This report assesses the progress made over the past four years in building the global impact investing industry. It is divided into three parts: first, context, which introduces the structure of and key actors in the impact investing field; next, an examination of the recent achievements and challenges in building the impact investing marketplace; and finally, presentation of a set of recommendations for accelerating the rate of growth of the field.
Accelerating impact is the organizing theme of this report. Looking back, the past four years
have certainly seen accelerated growth in, among other things, the number of organizations in the field, the quantum of capital mobilized, the variety of financial products offered, the number of participants in key networks, the number and depth of research outputs by the industry, and the range of methods and tools for measuring impact. In spite of this impressive progress, however, global impact investing still faces a range of challenges and complexities. Looking ahead, there is both a need and an opportunity for industry leaders to join together to catalyze a powerful further acceleration—a surge in the rate of growth—across a wider range of dimensions, in order for the field to reach maturity, scale and sustainability.
What’s Happened So Far, and What Hasn’t
The past four years of industry building in impact investing have been dynamic, creative and, above all, productive. There have been tangible gains in the mobilizing of capital for impact investments by a growing number of players. The quantum of capital has risen steadily, key intermediaries have emerged, and there has been significant growth in innovative products and platforms for investors. However, while there is also evidence of gains on the demand side of the sector, there are still too few investment-ready projects and enterprises to enable the optimum placement of this new capital. The good early-stage work of building initial global standards and rating systems for the industry still requires more time and better articulation, given the proliferation of methods and tools and the brand confusion among several measurement initiatives addressing the impact of investments. While very strong progress has been made in establishing a global network on impact investing, here too there is much more yet to be done, especially in facilitating the building of platforms and partnerships in the developing world.
Overall, there has been a significant acceleration of capital commitments toward impact investing. In addition to an increase in the variety of investors engaged, larger volumes and more types of capital are being deployed globally. Industry research suggests that approximately 2,200 impact investments worth $4.4 billion were made in 2011. This represents a significant achievement. And there are positive signs to suggest even greater interest and activity in the short term. Despite this tangible progress, though, our interviews indicated that there is large variation in where capital is deployed relative to where it is needed, a mismatch between the type of capital being offered and the demand for this capital, and a large pool of financial assets that has yet to be tapped for impact investing.
Placing and Managing Capital
Placing and managing capital have proven to be more difficult than raising capital. Barriers here have included investor concerns with a lack of exit opportunities, an insufficient menu of products designed for large investors, models of risk assessment that force a trade-off between impact and risk-adjusted financial returns and high transaction costs associated with structuring and executing innovative and untested investments. On the positive side, however, there has been steady, though uneven, progress in the global development of intermediation in impact investing. A cohort of specialist intermediaries has emerged over the past few years, though they are still limited to certain regions and sectors. Prominent among these intermediaries are values-based impact investing funds. As well, there has been growth in promising boutique impact investing banking services, which, while still insufficient, are crucial to the development of the field.
Demand for Capital
While the impact investing industry has, understandably, been focused largely on its supply-side efforts to mobilize and place capital, its leading organizations have done relatively less work on actively developing the capacity of ventures to effectively prepare for capital infusion and to use it effectively. This has meant that the field has not been able to move the needle as far as it would like to increase the number of investment-ready opportunities in its target regions and sectors. One important task on the demand side is finding scalable business models that are ready to receive investment.
Social measurement continues to be one of the most active areas in the field of impact investing. Efforts on impact assessment have accelerated over the past four years, though there is still much more work to be done. A number of global projects have gained visibility and momentum in recent years with the shared goal of providing a common set of tools on social measurement for investors, in particular. At the same time, a host of smaller, decentralized initiatives in impact assessment continues to exist, and even to proliferate at the sector and organizational levels. Leaders in the field must find new ways of integrating and achieving synergies across the two levels of activity.
Creating an Enabling Environment
Governments can play important direct and indirect roles in creating a policy environment that fosters, rather than hinders, the growth of impact investing. Governments can encourage impact investing through appropriate investment rules, targeted co-investment, taxation, subsidies and procurement, as well as corporate legislation and capacity development that enable the efforts of investors, intermediaries and enterprises in this space. The last two years, in particular, have seen research and networking by the industry to connect policy experience and actors around the world, and to jointly produce new knowledge and tools to support governments. The prime vehicle for this work is the Impact Investing Policy Collaborative (IIPC), whose policy framework is gaining wider usage.
Over the past four years, a growing number of organizations have come to play key leadership roles in the building of the impact investing field. In particular, the Rockefeller Foundation provided grants and PRIs to a group of some 30 core allies, including the GIIN, IRIS and GIIRS, to help build collective action platforms, create standards and rating systems, scale up intermediaries, and engage in research and action. Leadership activity was undertaken in parallel in other fields as well, including socially responsible investing, community development finance and clean technology. By the end of 2011, most impact investing leaders agreed that good progress had been made in organizing their new field, and that the collective effort must move to focus now on the execution of investments and the implementation of models, policies and tools.
Opportunities and Directions: What’s Next?
Overall, our scan of the impact investing sector’s progress over the past four years has shown that the field has moved decisively from the “uncoordinated innovation” phase in the Monitor Report schema to a sustained “marketplace-building” phase. Within this phase, it is also clear that the industry is shifting from a period focused on organizing itself and establishing initial infrastructure to one much more clearly focused on implementation. Indeed, leaders whom we interviewed and other champions of the field more frequently speak of the need to move into an “era of execution.” This is entirely appropriate. To this, however, we would add: an era of acceleration and execution. There are some very concrete steps that can, and should, be taken in order to make such an era a reality.