In the spotlight – what’s your opinion?
Investing for impact – how social entrepreneurship is redefining the meaning of return
This recent research report by Credit Suisse and the Schwab Foundation for Social Entrepreneurship offers a framework for impact investment solutions and shows the major trends shaping the industry. As the industry grows, investors are increasingly rejecting the notion that they face a binary choice between investing in societal impact with minimum financial return or donating money to social and environmental causes. New philanthropists and impact investors are proactively using their investment goals to achieve societal impact while also have the potential for financial return.
While investors seek to improve their social impact, their investment goals and priorities differ widely when selecting solutions that meet both their financial and their extra-financial goals. For this reason and to help investors navigate the new and complex space of impact investing, Credit Suisse created The Responsible Investment and Philanthropy Services (RI-PS) Framework, which maps investment solutions along a spectrum that ranges from pure donation and investing in social businesses to investment solutions maximising financial returns.
As the RI-PS framework shows, the main goal of impact investing is societal change, combined with moderate financial return. This can happen in many ways, but a common impact investment structure is one that provides capital to small businesses and social enterprises which use market-based mechanisms to provide scalable solutions to a number of global problems.
These investments can target a wide range of sectors – from education to clean water – and rely on a variety of different funding structures – debt, private equity, various forms of mezzanine and grants. Deciding the right mix of financing tools to support a social business is an essential part of the investment process. The growth of successful social businesses proves how impact investors are catalysing change in the sector. But providing capital to Social Purpose Organisations (SPOs) is just one way impact investors are driving social change.
A major trend in the impact investment market is the creation of new financial instruments that offer more opportunities to invest for impact. In 2010 the first social impact bond was launched in the UK – the bond channelled private funding into social programmes, with the government paying interest rates that rise or fall with the measured success of the venture. The first social impact bond aimed to finance the rehabilitation of former convicts. If the programme meets its goal of moving the target group away from crime, the interest rate on the bonds will rise.
Another innovative financial tool, the vaccine bond, converts multi-year foreign aid commitments into immediate cash so vaccines can be administrated earlier and to more people. The structure can create large amounts of capital, with issues exceeding $3bn. The introduction of new financial tools is also being followed by government intervention in the sector – governments across the US, the UK and Europe have made around $4bn available for social investment solutions in the past three years.
Despite these many promises, current and potential impact investors should be aware of the risks, such as low liquidity for long periods of time, high start-up costs, exit risks, high due diligence costs and emerging market risks. In addition to these factors, the sector’s main challenge today is to tackle the complex topic of measuring societal impact. In recent years, impact investors and others related to the sector have been working on setting standard risk and financial return parameters with the added performance dimension of measuring social or environmental impact.  Tools such as Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS), which relies on IRIS for input, work to aggregate data on social impact performance so that investors can make informed investment decisions. These new approaches aim to build holistic, transparent and attentive reporting systems on the potential for mission drift. The GIIRS provides funds with an impact rating, giving them one to five stars based primarily on an overall assessment of their companies’ impact performance. Both IRIS and GIIRS are shortcuts to explore how investments perform both financially and socially over time. Even if still in an early stage, it is clear that the sector’s aim is to create and develop transparent and efficient communication of social metrics.
The imperative of building a reliable and standardised infrastructure for the measurement of social return is not only to give current investors more information on how their investments develop but also to attract new investors, especially retail and institutional clients, as most impact investors today are represented by wealthy individuals and foundations.
Many initiatives have emerged to allow more people to invest for impact. These range from organisations, such as Kiva, through which people can lend money via the internet to microfinance institutes in emerging markets, and Hoop Fund, a crowd-funding platform that allows people to invest in fair-trade. Even if these initiatives show a transformation at a grassroots level, attracting more capital is still a challenge for the sector. A large number of impact investment funds are now offering retail programmes that invest in small and medium-size enterprises (SMEs) in emerging markets and a growing number of publicly listed companies with a social mission are also investment opportunities for retail and institutional investors. These companies pursue a given social goal in a financially self-sustainable way. Nonetheless the infrastructure to help identify and support publicly-listed companies with a societal mission is still at an early stage of development and the risk of mission drift remains high. For this reason most investors are concentrating on large-cap companies minimising social and environmental risks.
The second part of the report focuses on the growth of social enterprises and the contribution that impact investing has brought to the sector. Presenting a series of interesting case studies, Katherine Milligan from the Schwab Foundation, highlights that investors in social enterprises need to be willing to take greater levels of risk and to deploy a mix of financial tools. Pioneers such as the Bill & Melinda Gates Foundation and EVPA member Shell Foundation are discovering synergies between grant-making and investment strategies in their goal to scale non-profits and for-profits with potential for greater impact.
After sharing useful lessons in the impact investing sector, the report finally shows how arranging the financing mix of the social businesses is essential in helping them achieve scale and sustainability. EVPA member Acumen Fund’s lessons from the field show that social enterprises go through a four-stage process – blueprint, validation, preparation and scale. The last stage often remains unclear to social businesses and their investors and thus the need for “patient capital” is essential, especially when creating the bridge between grants and impact investments.