Impact investing: An investment approach starting to interest mainstream investors
By Chris Harvey - February 11, 2014
This article was co-written with Erik Classon
Since the term, ‘impact investing,’ was first coined in 2009 by the Monitor Group ("Investing for Social & Environmental Impact: A design for catalyzing an emerging industry"), a great deal of interest has grown around this concept. Initially the dialogue around impact investing was concentrated among a niche set of players identifying themselves as impact investors (e.g., social entrepreneurs, foundations seeking to expand beyond grant-making, focused impact investing funds and public sector/supranational organizations).
More recently, ‘mainstream’ investors (e.g., banks, hedge funds, private equity, insurance companies, pension funds, etc.) have demonstrated increasing interest in impact investing. Many mainstream firms have made public commitments to engage in impact investing through various channels, ranging from CSR (Corporate Social Responsibility) programs to building out new business lines.
Furthermore, in September 2013 the World Economic Forum working with Deloitte published a report ("From the Margins to Mainstream – Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors"). The report aggregated the perspectives of a broad array of investing practitioners and synthesized insights of the impact investing landscape. Key questions addressed dealt with the definition of impact investing, its growth prospects, challenges to mainstream adoption, and potential solutions.
On the basis of the increasing attention on impact investing by mainstream investors, it is critical at this juncture that an honest dialogue occurs to consider the strategic viability of impact investing in both the near-term and long-term time horizons. To avoid hype and disillusionment, the flow of mainstream capital in impact investments must occur prudently based on the absorptive capacity of the sector. Additionally, while ‘mainstream’ capital is frequently referred to as a singular pool, the approach that various ‘mainstream’ investors would take in this space can differ vastly.
It is within this context that Deloitte continues its collaboration with the World Economic Forum to engage mainstream investors in this dialogue. Specifically considering the following topics/questions:
- Why should mainstream investors allocate more capital to impact investing?
- What is the impact investing business case (e.g., potential for future competitive differentiation/ strategy and source of long-term value)?
- How can collaborations with stakeholders (e.g. public sector, DFIs (Development Finance Institutions), NGOs) in the ecosystem speed up adoption and capital flow?
- How should mainstream investors approach impact investing from an internal organizational perspective?
- What new skillsets and capabilities would mainstream firms need to develop/acquire in order to effectively capitalize on the opportunity?
These questions were discussed during a private session at the World Economic Forum’s Annual Meeting in Davos this January. Approximately 40 participants, including multibillion dollar hedge funds, private equity firms, sovereign wealth funds, asset managers, financial services companies, foundations, and social enterprises convened for this session. The group evaluated an array of impact investment opportunities and debated how such investments may behave over a long-term horizon considering potential geo/socio political scenarios that may occur. The following are a few highlights:
- Individual investors have individualized assessments of the relative value of social impacts (e.g., a life saved through medicine vs. an education vs. a farm insured). As such it is difficult to ascribe comparable social impact metrics across investments.
- The process of how the investor decides is more important than how social impact is measured.
- While significant hurdles exist to accelerating capital flow to impact investments, there is a huge potential if they can be overcome.Specific hurdles mentioned focused on:
- Trust in governments/public sector institutions in supporting mainstream investors as they enter the impact investing space, and
- Coordinating and organizing around the multi-stakeholder cooperation needed to make impact investments more attractive to mainstream investors.
- In the near-term, skepticism remains around the claim that impact investments can deliver competitive risk-adjusted returns.
- Over a long-term horizon the effect of government actions can have a significant impact on the relative attractiveness of impact investments. As such, a multi-stakeholder approach in thinking about such investments is important.
- Risks associated with impact investments are quite different from more traditional investments, therefore, creative means of structuring investments to make risk profiles more attractive to mainstream capital can have a positive effect.
- The importance of the context of whose money is being invested (fiduciary duty) and aligning the objectives of capital providers. Since these investments are not hedged in the traditional sense, it is something that requires real passion.
The Deloitte team and the World Economic Forum will continue working with mainstream investors to find creative ways to approach and further engage in impact investing. The session in Davos was a starting point for the work that will continue in the months ahead!
Chris Harvey is the Global Leader for Financial Services Industry, Deloitte Touche Tohmatsu Limited (DTTL). 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.
Erik Classon is a Manager in Deloitte Consulting's Strategy and Operations practice. Erik has 9 years of experience advising clients mostly in financial services. Subsequent to business school he worked for a major global financial company where he gained significant experience in private wealth management, including investment portfolio management, estate planning, private client relationship management, and client acquisition.