Business Entrepreneurship Investment Life

Impact Investing: Going Once, Going Twice…

Photo by Edward Howell on Unsplash

Jessica Freireich and Katherine Fulton from the Monitor Institute released an 86-page document entitled Investing for Social & Environmental Impact completed in January 2009 with lead funding and support from The Rockefeller Foundation, Annie E. Casey Foundation, W.K. Kellogg Foundation and JPMorgan Chase Foundation.

It was a seminal paper of its kind and the one that drafted the name impact investment for the ‘using [of] profit-seeking investment to generate social and environmental good’. Here I share some extracts, links on the subject, orientations to understand more and several tumble ideas to discuss and further develop.

Promise, Peril and Precision

‘Evidence suggests that many thousands of people and institutions around the globe believe our era needs a new type of investing’. They didn’t’ know back then how much money had been invested to both social and environmental value as well as financial return, but the authors guessed that in 2019 — one decade later of its publication, the market could be as big as $500 billion or the equivalent to about 1% of total managed assets ($50 trillion).

Promise: These impact investors want to move beyond “socially responsible investment,” which focuses primarily on avoiding investments in “harmful” companies or encouraging improved corporate practices related to the environment, social performance, or governance. Instead, they actively seek to place capital in businesses and funds that can provide solutions at a scale that purely philanthropic interventions usually cannot reach. This capital may be in a range of forms including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many microfinance, community development finance, and clean technology investments.

Peril: The pressing question is whether impact investing will remain a small, disorganized, underleveraged niche for years or even decades to come — or whether leaders will come together to fulfill the industry’s clear promise, making this new domain a major complementary force for providing the capital, talent, and creativity needed to address pressing social and environmental challenges.

Precision: investing well is hard in any circumstances and wishful thinking is not a strategy for confronting real risks.

Embodying the Promise

In 2016 Bridges Impact+ skillfully facilitated a consultative process that to date has engaged over 2,000 stakeholders- including a wide array of investors, practitioners and standards bodies across more than 50 countries- to agreement on norms for what the word “impact” means, and how investors relate to different styles of impact investing, particularly as they relate to private sector enterprise and investment. (Imagine a world in which the impact of every investment is known, SVT Group).

What are the different kinds of impact that investments have on people and the planet? Impact classes bring together the impact performance (or goals) of the assets being invested in (x-axis) and the strategies that the investor uses to contribute to that impact (y-axis).

The Impact Classes of Investment — Impact Management Project (IMP)

Forces in search of a name: Impact investment

Recently it has become possible to see the disparate and uncoordinated innovation in a range of sectors and geographies converging to create a new global industry, driven by similar forces and with common challenges. This loose collection of investment activities — which operate in the largely uncharted area between philanthropy and a singular focus on profit-maximization — is still in search of a name. This report names the activity impact investing, recognizing the double meaning (investing for social and environmental impact, as well as the impact that this new approach could have on investing as a whole).

Terms used in 2009 and still around. I have reflected on many of these in The Garden of Forking and Converging Paths to Higher Purpose, Being There. Life Is a State of Mind! From Chat to Act in the Sustainability Board Game and The Prestige of Future Economy, also in Let’s Be Clear: They Don’t Truly Love Us! Besides, Call It Greed not Philanthropy, and last but not least How To Lose a Corporate Vice in 10 years:

  • Socially Responsible Investing
  • Bottom of the pyramid (BoP)
  • Blended Value
  • Corporate Social Responsibility (CSR)
  • Mission-Driven Investing
  • Mission-Related-Investing (MRI)
  • Triple-Bottom Line
  • Social Investing
  • Values-Based-Investing
  • Program Related Investing(PRI)
  • Sustainable and Responsible Investing
  • Creative capitalism
  • Responsible Investing
  • Ethical Investing
  • Inclusive Business
  • Environmental, Social, and Governance Screening (ESG)
  • Philanthropy and nonprofits

Social Investing: it generally refers to investing that considers social and environmental issues. Social investing includes investments made with the intention of having a positive impact, investments that exclude “harmful” activities, and investments that are driven by investors’ values and don’t necessarily correspond to having a positive social or environmental impact. Impact investing is a subset of social investing; it refers only to the social investing that actively seeks to have a positive impact.

Philanthropy and nonprofits: traditionally focused on gifts made by individuals and organizations to benefit society and the environment. Impact investing, with its requirement of a minimum return of principal, is distinct from grantmaking activities. Impact investing can however be an important vehicle for philanthropists to realize their objectives. Similarly, nonprofit organizations can act both as impact investors and as recipients of impact investments to enhance their impact.

Mission-Related-Investment (MRI) and Program-Related Investment (PRI) — MRI is a term coined recently to describe market rate investment by private foundation endowments that use the tools of social investing, sometimes including shareholder advocacy and positive and negative screening. PRI is below market rate

investment by foundations, deeply focused on impact and counting toward endowment payout requirements for foundations in the U.S. Impact investing includes all mission-related investing that actively seeks to have a positive impact (i.e. all MRI except for screening which is not often thought of as MRI). Almost any PRI would be considered a form of impact investing.

Bottom of the pyramid (BoP) refers to a broad set of business activities focused on the 4 billion people living on less that $2 per day. Different schools of thought within the BoP community advocate that the poor should be seen as potential consumers, producers, partners, and/or innovators. Impact investing overlaps with some BoP activities to the extent that they involve investments with the intention of having a social or environmental impact for low-income communities. But impact investing does not assume that any investment in a business selling products to poor people inherently creates social impact.

Corporate Social Responsibility (CSR) is defined as the integration of business operations and values, where the interests of all stakeholders — including investors, customers, employees, the community, and the environment — are reflected in the company’s policies and actions. Special attention is given to corporate practices as they relate to environmental, social, and governance (ESG) performance.

Creative capitalism, a term publicized by Bill Gates, advocates for a new form of capitalism in which companies harness market forces to generate profits while addressing social and environmental problems.

Inclusive Business: refers to sustainable business opportunities that are profitable and benefit low-income communities. These companies may also be considered social purpose businesses or social enterprises. Examples include direct employment of the poor, often through targeted development of supply chains, and the provision of affordable goods and services to them. This concept has significant overlap with creative capitalism, CSR, and BoP. Impact investing includes the subset of inclusive business activities that involve the deployment of capital with the intention of having a positive social or environmental impact.

“Great leaders are identified by their ability to perceive the nature of the game and the rules by which it is played as they are playing it. In other words, the act of sense making is discovering the new terrain as you are inventing it.” — Brian Arthur

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