The Rapid Mainstreaming of Impact Investing

Amid all the noise about impact investing it can be difficult to get a clear read on what counts as fact or fiction. Yet the question remains: just how rapidly is the market changing, and what are the implications?
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It's no secret impact investing is mainstreaming quickly, with large, commercial investors like Zurich, Blackrock, and UBS taking significant strides. Yet the question remains: just how rapidly is the market changing, and what are the implications?

Amid all the noise about impact investing it can be difficult to get a clear read on what counts as fact or fiction. Yet each year the Global Impact Investing Network (GIIN) makes a critical contribution in the form of its comprehensive investor survey.

As a headline number indicative of mainstreaming, 59 percent of impact investors reported targeting market-rate financial returns in the 2016 survey, up from 54 percent in 2014.

However, there are a number of other findings that may be more predictive of the accelerating pace of commercialization.

The first relates to the experience of fund managers in impact investing.

In 2013, GIIN reported that the top two providers of capital to fund managers were high net worth individuals and development finance institutions (DFIs); two groups with storied legacies in impact investing. By 2016, institutional asset owners including pension funds and insurance companies (28.5 percent of fund capital) and diversified financial institutions including banks (17.7 percent) had taken the top two spots; the same investors out front in almost any mature market.

Because fund managers are a vessel for the preferences of their investors, this would suggest that fund managers themselves have been responsible for the growing interest in market-rate returns in the GIIN survey. And sure enough, the growth in the proportion of respondents seeking competitive financial returns has closely paralleled the increased participation by fund managers in GIIN's research.

With the shifting investor landscape comes an evolving set of motivations and impact preferences. "Responding to client demand" and "[benefiting from] exposure to growing sectors and geographies" have gained ground as top reasons for impact investing. And in the last year, interest in environmentally-oriented approaches to delivering impact has surged, according to GIIN, which may indicate these strategies align well with the stringent financial requirements of mainstream capital.

The second, somewhat counter-intuitive finding: fewer survey respondents reported making their first impact investments in recent years -- just five in 2014 and four in 2015 -- compared to an average of 10 new entrants per year from 2008 to 2013.

In all likelihood this says less about the absence of new investors -- 2015 was actually the strongest year on record for fund launches -- and more about the fact an increasingly diverse set of capital providers are less likely to self-identify as impact investors, and therefore participate in a survey of this kind. Knowing we have a lot to learn from these new actors, the question arises: how best to provide them with a seat at the table?

Finally, the 2016 survey finds that 27 percent of investments outperformed their impact expectations, up from 20 percent in 2014 (72 percent performed in line with their impact objectives, versus 79 percent in 2014).

While impressive, one wonders if the result is another sign of mainstreaming, or some other significant development. Are investors simply becoming more realistic about the impact they should expect, or less discerning about what it means to outperform? Does the finding indicate that impact performance is becoming more visible or reliable thanks to improved measurement or management practices? Or is the market becoming better at matching investors to the right products?

All these and many other questions merit further attention. However this we can be sure of in 2016: Yes, the field of impact investing is rapidly mainstreaming. And yes, the implications are significant. Buckle up for the ride.

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