Center for Global Development, John Simon and Julia Barmeier (2010)

This article reviews the achievements, prospects, and obstacles in the emerging impact investing sector.

One interesting question in the development field is the impact of private sector investment on poverty alleviation.  Financial investment with explicitly developmental goals—sometimes known as venture philanthropy, social-impact investing, or triple-bottom line investing—has come into vogue in recent years.  Social impact investing is qualitatively different from corporate social responsibility.  Unlike the latter, social impact investing projects do not “seek to augment the purely commercial activity of a firm with philanthropic pursuits, and they are not socially oriented arms of firms whose primary focus is profit” (2).  The spirit is captured by Shell Foundation director Chris West, who argues that “There is an urgent need for more ‘venture philanthropy’—an approach that applies venture capital principles, based on detailed due diligence, setting clear objectives, and providing hands-on mentoring support, appropriately structured finance, and clear performance measurement—to tackling development challenges” (11).

Impact investing tends to target frontier rather than emerging markets and sectors that are not traditionally attractive for foreign direct investment, such as renewable energy, health, and rural development.  Specifically, “Impact investments can exist only where commercial investment is limited or unavailable; otherwise there would be no need for the impact investor” (9).  It does, however, expect returns in line with the increased risk they undertake, sometimes above 20% annually. 

Consultative Group to Assist the Poor estimates suggest that microfinance investment returns in 2008 ranged from 6.3% in fixed income funds to 12.5% in private equity funds.  While still relatively small, the Monitor Institute estimates that impact investing will grow into a US$500 billion industry by 2020 (10).  The Gates Foundation alone has recently pledged US$400 million to impact investing (11).

In this Center for Global Development report, Simon and Barmeier ask if this tool is an effective way to promote long-term development, if it is feasible in terms of scale, and if it is ultimately “worth promoting as a matter of public policy” (2).

Over 125 funds and foundations engage in some form of impact investing today.  One of the founders of this field was the Acumen Fund in 2001.  As a source of information, they surveyed nearly 200 existing and aspiring funds and interviewed individuals at organizations involved. 

Some obstacles confront this emerging field.  Frontier markets tend to be fragmented, and as a result, there is less than optimal cofinancing, due diligence sharing, and exit opportunities for seed funders.  Also, there is less information available due to the lack of market exchanges; rating, investment, and merchant banking services; and professional support providers such as lawyers. 

Simon and Barmeier close with six recommendations.  First, practitioners should focus on promoting transparency in impact investing.  Increased information would provide a basis for additional investments flowing into the sector.  Second, practitioners should agree on common terminology in their discipline, as the numerous terms floating around, such as social entrepreneurship versus impact investment, creates confusion.  The authors recommend impact investment as the essence of this field is striving for an impact beyond financial returns.  Third, development finance institutions should make their funds more clearly available for impact investing projects.  Fourth, development institutions should provide seed funding for such projects.  One successful example is OPIC’s 2007 Africa Social Development Fund which drew over 30 applications.  Fifth, regulators should clear the red tape surrounding such investments.  The IRS, for example, forbids foundations from making such investments if they are expected to achieve a market rate of return.  Some states have legalized low-profit limited liability companies focused on social returns, which is a step in the right direction.  The federal tax code needs to do more to make such investing attractive for foundations, however.  Sixth and finally, lending and securities regulations should be decreased as they pertain to this sector.