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December 16, 2011
New Report Surveys Current State of Impact Investing
    by Robert Kropp

The Global Impact Investing Network finds that impact investors often provide debt investments to microfinance institutions in emerging markets, but provides little to distinguish the practice from sustainable investing.


What exactly is impact investing, and how does it differ from sustainable or responsible investing?

A report from a year ago, authored by J.P. Morgan Global Research in collaboration with the Global Impact Investing Network (GIIN), differentiates between the two by stating that traditional socially responsible investing (SRI) "generally seeks to minimize negative impact rather than proactively create positive social or environmental benefit."

In fact, however, reliance on negative screens as the predominant strategy for sustainable or responsible investors gave way well over a decade ago to integrating environmental, social, and corporate governance (ESG) criteria, as well as shareowner engagement, as dominant investment strategies.

Confusion over whether there exists a genuine difference between the two forms of investing led Amy Domini, the founder and CEO of Domini Social Investments, to write in The Huffington Post in March, "Please, 'high impact investors' who are so eager to distance yourselves from us socially responsible investors, don't just presume that you are doing more than we all have for the last 30+ years. If you want to have a high social impact in the world, join us."

Tim Freundlich, President of ImpactAssets, described the difference between the two to SocialFunds.com as being "more about motivation than an exact definition."

"It's about capturing the zeitgeist of the moment," he said.

In their 2009 pap er on impact investing, authors Antony Bugg-Levine and John Goldstein contrast the practice to philanthropy, stating, "Investment, rather than pure philanthropy, could generate development outcomes."

Writing recently in The Huffington Post, Robert Zevin of Zevin Asset Management described impact investing as incorporating "the outlook and aspirations of a generation of dot.com entrepreneurs who made millions or billions of dollars before they were 30 years old."

"They have concluded that most environmental and social problems can be solved with the same entrepreneurial and technical skills they employed to make their fortunes along with capital infusions that they can supply," Zevin wrote. "And they see no reason why they should not make more than normal profits on these investments."

J.P. Morgan and GIIN recently published the second of their surveys on impact investing. While the new report declines to define the difference between the two investment practices, it does give an idea of how impact investors define themselves and their investment strategies.

Sixty-two percent of respondents to the survey report they are willing to sacrifice financial returns for social impact, but "60% of respondents do not believe that a trade-off is generally necessary."

The new report more than doubles the number of transactions surveyed over that of last year, to over 2,200, totaling more than $4 billion in investment planned for the next year. Investors surveyed primarily consisted of institutional investors and high net worth individuals.

Respondents to the survey reported far more debt investments than equity investments. While 67% of investments were made in emerging markets—with Latin America, at 30%, leading the way—the more than 1,400 emerging markets investments accounted for 44% of dollars invested. The amount invested in the US and Canada was 51% of the total.

Last year's report acknowledged that some critics have criticized impact investments like microfinance as potentially exploiting the poor that they profess to help. Yet microfinance continues to be by far the most popular sector for investment, accounting for 34% of the number of investments and 37% of the dollar amount.

The focus of impact investors on emerging markets is shared by traditional sustainable investors. The Emerging Markets Disclosure Project (EMDP) of US SIF: The Forum for Sustainable and Responsible Investment, established in 2008, seeks to improve corporate ESG reporting in emerging markets. As of November, 2010, investors with more than $1 trillion in assets under management have become signatories.

And in February of this year, the United Nations' Principles for Responsible Investment (PRI) launched its Principles for Investors in Inclusive Finance (PIIF), whose 40 initial signatories agree to "fair treatment and protection of the interests of the ultimate client in inclusive finance—low-income households and small and medium-enterprises."

The lack of a track record of successful investments was cited by respondents as a key challenge to the growth of impact investing. Two initiatives developed in the past year have increased the availability of information about products and services. GIIN launched ImpactBase, an online database of funds, that now has 385 subscribers and lists 125 funds.

On its website, ImpactAssets currently lists 50 private debt and equity impact investment fund managers.

"When compared with our data from last year," the report observes, "We note that the percentage of respondents using third-party systems increased from 21% to 31%."

 

 
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