“In their 2010 report, JP Morgan and the Rockefeller Foundation estimated that assets under management through impact investment strategies were $50 billion with profit opportunity of between $183 billion and $667 billion over the next decade. Opportunities for impact investing are enormous if one considers projected needs: $1.3 trillion to halve greenhouse emissions from the energy sector by 2050, $41 trillion to modernize global infrastructure by 2030, and $5 trillion to reach 4 billion people in the global consumer market.” (Wong, 2012)
So how do we scale impact investing?
Structure drives behavior. Leverage the system
In the race to implement yet another investment strategy, we must not lose sight of the larger system at play. “We now know how to fit together financial capital (grants and impact investments), intellectual capital (the ideas about what we need to do and how to do it), human capital (the ability to support organizations to implement bold strategies) and social capital (that allows people and institutions unused to working together to collaborate). Most of the easy problems that can be solved with siloed approaches are already being tackled. The increasingly complex and accelerating challenges that remain are going to require complete capital approaches to solve them.” (Bugg-Levine, 2012)
1. Realign compensation
“How does one reconcile the current capital markets, which make money on the scarcity of information, with incentive structures that reward increased collaboration towards solving global issues?” (Wong, 2012) There are efforts to align fund manager compensation with triple bottom line performance. “Some impact investors are attempting to address this challenge by tying a portion of general partner (GP) compensation to social and environmental performance. An impact-based incentive structure raises the GP’s financial stake in the non-financial performance of their funds.” (Impact-Based Incentive Structures, 2011)
It’s “essential for finding quality deal flow, sharing knowledge, increasing learning, and developing new investment vehicles.” One recent example comes from the 2012 Monitor Institute report, From Blueprint to Scale. It explores strategic partnerships between impact investors and philanthropists to bridge the gap between innovation and viable business models.
3. Policy innovation
First launched in the United Kingdom in 2010, Social Impact Bonds (commonly known as SIBs or pay-for-success-bonds) are “a new source of capital to scale evidence-based interventions. Aligning the interests of nonprofit service providers, private investors, and governments, SIBs raise private investment capital to fund prevention and early intervention programs that reduce the need for expensive crisis responses and safety-net services.”
4. Integrated reporting
Financial policy, regulatory structures and performance accounting systems must keep pace with the growing demand for impact investment opportunities. Two notable, emerging examples include Impact Reporting and Investment Standards (IRIS) and International Integrated Reporting Framework (IIRC). In the last four years, the Global Impact Investing Network (GIIN) created a global network of impact investors and broadened efforts initiated by Rockefeller Foundation, Acumen Fund and B Lab to develop IRIS, a common framework for reporting performance of impact investments. The core objective of IIRC is “to guide organizations on communicating the broad set of information needed by investors and other stakeholders to assess the organization’s long-term prospects. It brings together material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates.” (IIRC, 2012)
5. More social purpose entrepreneurs
Crowd-sourcing, social enterprises driven by purpose rather than profit, the decrease in public funding for social services, and general distrust of the global financial system are creating space for business model innovation. Bainbridge Graduate Institute start-up, SLICE Finance, is responding to decreasing federal subsidies for student loans, rising student loan debt, and the lack of impact investment options. Through their peer-to-peer business model, they link individual lenders with graduate student borrowers and foster community, financial literacy and social impact.
The opportunity is clear. It’s time to scale impact investing.
Meg O’Leary is an MBA Candidate at the Bainbridge Graduate Institute. She currently works as a coordinator for the Washington State Energy Independence Act. She is the sole proprietor of FigureGround, an evolving business that brings yoga to the Washington Corrections Center for Women. This article is an excerpt from her blog on Sustainable Finance.