Impact investing involves making investments with the intention to create a positive social and environmental impact, alongside financial gains. The impact investment market is growing, providing capital to address some of the most significant challenges in a range of sectors, such as sustainable agriculture, renewable energy, conservation, housing, healthcare, and education.
In this article, we will delve a bit deeper into the crucial aspects of impact investing, some of the key players in the impact investment market, and why this new and growing industry is so powerful (and so necessary).
The Key Features of Impact Investing
According to the Global Impact Investing Network (GIIN), the core features of impact investing are:
- Intentionality: an investor has a clear intention to make a positive social or environmental impact through their investment.
- Investment with return expectations: investors expect to generate a financial return on capital or at least a return of capital.
- Impact measurement: investors are committed to measuring and reporting the social and environmental impact of their investments. This helps to underscore which investments are the most effective and impactful, while also ensuring transparency and accountability.
We usually think of social and environmental problems being addressed at a governmental level or through philanthropic donations. However, impact investing challenges these assumptions. This growing industry shows that investors can promote social and environmental solutions while making financial gains at the same time. Making a difference and making a profit don’t have to be mutually exclusive, as many of us often believe to be the case. In fact, given the track record of the most profitable industries in the world, the profit-seeking motive tends to be associated with a great deal of harm and destruction.
Impact investing aims to change this narrative. Market investments don’t just have to focus on financial returns. When making a positive impact becomes the primary source of an investor’s drive, passion, and ambition, then the other motive of making a profit can be ultimately positive.
The impact investment market has attracted a wide range of investors, at both the individual and institutional level. Examples of investors include:
- Fund managers
- Development finance institutions
- Private foundations
- Pension funds
- Insurance companies
- Family Offices
- Individual investors
- Religious institutions
The Growth of Impact Investing
The term ‘impact investing’ is relatively recent, coined in 2007 by the Rockefeller Foundation. Since then, however, the impact investment sector has been growing rapidly. As GIIN point out in their report ‘Sizing the Impact Investment Market’, “over 50% of active impact investing organizations made their first investment in the past decade.” At the end of 2018, there were over 1,340 active impact investing organisations all over the world, managing $502bn in investments that are designed to enact positive change. GIIN underscores that “the market is quickly growing and will continue to do so”.
The vital question is whether the impact investment market can grow at a rate that is fast enough to adequately address the most pressing social and environmental issues facing us today. For instance, achieving the Sustainable Development Goals (SDGs) – which consist of 17 goals with the protection of people and the environment in mind – requires trillions of dollars in funding. Given that we’re experiencing a climate emergency, and with time running out to save the planet, the impact investment market will have to grow very rapidly indeed in order to help achieve SDGs. Of course, impacting investing alone won’t be able to resolve all of the most pressing social and environmental problems in the world today, but it could prove to be an essential part of the solution.
GIIN, nonetheless, is optimistic about the future of impact investing and the difference it can make in the world. As the organisation states:
“One in four dollars of professionally managed assets (amounting to USD 13 trillion) now consider sustainability principles. There is great potential for these investors, who have already aligned their capital with their values, to more intentionally use their investments to fuel progress through impact investments. The growing consideration of social and environmental factors in investing is also a signal of a larger shift in the global financial markets — an increasing number of people are recognizing that their money should do more than just make more money. Their investments can — and should — also seek to fuel meaningful, sustainable social and environmental impact.”
Rajiv Shah: An Important Figure in the Impact Investing Sector
So, impact investing may sound great in principle, but in order to get a proper sense of its potential, it’s important to examine key investors in the industry who are proving to make a significant difference. One exemplary investor – who helps to shine a light on the huge potential of impacting investing – is Rajiv Shah.
Shah is the President of the Rockefeller Foundation, which, since 1913, has made it its mission to improve the well-being of humanity around the world. Under Shah’s guidance, the organisation is now focusing on the power of impact investing. And based on his background and experience, Shah certainly seems well-equipped to turn impact investing into a fruitful endeavour.
In 2001, Shah joined the Bill & Melinda Gates Foundation, the largest private foundation in the world. He served in a range of leadership roles, including Director of Agricultural Development, Director of Strategic Opportunities, Deputy Director of Policy and Finance, and Chief Economist. During his time at the Gates Foundation, Shah launched the Alliance for a Green Revolution in Africa, which helps to address the environmental and agricultural needs of African farmers. He was also responsible for developing the International Finance Facility for Immunization (IFFI). And during his time working on this project, Shah helped to raise more than $5m for the Global Alliance for Vaccines and Immunization (GAVI). Based on Shah’s diverse experience at the Gates Foundation and his track record of generating substantial investment for global development, he stands out as a highly credible player in the impact investment sector.
