By Beth Sirull
Last year, here on TriplePundit, I proclaimed 2014 the Year of Impact Investing. Whether it was or not — and what that would really mean — is open to argument. Clearly, a lot happened in the U.S. and around the world — and a lot of impact capital was deployed — in 2014.
Capital deployed in 2014
Accurate estimates of the sheer volume
of impact capital deployed in 2014 are difficult to come by. Starting with the broader universe of socially-
responsible investing, the Forum for Sustainable and Responsible Investment
(USSIF), in its 2014 Report on US Sustainable, Responsible and Impact Investing Trends
, notes that nearly $7 trillion in U.S.-domiciled assets employ at least one socially-responsible investment (SRI)
strategy. This up 40 percent from $3.74 trillion in 2012. These SRI strategies include: incorporating environmental, social and governance (ESG) factors into investment decision making; shareholder advocacy; direct investing for measurable impact; or some combination.
But SRI funds and impact investing are not perfect overlays for one another. Impact investing requires not just the intention to affect a specific social change, but also the commitment to measure and report on that positive social change. SRI efforts to screen out particular ills do not automatically create positive social impact, certainly not a measurable one. ESG screening, a key component of SRI, is not impact investing.
Still, the two are correlated and the substantial, documented growth in SRI funds speaks to the growth of impact funds as well. Indeed, USSIF reports that community investments combined with socially-responsible alternative investments — private equity, hedge funds, property funds and other private market vehicles more likely to be impact investments targeting direct, measurable social impact — have grown over 40 percent since 2012, to approximately $300 billion in 2014. Clearly that’s a lot of investment activity.
Policy intertwined with investment growth
It's not just the increase in impact dollars invested that portends the rise of impact investing; it’s also the activity in the public policy sphere. While policy is often an afterthought for investors, in fact, policy sets and manages the stage on which investors invest. In their recent blog, “Is Social Impact Investing the Next Venture Capital?
Sir Ronald Cohen and Matt Bannick remind us all of the critical role that policy played in unleashing venture capital and note that the same can be true for impact investing. But will it be?
A lot happened in impact investing policy in 2014, but much more needs to happen this year. The G8 Taskforce on Social Impact Investing, originally convened at the 2013 G8 Summit, released its final report, Impact Investment: The Invisible Heart of Markets in 2014. This report is the cumulative effort of hundreds of people from around the world, with the backing of the G8 governments —England, France, Canada, Italy, Japan, Germany and the United States, as well as Australia — and outlines what policymakers can do to encourage investors to put money to work in financially sensible (given a variety of investor profiles), and socially impactful, ways.
Alongside the global effort, each of the member countries formed a National Advisory Board on Impact Investing (NAB). Each NAB member country released a National Advisory Board report. These are all valuable inputs to help policymakers around the world guide markets to ensure that private dollars are deployed for financial return and public good wherever possible.
2015 actions and field building
Here’s the problem, which leads to what has to happen in 2015 to keep this momentum going. The Global Taskforce report and the seven country NAB reports in combination contain more than 500 total recommendations. The Global Taskforce report alone presents eight high-level ideas, along with another 25 more specific recommendations. The United States NAB report details no fewer than 90 ideas. All of these are great ideas — and that doesn’t even take into account the hundreds that fell to the cutting room floor.
At the end of 2014, we saw the beginnings of an effort to make sense of this information. In November, the Global Learning Exchange on Impact Investing (co-convened and hosted by Pacific Community Ventures), released Impact Investing Policy in 2014: A Global Snapshot. What differentiates this report from all the others is that it begins to shift the question from “What should governments do?” to “What have governments done to encourage impact investing and what has happened as a result?”
In 2015, we need to take all these ideas that have been thrown up against the wall and start making sense of it all. We need to ask and get answers to questions like:
- Which of these policy ideas have been tried somewhere in the world? What happened? What can be learned and applied elsewhere? Surely some will be abysmal failures. How can we share these failures so they are not repeated in other geographic settings?
- Which ideas are likely to be most impactful? Which of these ideas are pipe dreams and which stand a real chance of being adopted somewhere? Analyzing what policies address gaps in the market versus those that work alongside other policies already in place is a useful place to start the prioritization.
- What’s being done to make sure that existing (and new) policies actually get implemented and widely used to maximize impact? Changing policy alone is often not enough to change. Policy changes are a necessary but sometimes insufficient condition. Strengthening networks that build practitioner awareness and educate investors, investees, and asset managers, among others is also critical.
- And what about the many ideas that didn’t make the reports? Should some of these be picked up off the cutting room floor?
These are important questions for all market leaders – foundation heads, policymakers, leading advocates, and savvy investors alike – who are developing their strategies to help grow impact investing. While these many reports are very useful, we mustn’t allow ourselves to be lulled into thinking that the field-building phase of impact investing is over. In truth, it has just begun. If 2014 was the Year of Impact Investing, 2015 must be The Year of Strategic Prioritizing in Impact Investing. It’s already late January. Let’s get started.
Beth Sirull is president of Pacific Community Ventures, whose mission is to create jobs and economic opportunities in low income communities through the direct support of small business and entrepreneurship as well as by promoting policies that drive investment in underserved communities. PCV is an impact investor providing capital directly to small businesses. The organization also works to build the capacity of these small companies to accept and deploy impact capital effectively.