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Mainstreaming impact investing: Overcoming the hurdles, addressing the skeptics

By Chris Harvey - January 28, 2013

Blog_tree_money_300x200Asset management is in a state of flux. Trillions of dollars are expected to change hands over the next number of years as baby boomers begin to transfer their wealth to the next generation – a generation that has grown up in a culture that calls on business to play a more active role in building a better society.  In this context, the field of “impact investing” has taken center stage as a means to enable and empower for-profit business models to address society’s toughest challenges.

But what exactly is impact investing, and isn’t all investing intended to create impact? First coined by the Monitor Group in 2009, impact investing is an emerging industry that places capital in businesses (or entrepreneurs) that intentionally seek to create social or environmental value. This could be an investment in a dairy products producer in Nairobi that works to increase the efficiency and production levels of small-scale farmers in rural Kenya. Or, it could be an investment in an innovative program that seeks to reduce youth recidivism (repeat criminal offense) in New York City. The common thread among impact investments is the notion of intent – when the investor intentionally seeks to create social or environmental value, the investment is an impact investment.

In certain instances, the rate of return on these investments is less than market rates; in other instances, they are substantially more. During a private session at the World Economic Forum’s Annual Meeting many examples of impact investments with identified social objectives which also generated significantly higher annualized return than comparable investments were identified and discussed.

Given the potential of generating both above market returns and a positive impact on society, invested capital in impact investing is forecasted to swell to between $400 billion and $1 trillion by 20201. Despite this burgeoning potential, many challenges arise when institutional and mainstream investors consider making impact investments.  Thus Deloitte Touche Tohmatsu Limited and the Deloitte US Firms (together, “Deloitte”) worked with the World Economic Forum to convene world leaders in the space – including multibillion dollar hedge funds, private equity firms, sovereign wealth funds, asset managers, financial services companies, foundations, and social enterprises – in Davos, Switzerland. The group of approximately 50 participants spent over two hours brainstorming and debating on how to accelerate the flow of capital towards impact investing. The following are a few highlights:

  • Impact investing should not (and cannot) replace philanthropy. There are many instances in which for-profit business models will not offer the best approach to addressing societal challenges.
  • Impact investing will likely be driven by foundations, family offices, and high-net-worth individuals and followed by institutional investors once track records are established and financial returns proven. Mutual funds and hedge funds face significant constraints when approaching impact investing and may not participate for many years (i.e. most impact companies are not publically listed).
  • Many challenges still remain before mainstream investors will move beyond one-off impact investments, including: early-stage ecosystem, small average deal size, fit within asset allocation framework, and measurement of the dual bottom line. Deloitte will work with the World Economic Forum to identify innovative solutions that address these challenges.

Although the workshop in Davos was a significant step forward to pique the interest of mainstream investors, much work still needs to be done in order to accelerate the flow of capital towards social impact organizations. The Deloitte team is now working with the World Economic Forum to craft a strategy for institutional investors to approach impact investing in new and creative ways. What started here at Davos will continue over the coming months!

1O’Donohoe, N., Leijonhufvud, C., Saltuk, Y., Bugg-Levine, A. and Brandenburg, M. (2010) Impact Investments, An Emerging Asset Class, J.P.Morgan Global Research, Rockefeller Foundation, and GIIN.


Dttl_chrisharvey_56x56Chris Harvey is the Global Leader for Financial Services Industry, Deloitte Touche Tohmatsu Limited (DTTL). In addition to his DTTL role, he is the Global LCSP for a major financial institution. Chris has held a number of leadership roles within Financial Services at Deloitte. Prior to assuming GFSI leadership, he led the Banking & Securities sector globally and was also the EMEA Head of Consulting for FSI. He has extensive international experience, having worked in 32 different countries and lived in five. He has been the Global LCSP for a number of key FSI clients and was part of the UK FSI leadership team for five years.

Comments

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One very practical idea for those interested in climate change and impact investing: private capital flowing to some small funds that independently finance energy efficiency capital projects for commercial real estate and industrial facilities. This removes the principal/agent conflict from the traditional ESCO model. Market potential is very large.

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