Trends in Impact Investing

The following text is an excerpt from a larger report. Available upon request.

1. Blended-Value Capital

The idea of blended capital paved the way for new thinking across silo networks of maximizing value. It focused on aligning the investments of endowments with the mission of the foundation. The philosophy was launched Jed Emerson, a strategic advisor to family offices and wealth management firms proposed the idea of “Blended-Value” to “describe the reality that the value we create in our lives and through our investing is a blend of social, environmental and economic elements in the intersection of nonprofit, for-profit, hybrid, and other capital identities.[1]

The idea of a blended value proposition is founded on the idea that the value cannot be simply divided into blocks of impact or financial returns, but that any business entities would consider social and environmental impact on society alongside their financial performance measurement. Within the same context, non-profits would consider their financial efficiency and sustainability in tandem with their social and environmental performance. Therefore, under the blended value proposition, measuring investments purely in terms of financial returns is a disingenuous assessment of reality because there are social and environmental implications to any business activity.

The momentum around impact ventures is that they are seen as investment vehicles support companies across different structures and meaningfully target solving of the issues less concerned by the growth proposition. The focus is less competition, on the event of a liquidity or an exit but more on sustainable prosperity model based on cooperation win-win model.

Organizations gather data in order to report their performance to their investors. When investors seek blended value, they look for social, environmental, and financial returns. Although there is no single standardized measurement system to define these returns for investors, efforts are being taken by organizations such as Global Impact Investing Network (GIIN) to create a set of measurement tools and metrics that make holistic assessment of investments more feasible.

2. SDG Aligned Initiatives

An international effort to streamline shared global challenges by impact themes has been led by the United Nations. In September of 2015, 193 member states put together comprehensive ambitious goals for all nations and people for governments and sustainable development goals to be achieved with businesses. The framework has made clear of the global challenges that companies and investors currently face, and they are asked to contribute to the SDGs through their business activities, asset allocation, and investment decisions.[2]

Sustainable Development Goals (SDGs) came to fruition as a way of consolidating and articulating the world’s most pressing sustainability issues in a globally agreed framework. Investors with long-term portfolios in the global capital markets can improve their long-term financial performance by investing in solutions guided by the sustainable development goals.

Though each SDG opportunity may vary by industry, the SDGs provide a multi-stakeholder tool for financial services and a focal tool for mobilizing private sector capital.[3] United Nations estimates about $3.9 trillion between now and 2030 to meet the challenges identified by the SDGs.[4]

In tracking impact performance against SDGs, the potential for impact investing to bring progress toward the goals is better streamlined and catalyzed. Asset management firms increasingly incorporate SDGs into the investment cycle in raising, asset classes, target returns, geographies, and sectors of investment.

In other words, SDGs become the overarching framework for the impact investors in global efforts for sustainable development. It provides a useful foundation for scalable impact bringing together global stakeholders around 17 ambitious development goals. When applied in an impact investing lens, investors looks inside the operations of a public company and scores/ranks are assigned based on a series of metrics under Environmental, Social, and Governance (ESG) factors. ESG investing assumes investing in areas that minimize business’s operational risk tend to be in environmental, social, and governance. Therefore, ESG investing or in socially responsible practices makes also good business sense. Investors measure their current exposure minimum ESG standards to minimize exposure to negative impacts and maintain minimum governance standards.

 “The SDGs are a powerful, visible and colorful set of flags around which investors can gather to learn a common language. Improved communication, complemented by bigger data on the consequences of choices made in the past, will lead to a better understanding and better investment decisions for the future. The SDGs are also 17 globally recognized beacons which investors can move towards. The speed and the direction of progress, how to measure it, and how to manage it is now a question of ‘how and when’ and not a question of ‘if or why’. Investors now have a framework within which to channel their sense of urgency for change towards more sustainable development.”

Vivina Berla, Co-Managing Partner, Sarona Asset Management[5]

3. SDG & United Nations Capital Development Fund

Sustainable Development Goals are also integrated within all the United Nations agencies, such as the United Nations Capital Development Fund (UNCDF). The SDG framework is integrated within its strategic framework financing model, local development level, and its partnerships.

