2014 in Impact Investing: The Big Bang and its Aftermath

From its origins in the closed circles of community finance, philanthropy, and international development, 2014 was a Big Bang for impact investing.
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Impact investing reached and surpassed the tipping point in 2014, ceasing to be an insiders' game.

From its origins in the closed circles of community finance, philanthropy, and international development, 2014 was a Big Bang for impact investing.

Fragments of ideas and practices scattered far and wide, infiltrating every segment of the economy and spreading seeds of innovation to all corners of the globe (thanks in part to the work of the Social Impact Investment Taskforce, Impact Investing Policy Collaborative, and World Economic Forum, to name a few).

The Big Bang of 2014 will have many ramifications, for many years to come. The most important, however, is the idea of segmentation, given the Big Bang has now conferred ownership of impact investing on a far larger and unimaginably diverse group of stakeholders.

To be sure, there remains a common core in impact investing -- the process of drawing out an investor's social/environment objectives, understanding the extent to which these objectives can be intentionally pursued through a range of investments, and tracking the performance and progress of any new strategy with discipline (starting with the guidance provided by the Impact Measurement Working Group, constituted as part of the Social Impact Investing Taskforce).

However the practice of impact investing is becoming necessarily more distinct. Consider the four subgroups of funds featured in The Impact Investor book, for example:

  • "First responders" leverage public subsidy to invest in the most underserved communities. Community Development Finance Institutions in the US are prototypical;

  • "Solution Specialists" respond to the discrete needs of anchor investors, which might include international development agencies or regulated, private institutions;
  • "Early-stage innovators" creatively blend different types of private capital (market, near-market, and philanthropic) to invest in smaller, mission-driven businesses. A debt fund like RSF Social Finance is a good example in this category; and
  • "Scale agents" attract primarily private, institutional capital for investment in more mature markets with impact, like microfinance.
  • Each speaks to a different audience, different intentions, different accountabilities, and a different approach to raising capital and generating blended financial and social performance.

    Cross-fertilization and cross-sector, "multilingual" leadership are crucial. Yet markets that are maturing and segmenting also become more specialized, suggesting it is more important than ever to think about roles and responsibilities in impact investing.

    Is philanthropy playing a sufficiently creative and innovative part in impact investing, and is it time to build a more robust bridge between foundation grantmaking and investment cultures? What does being a "21st Century" fiduciary imply for institutional investors? What investments in education are needed for wealth advisors to better align clients' investments with their values? How do we mirror the unity with which UK policymakers have approached impact investing for the last 15 years, or US policymakers have embraced community finance? And how do we give academic institutions and other think tanks the data, access to experience, and resources they need to connect the rich history of an insiders' practice to the norms of new market participants?

    These questions are not new. However finding the right answers with urgency, and emulating best practice, will demand dedication and empathy on an unprecedented scale: Dedication, because there are no shortcuts, experience matters, and investment track records take decades to build; and empathy, because the Big Bang replaces the solidarity of pioneers and early adopters with a myriad of new individual and institutional idiosyncrasies that must be understood, honored, accounted for, and only then leveraged.

    The Big Bang of impact investing makes listening and learning hot in 2015. Egos are not.


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