Imagine a stock market where share price is based solely on the currency of creating social impact. If you improve the lives of people in a community, identify a tangible solution or business model for a social problem, your stock goes up. The caveat is that the solution has to work, and has to demonstrate a measurable social impact to produce a return. Would you buy this stock? And if so, how much would you expect in return on your investment?
This is a question that companies, foundations, non-governmental organizations—and even governments—have been increasingly tackling over the past decade. This might sound like international development aid or philanthropy, but it is not. The core difference is a measurable solution that creates enough impact that it is valuable, and ultimately, profitable for investors. Enter impact investing, a budding new(ish) arena that allows investors to change the world in one of the most sustainable ways—with their pocket books.
This past year saw the rise of social finance investments across Fortune 500 companies, with Wall Street giants such as JP Morgan and Goldman Sachs unveiling new social finance funds and major management consulting firms accelerating the development of social finance divisions within their companies. Just as many multinational companies have embraced the tripled bottom-line philosophy (simplified to people, planet, and profit), investors are increasingly looking beyond traditional profit models towards impact investing options.
Fueled by the global economic crisis and modest rates of return on savings, impact investing has the potential to dramatically change the how—and why—future investors invest. The Millennial generation, hailed as digital natives that have grown up instantly networked to the rest of the world through technology, are used to crowdsourcing problems. They are comfortable leaning on the wisdom of the crowd to help curate opportunities and develop collaborative approaches to intractable problems. While investment bankers were the icons of the bull market of the 1980s, impact investors are poised to be the sought after mavens for millennial investors. For a generation hampered by a financial crisis that will leave them less affluent than their parents (inheriting an estimated $41 trillion in debt over the next 40 years, according to a World Economic Forum report), it is not surprising that alternative financial solutions that yield a social impact would be of interest. If impact investing becomes more accessible to these future investors, it may well re-define the face of investing.
To shake up the world of finance and tip the $trillion+ capital markets towards social finance, the budding field will need to get clear, coordinated, and collaborative. Here are three ways to help demystify impact investing and position this trending field as a scalable global investment:
1) Connect the continuum: Hundreds of articles have been written about what is holding back impact investing. Despite calls for clearer definitions of what it means to be an impact investment, there is a wide range of activities that seem to fall under the umbrella of impact investing. Instead of spending the next decade dividing impact investments up into separate camps, there should be an acknowledgment that impact investing, like many budding fields, is a continuum with varying degrees of complexity, measurable social impact, and social finance products. On one side of the continuum could sit social entrepreneurs in Guatemala developing sustainable coffee and handcrafted garments that can be sold to retailers. On the other side, funds from Goldman Sachs, JP Morgan, and other Fortune 500 companies and foundations that have launched impact investments seeking ambitious returns. While these may be different models, along different sides of the impact investing continuum, they all create impact and help to fuel the social finance economy. Organizations such as the Rockefeller Foundation and the Stanford Center for Social Innovation are making great strides to bring the social finance field into focus. To maximize this progress there needs to be industry-wide recognition that acknowledging a continuum of impact investing activities is a rising tide that will lift all boats.
2) Create a clear pipeline: While not formally structured as a literal stock market, the social finance field is ripe with ideas, resources, existing models, deals, and proofs of concept. Governments in Canada, the U.S., and U.K. have already rallied behind the social finance movement, setting aside funds to catalyze new investments, mitigate risks, take ideas to market, and underwrite deals. Enterprising social financiers in Asia have recently launched an Impact Investment Exchange that is being dubbed the world’s first social stock market.
With all of these resources on hand, impact investing seems poised to tip the scale of mainstream finance. So why has it not happened?
Despite the rise in social finance activity, it is rarely connected to other efforts across the impact investing continuum. Impact investments are also still viewed as a nascent asset class by investment banks and can be seen as too cumbersome (read: costly) for institutional investors to undertake. To overcome these challenges there is a need for coordination across the impact investing continuum so a clear pipeline for the various stages of investments can be created. This will help ensure that early-stage investors seeking to get involved know where they can plug in to investments, and that educational resources on impact investing are readily available and easy to decipher. A clear pipeline will also help seasoned institutional investors quickly determine the viability of deals by identifying the types of impact investments that provide clear analytics, are thoroughly vetted, and have electronic platforms in place to ease the cost of doing business. From the Calvert Foundation’s efforts to democratize impact investing through offering affordable $20 investments that individuals can purchase, to new crowdfunding platforms for impact investments, to the recent launch of a social stock exchange in Asia, to corporate funds that seed early-stage health technologies, these activities all help form a pipeline for various types of investors to plug into. With more investments on the horizon, a well-defined pipeline—one that can be easily accessed by new and established investors—will help make impact investing easier for investors to understand, measure and undertake.