The United Nations Capital Development Fund has an ambitious mission in unlocking the public and private finance for the 47 least developed countries (LDCs). UNCDF’s financing models work through two channels: financial inclusion that expands the opportunities for individuals, households, and small businesses to participate in the local economy, providing them with the tools they need to climb out of poverty and manage their financial lives; and localized investments that show how fiscal decentralization, innovative municipal finance, and structured project finance can drive public and private funding that underpins local economic expansion and sustainable development.[6]

The goal is for the least developed countries to achieve the sustainable development goals and achieve structural transformation. UNCDF’s contributions detail to SDG 1 “No Poverty”, SDG 5 “Gender Equality”, SDG 7 “Affordable and Clean Energy”, SDG 8 “Decent Work and Economic Growth”, SDG 9 “Industry, Innovation, and Infrastructure”, SDG 10 “Reduced Inequalities”, SDG 11 “Sustainable Cities and Communities, SDG 13 “Climate Action”, and SDG 17 “Partnership for the Goals.”[7]

UNCDF also uses the SDG framework to partner with external entities, such as Impact Shares, a non-profit fund manager launching an Exchange-Trade Fund (ETF) to include social criteria identified by UNCDF. [8] Impact Shares also supports UNCDF’s work through sharing its fund management fee and allow for a decentralized platform for investors to reward companies investing responsibly to achieve the SDGs.[9]

4. Technologies in Impact Investing

The UN hopes that by 2030 we can have a major impact on averting climate change. Threats from overpopulation to climate change to natural resource depletion are reaching their tipping points, and the only way to generate responsive tipping points is by leveraging the momentum with new technologies such as AI, IoT, blockchain, renewable energy, and more. All of these exponentially-growing sectors of innovation coming together will create a profoundly different set of operating systems and paradigms over the next decade.

Blockchain technology is currently revolutionizes the storing, management and transfer of value between digital identities in many economic sectors. It can catalyze growth of impact investing with number of potential benefits: greater transparency, enhanced security, improved traceability, increased efficiency and speed of transactions, and reduced costs.[10]

Blockchain has recently made its way into the impact investment community, and a broad range of use cases are being developed to take advantage of its features, giving rise to a new category of application referred to as “impact tokens.”[11] These tokens represent a UN Sustainable Development Goal-related impact, usually in the form of a quantified, unit-based measurement metric, which is linked to its origin. These tokens can be used to make performance-based payments, track impacts through supply chains or substantiate claims on supporting SDGs.[12]

Investment managers today employ proprietary analytical methods to process both ESG and financial data and identify which securities to include in their portfolios. Sustainalytics is a tool emerged as a major source of ESG data in the United States.[13] In 2016, Morningstar announced that the firm would serve as the data provider for its own mutual fund sustainability ratings system. The ratings methodology is that they score companies relative to their industry peers on those issues that are most material to financial performance. Arabesque is another ESG Quant fund platform launched by Georg Kell, the formerly the Executive Director of the United Nations Global Compact, as a voluntary corporate sustainability initiative. It uses a proprietary algorithm called S-Ray that compares the principles of UN Global Compact, such as Human Rights, Labor Rights, Environment, and Anti-Corruption and the financial performance of over 7,000 of the world’s largest corporations.[14]

Other online platforms, such as OpenInvest, Swell, Hedgeable, and Wealthsimple enable investors to mix and match among impact themes and offer a more transparent and customizable variety of impact investing and allow for the general public to sign up for impact investing options.  

New York-based Fintech company, First Access, offers smart data platform for financial institutions in emerging markets. Invested by Bamboo Capital Partners, an impact investing private equity firm, it offers a smart data platform for analytics and credit scoring to lending institutions in emerging markets.[15]

By identifying high-potential companies on innovative solutions, the leading open source platforms bring forth decentralized platforms for at-large conscious investments. Emerging technology platforms allow for a baseline comparison bringing financial transparency for a variety of stakeholders. With new advent of technologies, unlocking of finance can happen at scale to achieve the global goals.

