The idea of deploying capital not only to generate a profit but to create some social return--"impact investing"--has come a long way in the last few years. From benefit corporations to social impact bonds, we now have plenty of variations on the theme, but perhaps not as much progress as first appears.
For example, a recent report from the Global Impact Investment Network and JP Morgan said the world's 125 leading impact investors will raise their commitments by 125% this year. And yet, there's universal agreement in the sector, even among its biggest champions, that it's nowhere near the force it could be.
Various recent reports and books have attempted to identify bottlenecks to further growth. The latest comes from an international task-force set up by the G8 group of leading industrial nations. Called the "Impact Investment Report", it's a comprehensive survey of the scene, combined with some detailed proposals for what needs to happen if impact investing is to gain steam. Here are a few ideas we picked out.
Put a value on social outcomes
Social impact bonds pay a return to investors if a social goal is met--say, a reduction in the recidivism rate at a prison. The report argues that intermediaries would be more likely to organize investment rounds if the potential value of the improvement was more visible or quantifiable--say if keeping one person out of prison equals returning $50,000 to the taxpayer. "Greater transparency about the fiscal value of achieving specific social outcomes would help enormously, by showing social innovators where opportunities exist to do better," the report says.
The U.K. government now publishes a "Unit Cost Database" covering 640 social issues, from education to crime. For example, a child taken into care costs taxpayers over $100,000 a year. So, investors now know they need to provide a solution that costs less than that. Such measurements would also allow non profit groups to put a value on the services they offer, and allow something like a market to develop.
Define duties for trustees
A lack of clarity around the duties of trustees overseeing pension funds and foundations restricts their ability to approve impact investments, the report says. The rules differ from country to country, but there's a general need for governments to step in and codify the rules. "A key recommendation..is to give foundation trustees the freedom to invest in impact assets, and where possible a clear signal that allocating some of an investment portfolio to impact investment is positively desirable," the report says.
Bearing first losses
Investors are more likely to invest if their money is secured, or, failing that, if someone else is going to take a hit before they do. The more polite term for this is "bearing first losses." The report argues that governments and foundations can catalyze investment by offering guarantees, as the Rockefeller Foundation and others have started to on several projects. That doesn't mean anyone actually has to lose money. Last year, the Gates Foundation promised to cover the first 20% of losses in its $100 million Global Health Investment Fund. But Bill Gates said he actually expected to make money on the deal, while also saving plenty of lives.
The need for intermediaries
In conventional capital markets, intermediaries play a key role in analyzing, packaging and demystifying investment. The same sort of players are needed in impact investing, the report says. "To help bridge the gap and to forge a distinct culture of social impact investing, there is a need for specialist intermediaries to play at least as big a role as in mainstream finance," the authors write. "Just as with venture capital and private equity previously, a profession of impact investment managers and advisers needs to be created in order to deploy significant capital."
Conventional entrepreneurship would be nothing today without government support (a point that's too often forgotten by free-marketeers). Impact investing needs the same tax breaks, university research, and official championing. The report calls for a point-person in the bureaucracy to lead the charge. "This person will be a senior government minister empowered to act as a leading champion for impact investment, helping to formulate and implement appropriate policies that build market infrastructure and to support the development of the sector," it says.
The need for standards
Commonly-defined measures of impact are a key requirement for greater investment, the report says. Accounting standards and economic measures like gross domestic product spurred growth after WW2. Something similar is needed with impact funding. "A degree of global standard setting in measurement will boost the flow of trade and capital," the report says. Current initiatives include the Global Impact Investing Ratings System, developed by the same people behind B Corps, and the EU Standard for Social Impact, developed by the European Commission. The report argues government could spur adoption of standards by using impact measurement in its own reporting and in the requirements it places on contractors.