12/17/2012 11:07 am ET Updated Jun 11, 2013

10 Ideas for Scaling Impact Investing


When the Global Impact Investing Network is awarded over GDP10 million to grow impact investing in Asia and sub-Saharan Africa - and adds almost 100 new "network members" in the space of a month, including institutions as large and diverse as asset manager Northern Trust, ratings provider Moody's, and the Dutch Ministry of Foreign Affairs -- you know that impact investing has arrived.

Even as momentum builds, however, the work to grow impact investing into an established category of mainstream investment remains very deliberate. Impact investments are often small, unconventional and untested, which is a deterrent especially for large institutional investors, many of which are obliged to earn a competitive rate of financial return for beneficiaries.

There will always be other categories of investors with the flexibility to deploy capital at an earlier stage or for targeted impacts with more modest financial returns, including private foundations and high-net-worth individuals. This is the heart and soul of impact investing.

However it is market-rate investors that will propel impact investing over the tipping point and that are the focus of growing attention, as they were at an event October 1st at the Federal Reserve Bank of San Francisco, co-hosted by the Rockefeller Foundation and documented in a new report. Out of that discussion emerged many concrete ideas for building scale in impact investing, 10 of which are highlighted below.

(An important caveat: these 10 ideas exclude the perennial challenges of arriving at a widely accepted definition of impact investing, and tracking impact with rigor and transparency. I will focus on these issues in subsequent articles)

  1. Segmentation: The more we segment investors, the greater the likelihood that products can be standardized, moving beyond the status quo of customized and costly deal making.
  2. Focus on immediately scalable opportunities: Particular market sectors include especially promising opportunities; energy efficiency in environmental markets, for example, or the significant reforms stemming from the Affordable Care Act in health care. These opportunities present important, discrete openings for institutional investors.
  3. Ensure the policy/subsidy question is front and center: In the same way subsidy has been at the core of many established mainstream markets, including in financial services and telecommunications, policies in impact investing like the Community Reinvestment Act and Tax Increment Financing have been essential and ought to play an ongoing role. There may be opportunities to better focus subsidy, create new incentives, and to layer government support in a manner that creates more institutional-quality markets.
  4. The "Giant Pilot": Is there an appetite for identifying a single, promising market and doing whatever it takes to bring blended sources of capital together with established and innovative intermediaries?
  5. Work with what works: Reinventing the wheel in institutional markets is probably not a good idea. Rather, the field should leverage existing expertise, rigorous methods of analysis, deal structures, and established distribution infrastructure.
  6. Education, education and more education: There are too few impact investing intermediaries and too few asset owners and financial advisors that understand what they do. Education is needed to build market knowledge and participation.
  7. Develop relationships: Closer dealings between investors and intermediaries, earlier in the product development cycle, will have numerous benefits. It will ensure that significant investments in product innovation (primarily on the part of intermediaries) are better matched to the demands of asset owners and that, through this process, investors become more comfortable with market characteristics and risks.
  8. Pull established intermediaries into the fold: There are many funds and intermediaries having more impact than they know, and many market sectors that include significant "imbedded impacts", for example in real estate or forestry. Introducing established, committed intermediaries to impact investing would have the effect of bringing additional credibility to the field and providing institutions with more investment options.
  9. Get the messaging right: Institutions driven by fiduciary duty ought to be approached on their terms. This means leading with a story of competitive market-rate returns, because impact investors better understand the sustainability "mega-trend", new technologies and consumer patterns, or how to access government programs and other subsidies.
  10. Build credibility through persistence: Patience and determination in the face of entrenched skepticism -- backed up by data -- will eventually change minds.