I recently went to an event at the Center for Strategic and International Studies called 'Impact Investing: An Opportunity for Development?'. The event brought together a diverse panel of experts from the private and philanthropic sectors to discuss what the title implies: impact investing and its potential to address global issues.
With all the hype surrounding it these days, impact investing could easily be considered the magic remedy for international development and economic growth. Part of its allure is the promise that both investors and investees can win.
Filling funding gaps
Saadia Madsbjerg, Managing Director at Rockefeller Foundation, opened up by pointing out the need for more capital for development. She noted that there was a $200 trillion funding gap in dealing with the problems in the developing world - a gap that impact investing could help fill.
Impact investing is a fast growing segment of the investment marketplace, and will continue to grow. Although the market has not been fully quantified, GIIN with J.P. Morgan released their annual investor survey report for last year, which showed more than a hundred investors (organizations, foundations, institutions and individuals) reporting to manage over $60 billion in impact investments. Calvert Foundation investors alone have invested more than $1 billion since 1995. John Simon, Founding Partner of Total Impact Advisors, asserted that impact investing is growing at about $10 billion a year and will continue to grow for the foreseeable future. Stats like these are impressive; but if philanthropic and public sector funding gaps continue to grow in the trillions, even with its projected growth the impact investing sector won't be able to fully address those gaps.
Even if impact investments were being made in the trillions, it is likely they will never be able to replace the value of philanthropic grants. Julie Katzman, Executive Vice President and COO of the Inter-American Development Bank, made the point that grant money is equally as important as investments. Many organizations and enterprises rely on grant money for seed funding, which helps them become investor-ready. Some social enterprises will never be 'market-ready' because they address high need populations, or other critical issues that don't translate into revenue.
The growing appeal of impact investing
Indeed, grants are important, but what makes impact investing have this 'silver bullet' appeal is its sustainability. You invest, you get returns (hopefully), you reinvest those returns for further social ends, and get more returns. The cycle continues and sustains itself. From an economic standpoint, impact investing outweighs the benefits of traditional philanthropy.
Investors, philanthropists, and the rest of the international development space have quickly picked up on this. Impact investing, as a movement, has accelerated in the past decade. Today most major financial institutions have an impact investing program, including major family foundations like MacArthur Foundation and Rockefeller Foundation, and multi-national banks like J.P. Moran and Bank of America. Given its growing popularity, David Wilton, Managing Director at Morgan Stanley Alternative Investment Partners, surmised that in ten years impact investing could very well become the norm in investing overall.
The capital pipeline
With all this popularity and wealth, how are dollars reaching the organizations and projects that need it? Jeff Liebert, CEO of Gazelle Finance, from the audience rightly asked, 'You say there is enough capital out there, but is there a mismatch of supply and demand?' How can we better deploy these billions of dollars, because there are many organizations and enterprises out there that need them. Huburtus van der Vaart, CEO and Co Founder of SEAF, acknowledged that the sector is fragmented, meaning, it's difficult on a large scale to connect investors and borrowers on the same financial terms, and further, it's difficult to find investors and borrowers who align on the same mission. There are investors everywhere with good intentions, but fewer financial mechanisms to translate those myriad good intentions into real outcomes.
When the money does get employed, what is the actual impact? This was essentially the first question of the event: when it comes to impact investing, what is the actual potential for impact? What are the issues that are most tractable for change? Amie Patel, Vice President at Goldman Sachs Asset Management, pointed out that the outcomes depend on what investors want more of - impact or returns. Not all impact investors are created equal - some will seek returns first, and some will seek impact first. However Ambassador Simon argued that there doesn't have to be a trade-off; in the short-term yes, some investments will have better returns than others, but longer term investments could eventually meet in the middle to provide equal social and economic returns.
From the audience, Deepti Tanuku of Jhpiego, a global health NGO, asked how do impact investors themselves define impact? A complicated and very personal question, which even experts in international development and the NGO world have a hard time answering. Van der Vaart explained that different organizations will have different measurements of success based on what their intent is, and what looks like success for one organization may look different for another. There is no shared definition for impact investing, and so it will have distinct indicators for progress depending on the organization or project being funded.
A piece of the puzzle
As made evident by the panelists, impact investing is certainly affecting international development; it's providing an increasingly important source of capital that is sustainable and scalable. Although its impact can't be wholly quantified, individual impact investments show real, positive change.
There are however, many challenges that arise as the impact investing space continues to grow. Matchmaking capital with the users of capital is difficult, and not just in impact investing. This is a challenge that impact investors are trying to address. Grant funding remains vital and supports organizations where impact investing can't; but complement each other.
No, impact investing is not a silver bullet. Markets are deeply complicated, multi-faceted organisms which don't allow for simple, single solutions. Rather, impact investing is a vital piece in the puzzle in which we all have a role to play.
Want to find out more about this event? Watch the video coverage.
Looking to invest for impact? You can invest as little as $20 on Vested.org and target it to international development initiatives.