Reflections from the World Economic Forum’s Impact Investing Initiative
By Chris Harvey - October 03, 2013
This article was co-written with Carolien de Bruin and Joel Bryce.
September marked the completion of Phase 1 of a year-long initiative in which the World Economic Forum (The Forum) engaged Deloitte on its Mainstreaming Impact Investing initiative. The purpose of the initiative was two-fold:(1) Better understand whether the buzz and excitement with impact investing is more than “a flash in the pan” and if it represents a structural shift in how investments are made, especially as it relates to mainstream or institutional investors; and (2) Assess who are making impact investments, and – as importantly – who are not, today.
In this context, impact investing, in its simplest form, is leveraging one’s investment portfolio to intentionally create social value (of course, and financial returns). Going into this initiative, we knew that many high net-worth individuals, foundations, and development organizations look to create social and environmental value with their investment portfolio. However, we were keen to understand whether “mainstream investors” such as pension funds, insurance companies, sovereign wealth funds, university endowments, and other large-scale asset owners were making a play in the space, and if not, why.
Much of our findings and insights are highlighted in the Forum report From the Margins to the Mainstream. As Phase I of the initiative comes to a close, we decided it would be a useful exercise to step back from our work, set the report down, and reflect on what we have learned over the last year. Our observations:
- Large-scale asset owners are more than just curious about impact investing
- Definitional issues related to the term impact investing and uncertainty related to the financial returns on impact investments, has created what some call an “identity crisis” within the space
- To address this identity crisis, and to convert interest into investment, a more nuanced and segmented perspective is key
First, large-scale asset owners are more than just curious about impact investing. Throughout our work with the World Economic Forum, we had the hunch that most large-scale asset owners would not be investing to create social or environmental value. We were wrong. Although many of the examples are based in European markets, we learned through myriad interviews that indeed there are asset owners that are more than just curious about impact investments. They are seeing impact investing as a way to engage and motivate investment teams, signal to shareholders an emphasis on long-term value creation, and drive higher investor commitments.
In fact, we surveyed US-based pension funds and 64% of respondents said that in the future they anticipate pension funds to more intentionally invest in organizations or funds that achieve social and environmental outcomes in addition to financial returns. While the statement “in the future” is certainly ambiguous, our sense is that they are seeing signals indicating a trend: their members want to see that their investment portfolio delivers more than just stable financial returns.
Second, the lack of a clear definition for impact investing – and of the financial returns that one can expect – is an often mentioned obstacle to investment. Most investors agree on the critical combination of the intent to generate impact as well a commitment to measuring – and being held accountable – for the impact that is generated through investments. Definitional questions become more complex when it comes to the question of realistic financial returns as well as the asset classes that are at play.
The report is very clear on the answer to these questions: “It depends.”
Impact investing is understood on a multi-dimensional continuum. It can include fixed income products and equity stakes; above market returns, and below market returns; it includes the provision of high-risk capital into low-income communities in frontier markets with highly fluctuating returns, but also could include a bond issuance by enterprises with stable cash flows that are seeking to create positive social or environmental value. Ultimately, impact investing covers a wide array of financial instruments that deliver a wide distribution of financial returns.
For the Mainstreaming Impact Investing initiative, we were focused on the aspect of this continuum that would be most relevant for large-scale asset owners. In the report, we describe the internal rate of return that impact investment fund managers are targeting , but much more work needs to be done to track what they are actually achieving (by asset class, geography, and sector). This tracking, reporting, and segmenting of returns data is a critical factor in bringing large-scale asset owners to the field. We are already beginning to see a more active focus among leading data providers and investment consultants, and our expectation is that greater insight and transparency of impact and financial returns will come.
To convert interest into investment, taking a more nuanced and segmented perspective is key. The Mainstreaming Impact Investing initiative looked at what it would take to bring more large-scale asset owners into the space. The report articulates which factors and investment types would provide an effective on-ramp for these investors. Our suggestion is now to embrace a more segmented view on the market, where the question is no longer “what is impact investing” but “what shape should impact investing take” for different investor segments to adopt impact as a lens of relevance in their portfolio. To get to this point, more research and dialogue is needed. Our hope is that adopting a segmented approach to our research, convenings, and investments, will not only result in talk across the full investor community about impact investment, but also more action which – at the end of the day – is needed to make the field become mainstream.
While the work over the last year was certainly a start, we feel that there is much more that needs to be done before the impact investment sector experiences a significant influx of capital. Over the course of the next year, we will continue to work with the World Economic Forum, specifically to identify best practices and organizational structures that asset managers, private wealth managers, and financial services institutions can implement in order to make impact investing an integral part of their strategy and operations.
Chris Harvey is the Global Leader for Financial Services Industry, Deloitte Touche Tohmatsu Limited (DTTL). 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.
Carolien de Bruin is a Specialist Leader within Monitor Deloitte, Deloitte’s strategy practice, with a focus on impact investing and market-based solutions. As part of her work, she has advised leading players in the impact investing market and is part of the team that coordinates Deloitte’s impact investing activities globally.
Joel Bryce is a Manager within Monitor Deloitte. He has served as Project Manager for the World Economic Forum’s Mainstreaming Impact Investing initiative.