In a world where addressing global social and environmental problems are still more prominent than ever, Impact Investing as an emerging asset class is the best new alternative for channeling large-scale private capital for social and environmental benefit. This is the new face of corporate social performance in the next wave of globalization. Companies operating in emerging markets must address the challenges of serving low-income consumers and rural communities, and must adapt to the limitations that impede commerce. The global economy has reached a tipping point where emerging markets are no longer simply a rising force but are now taking center stage. Even companies with a strong existing market presence must grapple with how to expand their reach into new countries and segments, including second-tier markets and rural areas.
More than a million people in China die prematurely each year from air pollution. Throughout the developing world, water, sanitation, and hygiene are matters of life and death. Every 20 seconds, a child under five dies from a waterborne illness and eighty percent of diseases are related to contaminated water, and more than 780 million people do not have access to clean drinking water.
The Impact Investing market Is now entering the mainstream and is emerging as an alternative asset class, forcing Investors to re-consider the nature of their portfolios and start looking afresh at the Idea of intersecting 'money and meaning'. Impact Investing focuses on addressing major social and/or environmental challenges while generating financial returns. Impact Investing can be applied as a lens across an entire portfolio. Impact investing also refers to the component of portfolios that is most targeted on achieving environmental and social impacts. This may be in fixed income community loan funds or highly targeted environmental private equity funds.
Even though, impact investing overlaps with many of other appropriate and invaluable practices such as Corporate Social Responsibility (CSR), Social Investing, Philanthropy, Mission and Program related Investments (MRI), Bottom of the Pyramid (BoP), there is, however, an increasing need for well thought-out and professional capital markets solutions to worryingly large social and economic disparities. Corporates' actions are not philanthropy; they are key elements of the companies' global business strategy. Major multinationals companies global revenues now comes from emerging markets and they cannot thrive as a business in a world where nearly 1 billion go to bed hungry every night, 2.8 billion are short of water and increasing numbers of people are excluded from the opportunity to work. In the future, companies with a global agenda should assume that impact investment strategies, nonprofits and philanthropies will be involved in helping to develop and adapt new operating models and technologies using a thoughtful and diversified investment strategy.
However, increasing private sector activity creates economic value but it is done with a variety of intentions. Impact investing only includes those investments made with the explicit intention of having a positive social or environmental impact, such as job creation for low-income people. The fact that an investment is made in a poor country is not sufficient to qualify it as an impact investment. A set of standardized metrics that can be used to describe an organization's social, environmental, and financial performance such as location in an underserved area, fostering entrepreneurs, creating jobs and economic dynamism, environment, education, skills, health and well-being and inspire further entrepreneurial activity.
Impact investing requires not just the intention to affect a specific social change, but also the commitment to measure and report on that positive social change.
Investors should see their self as a bridge between private capital markets and the increasingly important entrepreneurial sector in developing economies. There is a direct correlation between the growth of the low and middle classes and the profitable business opportunities for local entrepreneurs and service providers. It is estimated that 60-85% of the capital raised currently by private equity funds comes from Development Finance Institutions ("DFI") and International Financial Institutions ("IFI") where governments investing in funds that support economic development in poor areas.
Relatively little international private capital has had access to this growing and profitable segment of the market and whatever name you give it, socially responsible investing, blended value, mission-driven investing, mission-related investing, triple-bottom line, social investing, values-based investing, program related investing, sustainable and responsible investing, responsible investing, ethical investing, environmental, social, and governance screening, Impact Investment growth is being fueled in the headlines and behind the scenes by such actors as:
• Prominent family offices for the world's wealthiest individuals that actively seek to source, vet, and execute investments to address a range of challenges, from the perils of climate change to the suffering of people living in U.S. inner cities, African slums, or rural Indian villages.
• Clients of leading private banks who call on their investment managers to provide them with more choices than just traditional investment and pure philanthropy.
• Private foundations that partner with investment banks, development finance institutions, and other foundations to make investments in areas related to their social mission.
• Private equity funds that aim to provide growth capital profitably to businesses that generate social and environmental returns.
• Mutual funds that have dedicated a portion of their assets to emerging companies committed to generating social and environmental value or bond portfolios financing housing for low- and moderate-income families or other civic improvements.
• Pension funds and sovereign wealth funds that are using their substantial resources to begin identifying how to deploy capital in ways that benefit the communities they serve and recognize the power of the capital they invest.
• Corporations that find ways to materially improve the lives of the poor while creating products and services that generate a profit.
Pioneers in microfinance, community development finance, and clean energy--to name a few of the arenas already full of activity--have been hard at work for decades. And some leaders in what is broadly called social investing have long been experimenting with going beyond "negative screening" to investing in companies actively doing good.
On the basis of that all investments come with risk, investors look for organizations aligned with their mission of creating opportunity for people to improve their lives. They seek for-profit companies and nonprofit organizations that use innovative, market-based approaches within their initiatives. Organizations that intend to develop new markets or industries, influence policy or practices among existing institutions, alter public perception, or demonstrate the power of business to create social and financial returns with significant growth potential, with the ability to scale operations and develop new markets. They ask for-profits to have the potential for a highly successful business model and nonprofits a path toward operational sustainability. They invest in management teams with a proven track record in their field of operation and an ability to articulate a clear vision and strategy, reinforced by a viable business plan. The organization must practice exemplary governance with operational efficiency and controls, transparent practices, and disciplined financial planning. They seek organizations that employ creative, entrepreneurial strategies to accomplish their goals. Investees may disrupt the status quo, establish a new business paradigm, or pioneer services for untapped market
Indeed, The Forum for Sustainable and Responsible Investment (USSIF), in its 2014 Report on US Sustainable, Responsible and Impact Investing Trends, notes that nearly $7 trillion in U.S.-domiciled assets employ at least one socially-responsible investment (SRI) strategy. This up 40 percent from $3.74 trillion in 2012.
Additionally, it reports that community investments combined with socially-responsible alternative investments -- private equity, hedge funds, property funds and other private market vehicles more likely to be impact investments targeting direct, measurable social impact -- have grown over 40 percent since 2012, to approximately $300 billion in 2014.
Clearly that's a lot of investment activity and Impact Investing has the potential to be a trillion-dollar market by 2020.
Yet, a study by Morgan Stanley Institute for Sustainable Investing, which surveys over 10,000 equity mutual funds (over the last 7 years) makes the argument that sustainable investing funds have actually met or exceeded the median returns of traditional equity funds. They define sustainable investments as those which offer "competitive financial returns and also create a positive social/environmental impact". Moreover, these funds had lower volatility. In fact, 72 percent of the companies surveyed with a sustainability mindset offered higher profitability. According to Morgan Stanley, $1 out of $9 in 2012 could be qualified as sustainable investments. In 2014, that ratio closed in to $1 out of $6, amounting to nearly $6.57 trillion in investments.
Sustainable investment has been on the rise, Impact investing is poised to change the trajectory of poverty, crime, homelessness, for education, green energy and much more. It just needs to be unleashed.