Investment can produce economic value, create jobs, and improve our standard of living. Increasingly, investors across a wide variety of sectors recognize that explicitly focusing on these outcomes can impact their bottom lines, helping them to refine their focus, plan effectively for long-term risks, and capitalize on a growing movement of socially conscious consumers.15 Both microfinance and community development, for example, have for decades driven positive change in underserved communities. Impact investing is firmly rooted in, and expands upon, these important historical movements.
Impact investors are a diverse group, seeking a wide variety of social and financial objectives. Some, including institutional and other mainstream investors, seek risk-adjusted market-rate returns. Often, these funds focus on more mature sectors, such as microfinance and community development finance, or high-growth, high-risk industries, such as emerging markets infrastructure. In one study of self-reported data, for example, Elevar Equity’s, investments in the microfinance space returned 21 percent to investors.27 Other funds, often capitalized by philanthropic sources, intend to pioneer new markets and build sustainable industries. These funds may be working in fields traditionally supported through public finance (such as water, sanitation, or education). They focus on underdeveloped geographies or target consumers with low incomes, providing scalable and sustainable pathways to reach the world’s poorest. They may also help an enterprise or market reach commercial viability, where it can scale through private sector markets and begin to attract commercial investors. Such funds may accept returns below commercial rates. For example, Accion Texas returned 2–3 percent to investors from its US-based small-business loans.28 In the absence of more transaction data, it is too early to systematically assess risk-adjusted rates of return, but these examples of pioneer investors suggest the breadth of potential objectives that can be accomplished using the tools of impact investing.
Sometimes, investors from across this spectrum of purpose join together to create innovative solutions. The Collaborative for Healthy Communities, a $130 million initiative to fund community health centers across the country, is one such example. The Collaborative makes use of a variety of financial tools and actors. It includes senior loan capital from Goldman Sachs’ Urban Investment Group and three community lenders (Low Income Investment Fund, Primary Care Development Corporation, and The Reinvestment Fund), a subordinate loan from the Rockefeller Foundation, and a loan guarantee from the Kresge Foundation, reducing the risk for other investors.29
All of this comes as impact investing shows signs of robust growth. A 2014 survey from J.P. Morgan and the Global Impact Investing Network (GIIN) of 125 major impact fund managers, foundations, and development finance institutions identified $46 billion in impact investments under management, with annual funding commitments estimated to increase by 19 percent in 2014.30 While this is significant, it remains a tiny fraction of the $210 trillion value of the world’s equity market capitalization and outstanding bonds and loans.31 Projections of future market size vary but are tantalizing. Sir Ronald Cohen, a leading British venture capitalist and impact investor (and chair of the Global Social Impact Investment Taskforce) believes the market’s potential to grow to be as large as “the $3 trillion of venture capital and private equity.” The field will provide increasing support to low-income housing, smallholder farms, affordable financial services, and more along the way.
What does this mean? It means supporting socially minded businesses and entrepreneurs, whether they are bringing a grocery store to an urban food desert in Philadelphia; inexpensive solar electricity to rural villages in Kenya; or small-dollar, low-interest loans to the unbanked in San Antonio. It means testing innovative public-private financing models like “pay for success,” which encourage government agencies to pay for measurable social outcomes and scale cost-effective preventive social services, such as asthma management or prisoner recidivism reduction. And it means doubling down on the progress we have made in the last quarter century, leveraging private capital for charter schools, financing low-income housing, and building small businesses where they are needed most.
At the same time, to truly scale these innovative solutions and produce widespread social change and economic value, investors across the public, private, and philanthropic sectors need to invest in market infrastructure. Like traditional financial markets, impact investing needs enabling policies; standardized performance measurement and reporting systems; third-party ratings and regulations; platforms to share market information and match capital with investments; educational programs to encourage impact investing; and easily accessible, transparent data to support investors in making disciplined investment decisions.
