How the market for impact investing could go from billions to trillions

The biggest misconception about impact investing — a term created to represent financial investments that have social and environmental benefits — is that it's charity, Amit Bouri says with a chuckle.

A market still in formation? Yes. A market in need of common definitions and metrics? Yes. But charity? No way, he says, dead serious.

More than $114 billion is invested in impact assets around the world — from affordable housing projects in the U.S. to eye-care providers in India to a Swedish maker of biodegradable baby diapers — according to a 2017 survey by the Global Impact Investing Network. Research by GIIN and others, such as Morgan Stanley and Cambridge Associates, has shown that such investments don't sacrifice financial return for social or environmental impact.

What the market needs, however, is a plan for growth, says Bouri, GIIN's co-founder and CEO. "We need a framework for action for everyone around the world who is committed to the potential of impact investing."

On Tuesday, GIIN published a "Roadmap for the Future of Impact Investing," an 80-page report that lights a path from $114 billion to a future where trillions are invested in impact assets. The action plan contains six steps, which Bouri says need to begin "immediately and with urgency."

Define what it means to be an impact investor.

Impact investing is a movement, and successful social movements have "clear identities and shares senses of purpose," according to the report. GIIN says the market needs to establish agreed-upon principles that define what it means to be an impact investor, create common ways to measure and report impact, and clarify the roles and return expectations of different types of capital — equity versus debt, for example.

Change the investor mindset.

The typical investor cares about two things: risk and return. GIIN believes that impact must be integrated into the calculus. That means adding impact performance to the factors considered in portfolio allocation and investor compensation, reshaping people's mindsets about the role of capital in society, and updating traditional, even decades-old investment theory to include impact alongside risk and return.

"We are seeing large institutional investors become much more interested in impact investing out of a recognition that, if you are thinking about the sustainability of economic performance in your markets over the long term, it is impossible to ignore issues of social and environmental impact," says Bouri.

Create new ways to invest in impact.

Institutions and individuals may have strong interest in impact investing but can't find the right vehicles for it, according to the report. GIIN says the market needs to expand impact investment products for both retail (individual) and institutional investors, back new fund managers who are seeking to invest capital in impact assets, and innovate with "blended finance" vehicles that can combine impact with specific risk and return objectives.

"The expansion of credible impact investment products with capacity can’t be understated," says Jamie Martin, executive director in Morgan Stanley's global sustainable finance group. "We’re seeing a lot of innovation in sustainable products, as well as products that are accessible to a broader range of retail investors."

Morgan Stanley's digital platform Access Investing, which launched in December and has been popular with younger clients, includes options to invest in impact themes such as climate action and gender diversity.

Marisa Drew, CEO of Credit Suisse's impact advisory and finance department, says she constantly is having discussions with clients about how they can invest in impact both at scale and in a liquid way. "It's a challenge," she says. "But how to mobilize the big capital is our goal."

Build tools and services.

Ratings agencies and data providers cover most investable asset classes, and investment banks and other intermediaries service clients and dealmakers in those areas. The impact investing market needs such tools and services in order to grow, according to GIIN.

"A big challenge is around data," says Morgan Stanley's Martin. "In the coming year, we expect to see increased demand for verifiable and comparable data between companies and over time. Until then, the disconnect between the information investors want and how companies are reporting on it remains a challenge."

Enhance education and training.

Wealth advisers, investment managers, and people seeking to work in finance are able to learn about most asset classes through established school and training programs. That allows those asset classes to attract talent, boost awareness, and maintain consistent practices. The impact investing market needs to bolster education and training for those purposes, according to the GIIN report.

"By educating investors of all sizes about the range of sustainable investing strategies and products available, we can start to shift perceptions that sustainable investing requires a financial trade-off," Martin says.

Improve policy and regulation.

Finally, GIIN proposes clarifying the interpretation of fiduciary duty so that investors and asset managers know how it relates to social and environmental factors, establishing tax incentives for impact investments, and promoting policies that foster impact measurement and reporting.

For Bouri, "the sky is the limit" for the future of impact investing. Some of the world's largest investment firms, including TPG and Bain Capital, have recently raised funds as large as $2.1 billion for impact deals. And big trends, such as the impending wealth transfer to millennials from baby boomers, make him hopeful, even as challenges remain.

"This is a pivotal moment for impact investing," he says.

What do you think of the roadmap for impact investing? Weigh in below using #impactinvesting.