3) Form strategic partnerships: “If you want to go fast…go alone. If you want to go far…go together,” goes the African Proverb. In a world where everything, and everyone, is interconnected, the key to adaptation and survival is strategic partnerships that help to connect the dots at various stages of growth. From new ventures that need their first seed capital to test drive an idea, to growing impact investing funds that are seeking high-quality deals yielding a rising return, there is a need for increased collaboration across the continuum of impact investing. If impact investing is going to thrive in the next decade, the field should take a cue from the ever-evolving public-private partnership landscape (where government, business, and civil society band together to solve intractable problems, innovate models, and share resources) and move beyond communities of practices and toward active alliances. Strategic partnerships can serve as the mechanism that promotes collaboration and provides a tangible pipeline for success across the various phases of impact investing. For example, partnerships with government can leverage and pool existing resources and establish a pipeline or hub that brings together disparate activities. These types of collaborations help to educate a global audience and elevate the impact investing industry. Establishing a link to efforts in the international development arena is key to scaling successful models, leveraging scarce resources, and building on existing infrastructure, talent and capacity. Creating strategic partnerships will help develop increasingly sophisticated models for impact investing, continuing to make the field more appealing to investors by creating shared value, measurable impact, and moving away from donor-recipient models and towards sustainable business partnerships.
Seeking to impact communities, drive economic growth, and build sustainable business models that yield investor-worthy returns is an ambitious task for any single project, let alone a whole industry. The question that Millennials and successor generations of investors will be asking is “how do I get involved in impact investing?” With a continuum of impact investing activities to choose from, and a pipeline to help investors figure out where they can plug in, it would be great to say “here’s exactly how.”
Daniella Foster is Co-founder and CEO of the Emergent Leaders Network and Director of Public-Private Partnerships at the State Department.
This article was originally published in the Diplomatic Courier's May/June 2014 print edition.
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Fueling the Currency of Social Impact
May 14, 2014
Imagine a stock market where share price is based solely on the currency of creating social impact. If you improve the lives of people in a community, identify a tangible solution or business model for a social problem, your stock goes up. The caveat is that the solution has to work, and has to demonstrate a measurable social impact to produce a return. Would you buy this stock? And if so, how much would you expect in return on your investment?
This is a question that companies, foundations, non-governmental organizations—and even governments—have been increasingly tackling over the past decade. This might sound like international development aid or philanthropy, but it is not. The core difference is a measurable solution that creates enough impact that it is valuable, and ultimately, profitable for investors. Enter impact investing, a budding new(ish) arena that allows investors to change the world in one of the most sustainable ways—with their pocket books.
This past year saw the rise of social finance investments across Fortune 500 companies, with Wall Street giants such as JP Morgan and Goldman Sachs unveiling new social finance funds and major management consulting firms accelerating the development of social finance divisions within their companies. Just as many multinational companies have embraced the tripled bottom-line philosophy (simplified to people, planet, and profit), investors are increasingly looking beyond traditional profit models towards impact investing options.
Fueled by the global economic crisis and modest rates of return on savings, impact investing has the potential to dramatically change the how—and why—future investors invest. The Millennial generation, hailed as digital natives that have grown up instantly networked to the rest of the world through technology, are used to crowdsourcing problems. They are comfortable leaning on the wisdom of the crowd to help curate opportunities and develop collaborative approaches to intractable problems. While investment bankers were the icons of the bull market of the 1980s, impact investors are poised to be the sought after mavens for millennial investors. For a generation hampered by a financial crisis that will leave them less affluent than their parents (inheriting an estimated $41 trillion in debt over the next 40 years, according to a World Economic Forum report), it is not surprising that alternative financial solutions that yield a social impact would be of interest. If impact investing becomes more accessible to these future investors, it may well re-define the face of investing.
