How can impact investing have more impact?

A few weeks ago, I wrote about how impact investing can fulfill its dual purpose – generating a defined social benefit as well as a competitive financial return. I focused on a universal social issue with substantial investment potential, cancer treatment, a topic that is particularly important to me (you will see why if you read it here). But there are many other areas with similar prospects, such as alternative sources of nutrition, innovations in textile supply chains, and affordable healthcare in emerging markets. 

The advantage of concentrating on universal rather than localized issues is high because the demand for solutions (i.e. scale to bring about positive social and environmental impact) is greater, the investment case is typically stronger, fundraising is easier, opportunities are more plentiful, and the financial innovation required is therefore less esoteric.

And yet impact investing has often focused on regional and/or narrow topics, that require complicated, and often opaque, financial structures.  

If the industry wishes to raise more money, I would recommend it focus more on 'big bang' solutions as well as worthy localized alternatives.

It's all about the supply

When it comes to impact investing, the clients I meet regularly ask me about opportunities to make a difference to society or the environment. On average, we are all increasingly conscious of our impact on the world. A Nielsen 2014 survey showed that 55% of participants would prefer to pay more for products and services from companies committed to positive impact, while 67% would prefer to work for a socially responsible company.

But although demand for impact investing should theoretically be large, the amount raised to date, USD 77 billion, is a drop in the ocean compared with total assets under management globally, well over USD 70 trillion.

#1: The industry needs to communicate more

Many investors feel that in trying to fulfill its two goals, impact investing is actually fulfilling neither – that the need to make a profit must necessarily compromise the social impact, and vice versa.

The healthcare field shows why this is not necessarily the case. Investing venture capital to develop cancer treatments is a highly profit-oriented business. And yet, if the drugs are successful, the social benefits are substantial. 

 A bigger supply of education on impact investing can help overcome these issues. For our part, we have recently contributed to the industry education push by publishing a primer on impact investing, Doing well by doing good. Elsewhere, the creation of the Impact Investment Benchmark by Cambridge Associates and the Global Impact Investor Network in 2015 represented a big step towards institutionalizing the industry.

#2: The industry needs to create more opportunities

By using traditional venture capital methods, cancer treatment development illustrates why impact investments do not necessarily have to resort to elaborate strategies as long as they focus on mainstream opportunities. For example, those who wish to make investments in alternative sources of nutrition can theoretically structure them as traditional farming assets, with some novel tweaks to reflect impact goals. 

Building a track record for innovative but less radical solutions is as important as building one for creating the most complicated structures

If the industry wishes to scale up, building a track record for innovative but less radical solutions is as important as building one for creating the most complicated structures.

For instance, blended finance solutions, where governments or non-profit entities agree to absorb losses as junior partners in the capital structure, can entice capital to areas in which for-profit investors would not tread alone. But in cases like cancer treatment, where the for-profit opportunity is mainstream and compelling enough, it should be possible to raise substantial sums without resorting to such vehicles.

The (double) bottom line

To be clear, I hope that highly progressive impact solutions like blended finance also enter the financial mainstream. But if the industry wishes to scale up and raise more money quickly, it cannot rely on those areas alone. More conventional strategies and focuses like cancer treatment are needed, and the industry should be swift to embrace them and educate investors accordingly.

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