Co-authored with Jed Emerson
Impact investing has not been growing as quickly as many practitioners might have hoped. Knowledge of what does and does not work in impact investing remains closely held. And because impact investing is unconventional (blending capital market tools, investor motivations, and professional disciplines from the private, public, and social sectors), the need to explain to outsiders precisely what is going on is more pressing still.
At the same time, this inherent complexity has not prevented the field from attracting tremendous interest. Make no mistake: investors are eager to proactively align their portfolios with their values. However, the key organizing principles in the "1.0 era" -- anecdotes and observation, as opposed to evidence -- are no longer enough. The larger wealth advisors and institutional investors on which growth depends are demanding a level of product and performance specificity that has so far been elusive.
In an attempt to address this need for additional data -- and kick-start the 2.0 era -- InSight at Pacific Community Ventures, CASE at Duke University and ImpactAssets have been working together for two years now, with lead funding from the Omidyar Network, to closely examine the practices of 12 high-performing impact investing funds, culled from an initial list of 350. And this evening, at the World Economic Forum in New York, we release our findings in a new report, "Impact Investing 2.0 - The Way Forward: Insight from 12 Outstanding Funds."
This research represents an unprecedented exercise in disclosure. Asset managers with private investors need not share their performance and lessons broadly, and most have not. The funds we selected agreed to reveal their inner workings in order to drive the field forward. They are listed below and account for over $1.3 billion of assets. Taken together, the funds represent a rich and diverse cross-section of impact investing and prove that concurrently delivering significant social impacts and financial returns that meet investor expectations is not only possible, but is being done at significant scale:
- Aavishkaar: $9,428,270 India Micro Venture Capital Fund investing equity in early-stage rural enterprises in India.
- ACCION Texas, Inc.: Community Development Financial Institution with a $29,782,042 portfolio, primarily in microloans to small to medium sized enterprises in the southern U.S.
- Bridges Ventures: The Sustainable Growth Funds I and II manage $184,575,000 of equity investments in high growth, high impact businesses in the UK.
- Business Partners Limited: $331,300,000 of equity and debt managed through the Southern African SME Risk Finance Fund targeting small and medium sized enterprises.
- Calvert Foundation: The Community Investment Note is a registered security available to non-accredited investors which has $230,000,000 in loans outstanding to community and micro finance institutions in 24 countries.
- Deutsche Bank: Global Commercial Microfinance Consortium 1, an $80,600,000 structured microfinance vehicle.
- Elevar Equity: $94,000,000 of equity under management through Unitus Equity Fund and Elevar Equity II targeting essential services for the Bottom of the Pyramid populations in Asia and Latin America.
- Huntington Capital: $78,000,000 mezzanine debt fund, Huntington Capital Fund II, LP, creating jobs in underserved parts of the U.S. southwest.
- The W.K. Kellogg Foundation: $100,000,000 in Mission Driven Investments focused on education, health, food and community development in the U.S. and Africa.
- MicroVest: MicroVest I, LP, a $48,500,000 hybrid low-income financial institution fund.
- RSF Social Finance: The $101,000,000 RSF Social Investment Fund provides loans to for-profit and nonprofit social enterprises working in agriculture, education and ecological stewardship.
- SEAF: $22,512,500 Sichuan SME Investment Fund, LLC, investing equity in SMEs in China.
In many ways, the practices of these 12 funds mirror those of other high-performing asset managers. The funds carefully nurture their brands, leverage the relationships at their disposal, are often headed or backed by singularly reputable or experienced individuals and institutions, demonstrate exceptional financial discipline, are models of operational excellence and transparency, and work relentlessly to support the growth of their investees.
Above and beyond these mainstream investment practices, however, the funds exemplify four qualities that are distinct and foundational to effective impact investing:
- Policy Symbiosis: Impact investing is grounded in deep cross-sector partnerships, including with the public sector. Impact investing intersects with all levels of government, consistent with the public sector's strong interest in maximizing social and environmental benefits to society, and the promise that impact investing can deliver these benefits at scale.
- Catalytic Capital: The grants, guarantees, letters of credit, collateralization, subordinated loans, concessionary or cornerstone investments that trigger additional capital can be transformative, generating exponential social and/or environmental value. Catalytic Capital can be instrumental to a fund, from providing early funding to driving reputational benefits.
- Multilingual Leadership: Those responsible for making investments must execute with unshakable financial discipline, but successful fund leadership is about more than simply effective money management. It requires cross-sector experience and fluency in the private, public, and non-profit sectors, both at the institutional and individual level.
- Mission First and Last: As opposed to being "financial- first" or "impact-first," successful funds place financial and social objectives on an equal footing by establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment.
In sum, in an effort to generate multifaceted financial and social returns, high performing impact investors become familiar with policy issues and spend energy cultivating mutually beneficial relationships with philanthropists and government actors; they are less masters of the universe than they are masters of collaboration (soft skills) and financial structuring (hard skills); they take the time to build teams with multi-sector experiences, approaches and skill sets; and they recognize and act on their accountability to multiple stakeholders, including their investors, investees, and target beneficiaries.
Identifying these practices signified to us that, while inherently diverse in its application, impact investing is in fact more developed and coherent than many believe. As a result, it is time to move away from existential discussions of definition, and instead build off of the experiences of funds with veritable track records of successful financial and social performance.
For a more in-depth look at our findings, please visit the Impact Investing 2.0 project site to learn about the funds in detail. Today we are releasing six of the 12 case studies from the project, as well as our full report. We believe that the disclosure of these collective experiences opens the curtain on the new 2.0 era of impact investing.
Jed Emerson is co-author of the book, Impact Investing: Transforming How We Make Money While Making A Difference, and a long time actor in sustainable investing and social enterprise. He coined the term Blended Value and has written extensively on the pursuit of financial returns with social/environmental impact. He is Chief Impact Strategist with ImpactAssets and Senior Advisor to three family offices executing "all in" impact investing strategies to asset management.