Making Impact Investible

Abstract

Impact investing (also referred to as “social finance”, “social impact investing” and “blended value investing”) has gained significant momentum in recent years. As we move through the first quarter of the twenty-first century, this is perhaps the biggest idea to renew the relevance of finance for the real economy and social progress. Estimates indicate that impact investing could become a new asset class or investment style that will grow to USD 1 trillion by the end of the decade. Paralleling the emergence of impact investing, research is proliferating that is aimed at understanding the phenomenon and strengthening the market building process currently underway. At Impact Economy, we have worked on impact investing with a variety of clients and partners since the inception of the firm. Over more than a decade, the author of the study has been involved in a variety of senior roles in the pioneering efforts that have led to the creation of the concept of “impact investing” in 2007-2008, investment ideas such as contingent return models that link a financial return to a social outcome, and in their mainstreaming. In 2011, we reported interim results to a group of stakeholders and called for a “Geneva Consensus” to enhance the practical investability of impact investing.

This working paper reviews the state of action in impact investing, its potential for mainstreaming, and the pathways. The paper begins by providing a framework of understanding for the “impact investing” term, its forms of capital, institutional landscape, and blockers as well as enablers of further market growth. It then locates impact investing in the broader context of four megatrends that are creating new investment opportunities, namely massive pent-up demand at the “Bottom of the Pyramid”, the need for radical resource efficiency and green growth, the restructuring of the welfare state to drive efficiency, and the rise of the “Lifestyle of Health and Sustainability” (LOHAS) consumers. It subsequently explores how to best stimulate the impact investment marketplace via capital supply, capital demand and capital use policies. The paper provides a look at the emerging ecosystem of impact investing and the role different groups of investors play and concludes with recommendations for how to fully unlock the potential of impact investing. Two impulses are critical at the current stage of industry development: (a) intelligent policy action to build the impact investing market; and (b) sorting out social impact measurement to achieve reliable metrics for impact.

Building on more than three years of research on impact investing, this working paper also serves as a finance-focused companion to our real-economy study “CSR’s New Deal.”

Keywords: impact investing, social finance, blended value investing, finance, investments

JEL Classification: F30, G00, G18, G24, G28, G30, H00, H41, L30, M13, I00, P16