Impact investing faces serious obstacles before reaching its market potential.
The "Gateways to Impact" study recently released by the Calvert Foundation shows that the impact investment market is primed for explosive growth while simultaneously stymied by serious problems. The study found 69 percent of financial advisors would increase funds in sustainable investments for over one-third of their client base if concerns over financial performance, client demand, and track records are addressed. These assets amount to roughly $650 billion.
Considering current estimates place impact investment assets at $50 billion, the growth potential suggested by the study is staggering. But let’s hold off on popping bottles. The road to a fully realized market is arduous, fraught with problems such as the growth of robust evaluation tools and the need for long-term time horizons on investments.
In recent years several tools have emerged that have pushed along the industry. PULSE, IRIS and GIIRS each provide a unique piece of information necessary to evaluate impact investment decisions.
- IRIS is an initiative that sets standard metrics and indicators to measure investment sectors. These metrics span a wide range, from financial performance areas such as cash flow to operational impacts like the use of biodegradable packaging.
- PULSE, a software platform, allows individuals to aggregate, search and manage data based on IRIS metrics.
- Finally, GIIRS provides neutral ratings of companies and funds. Ratings use a five star scale similar to that of the investment rating agency Morningstar.
An overall rating is composed from individual scores in categories such as accountability and environment (see an example here). While these tools have undoubtedly strengthened the confidence of financial advisors and their clients, concerns still exist.
IRIS lacks a standard data verification process and companies can decide to withhold information at their discretion (from the Credit Suisse report, "Investing for Impact"). Furthermore, IRIS only provides aggregate data on sectors, not individual companies, unlike the ratings provided by GIIRS. Additionally, the sector still suffers from a lack of multiple rating agencies in the marketplace. A variety of opinions on particular companies or investment funds only increases investor security. Moving forward, the impact investment market’s growth and maturation will be directly tied to the improvement of current tools and the emergence of new ones.
A greater threat still is the so-called "pioneer gap." The Monitor Group’s From Blueprint to Scale report finds a "lack of sufficient absorptive capacity for capital. This means there is an imminent lack of impact investing opportunities into which large amounts of capital could be placed at investors’ required rates of return." Minus the jargon, there aren’t enough businesses ready to make use of investor’s funds.
The problem: many businesses seeking to solve social issues or make positive environmental impacts require a great deal of initial development and groundwork before they can reach scale (and thus attract impact investors). The report refers to this period after startup but before scalable operations commence as the "pioneer gap." The authors offer a number of prescriptions to solve this problem, but chief among them is growth of "enterprise philanthropy." Enterprise philanthropy is "not grant funding in a conventional sense. Its immediate beneficiaries are typically businesses...The focus is still on impact, but instead of paying for specific social goods or services, enterprise philanthropy aims to establish models into which return-seeking capital can be invested to drive scale."
Over half a trillion dollars awaits if the problems facing impact investment can be overcome; a sum 10 times the amount the U.S. spent on foreign aid in 2011. The difficulties of providing investors security and ample opportunity loom large, but when titans of philanthropy, such as the Gates Foundation, share goals with commercial investors like Citibank and J.P. Morgan, the odds of a favorable social return are high.
