By Elizabeth Boggs Davidsen
Elizabeth Boggs Davidsen is acting chief of the Multilateral Investment Fund's Knowledge Economy Unit, which seeks to cultivate the driving forces of the new economy--technology, innovation, and entrepreneurship--to promote inclusive growth and job creation in Latin America and the Caribbean.
"Add Impact" is the new rallying cry of the Global Impact Investing community, which concluded a two-day plenary meeting of its Steering Group in Lisbon, Portugal on July 8. Championed by Sir Ronald Cohen, founder of Big Society Capital (BSC), which is hailed as the world's first social investment bank, the Global Impact Investing Steering Group is the heart and mind of a growing social investment movement bent on making impact investing mainstream.
Impact investments are those that intentionally target specific social objectives along with a financial return and measure the achievement of both. BSC formally launched in April 2012, using an estimated £400million in unclaimed assets left dormant in bank accounts for over 15 years and £200million from the UK's largest high street banks.
The UK experience is now informing a global impact investing movement, and the Lisbon meeting provided a venue for many country delegations to showcase their fledgling National Advisory Boards, comprised of policy makers, impact-oriented organizations, nonprofits, and intermediaries. New boards from Argentina, Australia, Brazil, Canada, Germany, India, Israel, Italy, Japan, Mexico, Portugal, the UK, and the US are organizing and innovating to solidify and strengthen the impact investing landscape and resources in their respective countries. And it's clear the UK is the trend setter. Many countries are following the Big Society Capital model and working to set up impact investment wholesalers funded with unclaimed assets to unleash new sources of social finance to support access to basic services, education, improved housing, and aging populations in underserved communities in rich and poor countries alike.
What's needed: scalable enterprises, new funding facilities, regulations, and champions of impact investing
However, along with this greater mobilization of impact capital comes the need to stimulate deal flow, which still lags behind investor demand. There is an overall lack of scalable social enterprise models, signaling the need for catalytic grants, other flexible financing tools, and acceleration support to help social entrepreneurs validate proof of concept, solidify business models, and become investment-ready.
It's also clear that new funding facilities, regulations, and champions are needed to make impact investing mainstream. Social impact bonds (SIBs) were introduced in 2010, a type of "Pay For Success" model where private investors invest capital and manage public projects, usually aimed at improving social outcomes for at-risk individuals. SIBs are gaining traction with 57 models operating, but they have proven complicated and costly to design and implement. Yet, the practice of pay-for-performance that the SIB model requires has captured the minds of policy makers, non-profits, development finance institutions, and private sector investors, including the Multilateral Investment Fund of the Inter-American Development Bank Group, which is working to help bring the first SIBs to Latin America.
Likewise, in addition to direct investments in high-impact companies, impact investing funds are taking different approaches towards strengthening the sector. For example, the US$20M Inter-American Opportunity Facility - a partnership between Calvert Foundation and the IDB Group - provides debt financing to socially responsible financial institutions intended to support small business lending, education, housing, and other businesses that benefit the base of the pyramid.
Among the US policy and impact investing experts who make up the National Advisory Board, there is agreement on the need to change regulation to enable more capital from pension, endowment, and public finance vehicles to meet the needs of entrenched social and environmental challenges. Innovative impact-oriented businesses need investment, and certain regulatory barriers stand in the way--leaving much private capital on the sidelines. According to the US Advisory Board members, the IRS could further clarify and refine its rules about foundation investments in for-profit enterprises to help fill the funding gap between grants and commercial capital, and this would be cost neutral.
As for champions, there are many and the field is growing. Having Pope Francis sign on to the impact investing movement certainly helps to raise visibility. But, it's time for business to broaden out its buy-in. The Sustainable Development Goals are helping to raise the profile and alignment of business and development goals. CEOs from large companies and banks are signaling that they want to be part of the development conversation in the communities where they operate. Corporates are playing an increasingly important role in enabling and driving innovative solutions for the world's most pressing challenges, alongside impact investors. Today, we see VC tools being used to seed corporate startups, as many large companies are deploying capital to innovate with entrepreneurs and invest for the future. While many of these investment vehicles have expectations of financial return, they also require that the startups make a positive social and/or environmental difference, a de facto impact investment.
Measuring social outcomes will help make the business case
But, the business case still needs to be made. As Shawn Cole, of Harvard Business School commented in a panel on Unlocking Flows of Impact Capital at the GSG meeting in Lisbon, not one finance text book includes impact investing. Measuring and embedding impact in investment decisions is needed, and firms like Bridges Ventures, which has over $1 billion invested in impact, are helping to develop the metrics and tools to capture positive social outcomes of their investments.
And the rise of the Benefit Corporation and B Corps --those companies that use business as a force for good and meet defined standards of social and environmental performance, accountability, and transparency--is taking hold. Today, there is a growing community of more than 1,812 Certified B Corps from 50 countries and over 120 industries working together toward one unifying goal: to redefine success in business. In the US, 31 states have passed legislation to allow for Benefit Corporations.
Danone, a leading global food company, pledged in December 2015 to help more people use business as a force for good by joining B Lab's Multinationals and Public Markets Advisory Council (MPMAC). Danone has joined a group of experts committed to using the B Impact Assessment to measure and manage the social and environmental performance of 10 Groupe Danone subsidiaries in 2016. Danone's example opens the door for other multinationals to measure their impact, an important step towards creating the shared prosperity many in the impact space are seeking.
As David Blood, cofounder of Generation Investment Management, commented in his closing remarks in Lisbon, there's no evidence that you have to trade impact for return. But for scale to happen, more dollars, billions of dollars, need to flow into the impact space.
From the Multilateral Investment Fund Trends blog