5. The Current State of Impact Investing

According to the Global Impact Investing Network’s 2018 Annual Survey, the respondents collectively manage over USD 228 billion in impact investing assets. Here are the main key findings from the survey responses from fund managers, banks, foundations, development finance institutions, pension funds, insurance companies, and family offices.[16]

  • The impact investing industry is growing. Over half of the investors surveyed made their first impact investment in the last ten years, showing that there are many new entrants to the market. In 2017, respondents invested over USD 35 billion into over 11,000 deals, and indicated plans to increase capital invested by 8% in 2018.
  • The impact investing market is diverse. Top sectors to which respondents have allocated capital are financial services, energy, and microfinance. While allocations have grown across all sectors and geographies over the past five years (at a robust rate of 13% per annum overall), growth has been particularly strong in segments that historically accounted for a smaller share of investments – such as education and food & agriculture in terms of sectors and Oceania and East & Southeast Asia in terms of geographies – thus indicating expansion in investor interests.
  • Overwhelmingly, impact investors report performance in line with both financial and impact expectations. A majority of respondents indicated that their investments have met or exceeded their expectations for impact (97%) and financial (91%) performance.
  • Impact investors demonstrate a strong commitment to measuring and managing impact. Nearly all respondents measure the social and/or environmental performance of their impact investments. They use a mix of proprietary metrics, qualitative information, the GIIN’s IRIS aligned metrics, and other tools and frameworks. The majority of respondents (76%) set impact targets for some or all of their investments to track progress toward their social/environmental goals.
  • Investors are committed to the United Nations Sustainable Development Goals (SDGs). Many investors are recognizing the power of their capital to help achieve the SDGs. 76% of impact investors track their investment performance to the SDGs or plan to do so in the future.
  • Impact investors note that there are remaining challenges that need to be addressed as the industry continues to grow. The most commonly cited challenges facing the growth of the impact investing industry are: the ‘lack of appropriate capital across the risk/return spectrum’ and the ‘lack of common understanding of the definitions and segments of the market.’

[1] Edwin Epperson III, Doing Well and Doing Good – Interview with Jed Emerson, https://caninvestorssavetheworld.com/doing-well-and-doing-good-interview-with-jed-emerson/

[2] Principles for Responsible Investment, SDG Investment Case, https://www.unpri.org/download?ac=5909

The SDGs are a global effort to pursue an agenda for sustainable economic growth and address social needs including education, health, social protection and job opportunities, while also tackling climate change and other environmental issues. A study by the United Nations Conference on Trade and Development (UNCTAD) identified that achieving the SDGs “will take between US$5 to $7 trillion, with an investment gap in developing countries of about $2.5 trillion.” In this scenario, the role of the private sector is critical as it can bring “agility in delivery and new approaches to financing the SDGs.” Impact investing is one of many approaches the private sector can use to promote and support the implementation of the SDGs.

[3] KPMG, SDG Industry Matrix for Financial Services, https://home.kpmg/content/dam/kpmg/xx/pdf/2017/05/sdg-financial-services.pdf

[4] The Bridgespan Group, “What is Impact Investing and Why Should You Care?” https://www.bridgespan.org/insights/library/impact-investing/what-is-impact-investing

[5] Ibid.

[6]United Nations Capital Development Fund, https://www.uncdf.org/

[7] UNCDF, Are you a decisionmaker in government, business, or civil society? https://www.uncdf.org/article/3951/igniting-sdg-progress-through-digital-financial-inclusion

[8] UNCDF, Sustainable Development Goals Global Equity Exchange Traded FundsSDGA https://www.uncdf.org/sustainable-development-goals-global-equity-exchange-traded-fund-sdga

[9] Ibid.

[10] World Economic Forum, 5 ways Blockchain can Transform the World of Impact Investing, https://www.weforum.org/agenda/2018/09/5-ways-blockchain-can-transform-the-world-of-impact-investing/

[11] Ibid.

[12] Impact Tokens, https://www.impacttokens.com/

[13] Sustainalytics, https://www.sustainalytics.com/

[14] Arabesque, https://arabesque.com/s-ray/

[15] Finextra, Bamboo Leads $7 million round in credit scoring startup First Access https://www.finextra.com/pressarticle/71628/bamboo-leads-7-million-round-in-credit-scoring-startup-first-access

[16] GIIN, ANNUAL IMPACT INVESTOR SURVEY FROM THE GLOBAL IMPACT INVESTING NETWORK (GIIN) SHOWS EVIDENCE OF DYNAMIC AND DIVERSE IMPACT INVESTING MARKET, https://thegiin.org/assets/2018%20Annual%20Impact%20Investor%20Survey_Press%20Release.pdf