The State of Impact Investing

“Imagine if substantial portions of our global financial resources were devoted to making the world a better place.”

—Judith Rodin & Margot Brandenburg in The Power of Impact Investing

 

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It is fair to say that impact investing was created by the Rockefeller Foundation in a highly strategic effort that started shortly after Rodin joined this storied American institution in 2005. After spending 10 successful years as president of the University of Pennsylvania, Rodin wanted to transform the Rockefeller Foundation into a leading philanthropic force for the 21st century. Indeed, its leadership around impact investing has been nothing short of visionary. The foundation has mobilized partnerships and resources to turn impact investing from an idea into a global movement.

It all started in 2007, when the Rockefeller Foundation convened investors, entrepreneurs and philanthropists at its Bellagio Conference Center in Italy. While brainstorming ideas on how to more efficiently allocate their capital for social and environmental benefits, the participants coined the term “impact investing.” By 2008, the idea for the Global Impact Investing Network (GIIN) was born, and the foundation announced its formation in September 2009. In addition, the Rockefeller Foundation began publishing research reports on impact investing in partnership with J.P. Morgan and GIIN, starting with the seminal 2010 report Impact Investing: An Emerging Asset Class. The Rockefeller Foundation also funded nonprofit B Lab’s work on developing the Global Impact Investing Rating System (GIIRS).

To date, the Rockefeller Foundation has invested more than $40 million to develop impact investing as a field, and it has allocated over $100 million from its own endowment to pursue impact investments. The Power of Impact Investing

Within this context, it is especially exciting that Rodin and co-author Margot Brandenburg decided to write a book about impact investing. Titled The Power of Impact Investing: Putting Markets to Work for Profit and Global Good and released by Wharton Digital Press, this lucid, well-written work sums up the state of impact investing in a digestible 125 pages. It stands out as a definitive resource that delivers a strategic and expansive perspective on this emerging field and its important role in shaping the global landscape, while also providing interesting and relatable examples that bring the concept of impact investing to life. But the book’s greatest strength is its honest, highly astute commentary on what is really going on in the world of impact investing.

Though The Power of Impact Investing gives us many reasons to be hopeful about the future of this emerging field, it also indirectly sheds light on some really important issues that must be addressed in order for impact investing to truly go mainstream. As we take a step back and think analytically about impact investing, we see three core issues.

First, the field continues to be highly fragmented in a way that creates confusion rather than simply signaling innovative dynamism. For comparison, while the high-technology industry typically involves many startups offering interesting, innovative solutions, through the Darwinian “funnel” of market survival the list of “contenders” starts to whittle down and winners emerge. Akin to the nonprofit community, the impact investing ecosystem is more forgiving; the number of “impact enterprises,” funds and even supporting systems (such as the GIIRS) continues to expand without any sign of future consolidation. This fragmentation and lack of market rigor creates an environment where everyone believes that they are working on the next big idea. As a result, there is little commitment among players on the ground to align efforts around more promising solutions in order to gain greater mainstream support.

Second, the complexity of the impact investment process cannot be overstated. Though the book outlines the main decision points for different types of investors, it also emphasizes that the process is not going to be easy. While the support systems continue to grow and there are more tools and resources at our disposal, impact investments continue to be more complex to execute than traditional investments due to a whole host of factors, from lack of reliable data, to still unproven track records, to challenging investment target locations, to small deal sizes, just to name a few. Pursuing impact investments is much like working on an old computer that requires intimate knowledge of coding; in order to feel confident in your investment decisions, you will inevitably have to roll up your sleeves and really dig in. This process is not for the fainthearted.

Third, and perhaps most important, although impact investing in theory appeals to younger investors, the space continues to come across as stubbornly drab. This can become a real obstacle to gaining mainstream market support among millennials, who are (with Generation X) expected to inherit $41 trillion from baby boomers over the next 40 years. While there is no doubt that millennials care about social and environmental issues, they are also accustomed to products and services that delight—from Apple Inc.’s sleek tech gadgets to perfectly polished e-commerce platforms. In contrast, the world of impact investing is inhabited by “impact enterprises” that focus on serious, sober issues, such as gun violence, recidivism and sanitation. While these issues are undoubtedly important, it will be equally important to frame investing in them in a way that will resonate with these new, stylish investors. Otherwise, they will choose to invest in exciting, glossy technology companies instead.

The Power of Impact Investing is an important book that comes at an important time. Rodin and Brandenburg offer a clear and digestible interpretation of what is shaping up to be a complicated ecosystem, and it required deep insight and expansive perspective on a spectrum of global issues in order to sum it all up as neatly and concisely as they did.

However, it is also important to think about the picture that is painted in the book and how it can be improved. If we are to create a world where “substantial portions of our global financial resources [are] devoted to making the world a better place,” we must think about those who are going to be making the decisions that will enable this to happen.

What is it that really drives this next generation of investors? What are the factors that need to come together for large numbers of millennials to really embrace impact investing? How can we capture their imagination so that the future we envision is the future we ultimately create?

Editor’s note:  This is a condensed version of an article originally published on the Caldy Group Blog on May 30, 2014.

 

 

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