To shake up the world of finance and tip the $trillion+ capital markets towards social finance, the budding field will need to get clear, coordinated, and collaborative. Here are three ways to help demystify impact investing and position this trending field as a scalable global investment:
1) Connect the continuum: Hundreds of articles have been written about what is holding back impact investing. Despite calls for clearer definitions of what it means to be an impact investment, there is a wide range of activities that seem to fall under the umbrella of impact investing. Instead of spending the next decade dividing impact investments up into separate camps, there should be an acknowledgment that impact investing, like many budding fields, is a continuum with varying degrees of complexity, measurable social impact, and social finance products. On one side of the continuum could sit social entrepreneurs in Guatemala developing sustainable coffee and handcrafted garments that can be sold to retailers. On the other side, funds from Goldman Sachs, JP Morgan, and other Fortune 500 companies and foundations that have launched impact investments seeking ambitious returns. While these may be different models, along different sides of the impact investing continuum, they all create impact and help to fuel the social finance economy. Organizations such as the Rockefeller Foundation and the Stanford Center for Social Innovation are making great strides to bring the social finance field into focus. To maximize this progress there needs to be industry-wide recognition that acknowledging a continuum of impact investing activities is a rising tide that will lift all boats.
2) Create a clear pipeline: While not formally structured as a literal stock market, the social finance field is ripe with ideas, resources, existing models, deals, and proofs of concept. Governments in Canada, the U.S., and U.K. have already rallied behind the social finance movement, setting aside funds to catalyze new investments, mitigate risks, take ideas to market, and underwrite deals. Enterprising social financiers in Asia have recently launched an Impact Investment Exchange that is being dubbed the world’s first social stock market.
With all of these resources on hand, impact investing seems poised to tip the scale of mainstream finance. So why has it not happened?
Despite the rise in social finance activity, it is rarely connected to other efforts across the impact investing continuum. Impact investments are also still viewed as a nascent asset class by investment banks and can be seen as too cumbersome (read: costly) for institutional investors to undertake. To overcome these challenges there is a need for coordination across the impact investing continuum so a clear pipeline for the various stages of investments can be created. This will help ensure that early-stage investors seeking to get involved know where they can plug in to investments, and that educational resources on impact investing are readily available and easy to decipher. A clear pipeline will also help seasoned institutional investors quickly determine the viability of deals by identifying the types of impact investments that provide clear analytics, are thoroughly vetted, and have electronic platforms in place to ease the cost of doing business. From the Calvert Foundation’s efforts to democratize impact investing through offering affordable $20 investments that individuals can purchase, to new crowdfunding platforms for impact investments, to the recent launch of a social stock exchange in Asia, to corporate funds that seed early-stage health technologies, these activities all help form a pipeline for various types of investors to plug into. With more investments on the horizon, a well-defined pipeline—one that can be easily accessed by new and established investors—will help make impact investing easier for investors to understand, measure and undertake.
3) Form strategic partnerships: “If you want to go fast…go alone. If you want to go far…go together,” goes the African Proverb. In a world where everything, and everyone, is interconnected, the key to adaptation and survival is strategic partnerships that help to connect the dots at various stages of growth. From new ventures that need their first seed capital to test drive an idea, to growing impact investing funds that are seeking high-quality deals yielding a rising return, there is a need for increased collaboration across the continuum of impact investing. If impact investing is going to thrive in the next decade, the field should take a cue from the ever-evolving public-private partnership landscape (where government, business, and civil society band together to solve intractable problems, innovate models, and share resources) and move beyond communities of practices and toward active alliances. Strategic partnerships can serve as the mechanism that promotes collaboration and provides a tangible pipeline for success across the various phases of impact investing. For example, partnerships with government can leverage and pool existing resources and establish a pipeline or hub that brings together disparate activities. These types of collaborations help to educate a global audience and elevate the impact investing industry. Establishing a link to efforts in the international development arena is key to scaling successful models, leveraging scarce resources, and building on existing infrastructure, talent and capacity. Creating strategic partnerships will help develop increasingly sophisticated models for impact investing, continuing to make the field more appealing to investors by creating shared value, measurable impact, and moving away from donor-recipient models and towards sustainable business partnerships.
Seeking to impact communities, drive economic growth, and build sustainable business models that yield investor-worthy returns is an ambitious task for any single project, let alone a whole industry. The question that Millennials and successor generations of investors will be asking is “how do I get involved in impact investing?” With a continuum of impact investing activities to choose from, and a pipeline to help investors figure out where they can plug in, it would be great to say “here’s exactly how.”
Daniella Foster is Co-founder and CEO of the Emergent Leaders Network and Director of Public-Private Partnerships at the State Department.
This article was originally published in the Diplomatic Courier's May/June 2014 print edition.
