Growing the Impact Investment Market: Some Reflections
The global movement for investment to be used as a tool for social and environmental benefit is growing, as is public demand for sustainable investment opportunities; a good time for some healthy personal reflections.
When I joined Nesta 6 months ago, I was asked to reflect on my previous two years working on the Department for International Development’s Impact Programme. Over five years, as of December 2017, the Impact Programme through CDC Group had committed nearly £130m in investments and helped to mobilise nearly £300m of third-party capital into ‘impactful investments’. Moreover, the products and services of investee companies had reached over 12 million low income individuals and families.
Despite these considerable achievements, what I soon realised, was that the scale of capital that is needed to achieve both the SDGs and the transition towards a green economy is of another order of magnitude in scale. Impact investors and Development Finance Institutions (DFIs) can play a role in this push to re-direct the flows of capital markets, however, it seems inevitable that policy changes, led by national and supra-national government bodies will be necessary to move capital in the speed that is needed. Despite this fact, actors such as DFID and CDC Group can play a vital role in the development of impact investing, as they are able to set the standards in terms of best practice around impact measurement and management (IMM); and have a demonstration affect in illustrating the methods through which value can be created in local economies beyond simply the transfer of capital. First movers in the space, are therefore the best guardians of avoiding what many now refer to as the risk of ‘green washing’ in the broader impact investing movement.
Another key take-away was around the thinking developed by Matt Ripley and Sarah Forster at The Good Economy (and others) around the Business Value of Impact Measurement. The premise was a simple but compelling one – that IMM practices should produce meaningful insights that generate evidence that is meaningful from an impact and business point of view. By re-framing IMM as a strategic value add, rather than a reporting burden – they helped to further embed IMM into everyday business practices – for example through the deep dives conducted with investee companies.
A final take-away was around the power of integrating impact throughout the investment process, from deal origination and due diligence through to negotiating terms and portfolio management. By making impact an integral part of each stage of the investment strategy, investors are able to develop, what the EVPA call the ‘lock-step’ model, where business and impact value are created in tandem. I am happy to say this is what we do on the investments team at Nesta.
Some reflections, and thoughts for the future of impact investing: in a recent conversation I had with a friend, for some asset managers, they are still nervous about investing their clients money in true ‘impact investments’, due to a perception that the available products don’t offer the type of impact, financial return and liquidity that they desire. However, there are some interesting players in the space which I assume would disagree. Nevertheless, until the market reaches a more mature state, and performance data on both financial and impact returns from across the continuum of impact capital appear – there will still be an evidence gap between those with extremely high hopes and those with deep seated scepticism.
As the impact market grows, proper transparency on financial performance, and meaningful impact measurement data will be needed to build the evidence base to demonstrate impact investments track record across different financing needs. There is an opportunity for DFIs to publish performance data, to enable other investors to understand regions that may be underfunded due to a lack of understanding on the financial performance and risk/return characteristics of investment opportunities in certain markets.
Despite impact investing having a more intentional and ethical approach, trends from traditional investing seem to persist – specifically around a lack of diversity on those who are able to access impact capital. As the market grows, impact investors will need to be more proactive and innovative in their deal sourcing efforts to ensure that the networks of old, don’t continue to capture the vast majority of the capital. The data on the performance of female founders, is one example of many as to why this is so important.
In line with much of the work we do at Nesta, my final thought for the future, is that I suspect there will be a continued growth of interest into the tech for good movement, as increasing amounts of investors, entrepreneurs and consumers look to products and services which harness the power of technology to enhance, add-value and enrich people’s lives – rather than just stealing more and more milliseconds of people’s attention for ever-increasingly accurate advertisements………