Shah’s credibility is also underscored by his time spent working for the Obama Administration. In 2009, then-president Obama nominated Shah to serve as Chief Scientist and Undersecretary of Agriculture for Research, Education and Economics. Shah also led the creation of the National Institute of Food and Agriculture (NIFA), which ensured that agricultural research was carried out in line with peer-reviewed scientific processes.
Based on his experience, Shah knows how critical it is to apply evidence-based solutions to global issues. It is this keen insight that has allowed him to make successful impactful investments and which will allow him to continue to do so with his work at the Rockefeller Foundation. Shah has also been a key driver in the growth of the impact investment sector, which again can be explained by his unique experience, skills, and acumen. The potential difference he could make to the environment and the lives of others through the Rockefeller Foundation is, indeed, looking quite hopeful.
The Rockefeller Foundation and Impact Investing
Shah outlined the importance of impact investing in a blog post for the Rockefeller Foundation titled ‘To Meet the SDGs by 2030, We Must Attract New Streams of Impact Capital’, which is the same argument that GIIN was making in its report on the size and growth of the impact investment sector.
In his blog post, Shah maintains that “collaborative, catalytic investment is essential to fill the development-financing gap and help address pressing global challenges.” (Catalytic investment here refers to an “investment structured to be more patient, take on more risk, accept a lower return, or be flexible in other ways that differ from conventional capital”.) Based on this underlying belief, the Rockefeller Foundation created the Impact Investment Management (IIM). This asset management platform aims to scale up investments into promising new ventures that will help to close the SDG funding gap. The IIM gives the Rockefeller Foundation the ability to manage capital from like-minded partners and amplify impact in the Foundation’s main areas of interest – food, health, power, jobs, and innovation.
The first investment on the IIM platform is a $60m investment partnership between the Rockefeller Foundation and MacArthur Foundation, a private foundation that makes impact investments to support non-profit organisations all over the world. This collaboration between the two foundations is intended to scale up impact investing as a way to close the gap between global development funding needs and the resources available (an initiative that the Rockefeller Foundation calls Zero Gap).
The IIM has, so far, closed three transactions. The first investment is with Sixup, a company that helps high-performing, low-income students attend higher education, with the goal of boosting these students’ social mobility. The Zero Gap funds, managed by the IIM, are expected to support over 2,500 loans to students. Goldman Sachs has also invested in the company.
The second IIM investment is the Forest Resilience Bond (FRB), which supports forest management, such as the clearing of dangerous forest growth that can fuel wildfires. The third investment is with LeapFrog Investments, a leading private equity asset manager focused on the financial services and healthcare sectors. This investment will help 70 million emerging consumers in Africa and Southeast Asia gain access to financial services and healthcare.
Since the coinage of the term impact investing, and with Shah as President, the Rockefeller Foundation has contributed over $200m in impact investments, as well as leveraged many times that figure through leveraging private and public capital. Moreover, the Rockefeller Foundation has helped to develop the necessary infrastructure allowing the impact investment sector to flourish. For example, the organisation incubated GIIN, which increased both the scale and effectiveness of impact investing. This also helped to establish the Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Ratings System (GIIRS). Both of these systems help to measure, manage, and optimise impact funds, ensuring that the most evidence-based and effective solutions are prioritised, with positive effects maximised and negative effects minimised.
Leveraging Technology to Change the World
One crucial way in which we will solve serious global issues is through the leverage of technology. And impact investing is extremely beneficial in this respect since many of these investments are allowing innovative technological solutions to be developed. Indeed, impact investing is driving many exciting emerging technologies, with Bastiaan den Braber – venture advisor at LUMO Labs – saying:
“The advent of very powerful emerging technologies such as artificial intelligence, machine learning, robotics, blockchain, and XR can make big differences when combined with smart money coming from venture capital. The combination of the two has been the best that has ever happened to make sustainable development goals a reality.”
“We’ve reached the point where impact investing needs the technology sector to achieve change at scale and quickly. Additionally, the technology sector needs impact investing so it can redeem itself in an era when trust is plummeting. I believe that the future of investing in the technology sector will be based on impact and I’m optimistic that will help put us on a more positive path.”
Frog Capital is another example of an impact investment company that shares Miller’s vision. Frog has invested in leading technology companies in a range of sectors, such as mobility, education, and business. Yet, there are many emerging technologies are making real differences to the well-being of people and the sustainability of the environment. For example, well-being apps like Calm, Breathe, and Unmind are raising significant investment, as is Memphis Meats, a company that is developing synthetic meat, which may be necessary to feed a growing global population, while at the same time reducing the environmental destruction caused by traditional meat production.
The truth is that there are countless emerging technologies that can help us to effectively combat climate change. And of course, governments should be increasing funding into the research and development of such innovative solutions. But many governments don’t seem to be acting fast enough in this respect; instead, they are focusing on – arguably – less urgent policy decisions. Those in the impact investment sector, however, understand how important it is to focus on the development of technologies that have the potential to create significant positive change in the world.