Impact Investing 101 — The Work of The Case Foundation
What to Read This Week goes back to basics.
What To Read This Week returns to an impact investing “classic”, The Case Foundation’s A Short Guide to Impact Investing: A Primer on How Business Can Drive Social Change.
The Case Foundation is a leader in the impact investing landscape. Its important research, advocacy, data collection and network mapping continue to help drive and influence the field’s growth.
This relatively short primer (50 pages), updated in October 2015, is meant to attract and educate new players to the field. Quotes introduce chapters, keeping the tone light. Each section includes profiles of impact ventures, funds and investors to help bring to life the concepts introduced.
The report is built on the hypothesis that business and capital markets can be a tremendous force for positive social change because:
We face urgent challenges of poverty, inequality, health and climate change, domestically and around the world.
Neither government, nor philanthropy, even combined, are equipped to solve these problems alone.
Entrepreneurship unleashed is powerful. We need all hands on deck, all oars in the water.
Private capital markets reward scalable models that sustain growth, attract talent and drive cash flows.
The primer starts with basics: defining impact investing and demonstrating its range across the for-profit and nonprofit sectors, philanthropy to traditional investments.
Framework
The report asserts that both intentions for proactive impact and a plan to measure the results achieved is necessary for an investment to count as impact. It proposes a simple framework that ranges from “impact motivated” to “impact committed” to “impact certified” to represent increasing levels of intent, measurement and transparency.
With this groundwork laid, the report begins to break down the WHY (impact sectors), the WHAT(impact across asset classes), and the WHERE (emerging markets to developed economies) of impact investing.
Impact Sectors
All sectors contain opportunities for impact — from community development to renewable energy, with many more in between. Indeed there is great diversity within each of these sectors, and many ventures span multiple sectors and types of impact. The fact that many of these impact investment sectors align with ongoing philanthropic efforts opens the way for “layered capital structures and mutual leverage from various funding sources.” The opportunities are endless!
Asset Classes
Impact investing is no longer considered its own asset class but rather an investment approach that exists across all asset classes — including fixed income, public equities, private equity and venture capital.
This matrix demonstrates the variety of impact investment opportunities between and within sectors depending on the asset class used. By starting with either the traditional asset allocation framework (the “columns”) or the desired impact in a specific sector/issue area (the “rows”), you can use this framework to prioritize asset classes and sectors that best suit your investment needs and social interests.
Geographies
Where you want to focus your investments affects your impact opportunities and risks. Some of the biggest opportunities — and risks — exist in emerging markets. But impact investing opportunities exist in more developed economies as well. Since no two markets are alike, investors must be sensitive to the various deal structures, intermediaries and legal issues they will face across their portfolio.
Impact Funds vs Direct Investing
When deciding between investing in a structured product with a manager (a fund) or investing directly into deals and companies, impact investors must consider the same pros and cons as with traditional investments. A growing number of impact intermediaries exist to help investors determine the best approach or combination of approaches to pursue.
Risks and Returns
The principles of risk-adjusted returns hold true for impact investors, but they must also consider the additional element of social impact when determining investment allocations.
As the impact investor, you must answer critical questions on how much financial return you expect, how much social impact you seek and how much risk you will accept in the pursuit of financial and social return.
Rather than differentiating between “impact-first” and “finance-first” investors, The Case Foundation encourages investors to “strike a balance” between the two sides using strategies and profiles like:
- Blended Finance — investors who are willing to take lower financial returns, accept higher risks for an expected return,or wait longer to realize expected returns (patient capital) in order to have impact.
- Market rate with impact — investors who expect market rate returns and also filter for social impact.
- Sector-focused — early investments in sector innovators that ultimately may yield additional market rate opportunities.
- Impact Alpha — investments in sustainable business models that deliver increasing social impact as the business succeeds and grows to scale.
Social & Financial Returns
In addressing the always-challenging topic of impact measurement, the primer recommends the need for both “top-down” and “bottom-up” approaches.
One example of a top-down approach is when multiple players in specific sectors agree on standards for increased income for smallholder farmers. In other areas, a bottom-up approach will work, in which individual enterprises define their own impact goals and measure and report their results. Over time, broader sector norms will evolve.
In reviewing financial returns, the report focuses on the fact that studies show most impact investors are satisfied with their returns. The authors seem to feel that this is a better indication of financial success than trying to determine if returns were above or below market for all of the various sectors, geographies, asset classes, entrepreneurs and fund managers involved in impact investing.
Call to Action
The report concludes by requesting all players in this emerging industry to be “action-oriented”. While debates are necessary and inevitable, The Case Foundation favors the entrepreneurial approach of learning by doing, iterating and evolving. This is the best way to make more money while making money more “impactful, purposeful and powerful in driving social change around the world.”
A Short Guide to Impact Investing provides a broad but not in-depth overview of many aspects of impact investing — from frameworks to asset classes to impact measurement. Whether you are new to impact investing or are looking for a quick refresher on how far this emerging industry has come in just a few short years, we highly recommend reading this report from The Case Foundation in its entirety.
