions remains minimal at best. The Schwab Foundation for Social Entrepreneurship took this week at Davos to convene several important discussions about how to harness the hype and create results that are both practical and impactful.

On Tuesday, before the Annual Meeting began, the Schwab Foundation for Social Entrepreneurship hosted a private discussion on the possible future scenarios for impact investing. The participants were asked to map out what the space could ideally look like in 2030, and work backwards to identify the constraints and facilitating factors for this ideal state. The intimate discussion, which included a handful social entrepreneurs and several mainstream investors who are just entering the space, was moderated by professor Johanna Mair, chair of the Global Agenda Council on Social Innovation and editor of the Stanford Social Innovation Review.

Later in the week, the Schwab Foundation and the investors community of the World Economic Forum co-hosted a gathering that brought together some 30 CEOs, CFOs and Chief Investment Officers of the world`s most powerful private equity, venture capital, and investment management firms with 20 leading social entrepreneurs, as well as important players in the field including foreign investment authorities, pension funds and leading business professors. In an interactive and dynamic simulation, they were challenged to build a concrete investment case comprising both an economic and ESG (environmental, social, governance) bottom line. This exercise helped build empathy and a spirit of collaboration among the diverse participant group. The ensuring dialogue created actionable next steps and helped defuse some of the hype around the impact investment class.

Discussions like these are critical to help investors and social entrepreneurs start speaking the same language. Financial institutions like UBS, which recently launched at $100 million impact investment fund, have already made large commitments to the field. However, there is still a dearth of information for newer investors on how to navigate the impact investing sector.

For this reason the Schwab Foundation partnered with Credit Suisse to produce the report Investing for impact: how social entrepreneurship is redefining the meaning of return. Contributors include Jed Emerson, Cathy Clark, and Acumen Fund's Brian Trelstad and Rob Katz. The investment profiles of five social enterprises in the Schwab Foundation network are featured in the report. Working in sectors as diverse as health care, education, and job creation, these organizations are united by their innovative yet pragmatic approaches to solving social problems. They are:

· Felipe Vergara of Lumni in the US and Latin America; investment funds would be used to set up a Chile Fund to finance the university education of low-income students
· Asher Hasan of Naya Jeevan in Pakistan; equity and grant funding would underwrite a new initiative to provide health insurance to workers making less than $6 a day
· Patrick Shofield of The Indalo Project in South Africa; grants and low-interest loans would be used to establish twelve new craft producer groups
· Bam Aquino of Hapinoy in the Philippines; investment funds would allow Hapinoy to expand its model to less developed islands in the archipelago
· Kyle Zimmer of First Book; a loan will finance expansion of their services to reach 35,000 children in Mumbai, India.

The social enterprise sector is on the cusp of achieving significant scale and impact, thanks in no small part to the recent influx of investment capital. But to ensure the capital remains a tool to build the sector and not the other way round, investors must take the longer view, get comfortable assuming greater levels of risk, and be willing to deploy a mix of financial tools most suitable for social enterprises' needs. And take heart: you are laying the foundations for a new economy.

 

 

 

Follow Abigail Noble on Twitter: www.twitter.com/ab_noble

Comments

[audreysm]

07:48 AM on 02/03/2012

It's important to note that the success of this new "economy" is going to be a function of exactly the notion that the "economics" of impact investing work. As an impact investor working in India since 2007, I can say with no hesitation that the challenges (read: costs, in-kind and real) of due diligence on small social enterprises are... well, not small. The cost of deploying a $100m on impact investments is going to be a LOT higher than in others realms like private equity, simply because you're dealing with appraising businesses that are so small and high risk that diligence becomes a proxy for biz dev, and most don't want to spend equal amounts in diligence as on the actual transaction no matter how social the driving ethos. So all this to say - the way to make this HAPPEN is to get investors coordinating better on diligence. We're trying to do this in India on the Artha Platform (www.arthaplatform.com). Great article, in any case... thanks!

[FirstBook]

12:29 PM on 02/01/2012

The 'Investing for Impact' report itself is well worth checking out. You can download it for free (linked above in Abigail's post).

First Book was pleased to be highlighted in the report. We're proud of the work we've done over the past 20 years, and we're pleased that the global investment community is paying such close attention.

You can read First Book president Kyle Zimmer's response to the report here: http://blog.firstbook.org/2012/02/01/what-is-social-entrepreneurship-and-why-first-book-is-such-a-good-example/

[luvbrooklyn]

01:31 PM on 01/31/2012

Great article. You should also consider writing a story about HelpersUnite.com. The only crowdfunding site in the world that ties fundraising for creative and entrepreneurial projects with charities.

[HIPinvestor]

02:55 AM on 01/30/2012

impact comes in many flavors, shapes and sizes. Many types of impact are quantifiable, from increased income and graduation rates at Lumni, to reduced emissions of many eco efficient products to increased opportunity from diversity. Health, wealth, earth, equality and trust ; these 5 dimensions of impact can lead to better financial performance of for profit firms and society overall. More than $3 trillion is already flowing in the US. Investors have opportunities across their entire portfolio, from cash in eco focused banks to microfinance loans to venture capital to green real estate to public equities. What is missing is the willpower of investors to see the opportunity for potential human impact and profit, or what we call HIP. Its simpler than most people think to invest for impact, but you need to build it into your investment strategy, ask the right questions, and then track actual impact. We are ready, what's taking professional investors so long?