World Economic Forum, "From the Margins to the Main Stream", Sep 19, 2013.

7/29/2019 World Economic Forum, "From the Margins to the Main Stream", Sep 19, 2013.

1/40

From the Margins tothe MainstreamAssessment o the Impact

Investment Sector andOpportunities to EngageMainstream Investors

Industry Agenda

September 2013

A report by the World Economic Forum Investors Industries

Prepared in collaboration with Deloitte Touche Tohmatsu


2/40

World Economic Forum

2013 - All rights reserved.

No part o this publication may be reproduced or transmitted in any orm or by any means,

including photocopying and recording, or by any inormation storage and retrieval system.

The views expressed are those o certain participants in the discussion and do not necessarily

reect the views o all participants or o the World Economic Forum.

REF060913


3/40

3From the Margins to the Mainstream

Contents Preace

3 Preace

4 1. Introduction to the MainstreamingImpact Investing Initiative

4 1.1 Executive Summary

4 1.2 Motivation

6 1.3 Focus and Scope

7 2. Defnitional Alignment

7 2.1 Clari ying the Taxonomy

8 2.2 Areas o Defnitional Conusion

10 3. Impact Investment SectorAssessment

10 3.1 Harnessing the Hype

12 3.2 Impact Investment Ecosystem:The Landscape Today

18 3.3 Case Studies: Examples oMainstream Investors in ImpactInvesting

18 3.4 Impact Investing Across AssetClasses

21 3.5 Voice o the MainstreamInstitutional Investor

23 4. Challenges that InstitutionalInvestors Face

23 4.1 Early-stage Ecosystem

24 4.2 Small Average Deal Size

25 4.3 Fit within Asset AllocationFramework

26 4.4. Double Bottom Line

27 5. Recommendations

27 5.1 Role o Impact Investment Funds

28 5.2 Role o Impact Enterprises

28 5.3 Role o Philanthropists andFoundations

29 5.4 Role o Governments

30 5.5 Role o Intermediaries

31 6. Conclusion

32 Appendix: Institutional InvestorsInterested in Getting Started

33 Reerences and Further Reading

34 Acknowledgements

Investors have signifcant inuence over the social, environmental andeconomic challenges o societies, yet continue to operate within amarket inrastructure and investment ecosystem where the incentivesdo not generally balance social, environmental and economic impact.

Impact investing an investment approach intentionally seeking tocreate both fnancial return and positive social impact that is activelymeasured has been lauded as an emerging investment approachwith the potential to reconcile key shortcomings in traditional fnancialmarkets. Yet with less than US$ 40 billion o capital committedcumulatively to impact investments out o the tens o trillions in globalcapital, it is no surprise that many have labelled impact investing ahype.

At its Annual Meeting in Davos in January 2012, the World EconomicForum brought together mainstream investors, impact investors andsocial entrepreneurs to discuss how to harness the potential o impactinvesting. What emerged was a list o constraints the sector aces,

such as the perception that a social impact responsibility conicts witha fduciary duty, the ragmentation o the impact investing universewith small intermediaries and small deal sizes, and the lack o anestablished track record o exits or investors in double bottom linecompanies. While the list o reasons why impact investing wouldremain niche seemed overwhelming, bringing it into the mainstreamwas too important an opportunity not to pursue.

Impact Investing is a multistakeholder issue. It engages governmentsas impact investments oer opportunities or more efcient deliveryo public services. It engages civil society, rom the non-profts thatdesign and implement projects to individual recipients o socialprogrammes. And it involves businesses, ranging rom entrepreneursand lawyers to consultants and investors. Clearly, or impact investingto reach its potential, it must be considered rom the perspective o all

stakeholders. The ocus o this report is the mainstream investor angle,which oers the biggest opportunity to scale the sector at this stage.

With this context in mind, the World Economic Forum launched theMainstreaming Impact Investing initiative in 2012. This initiative buildson the Forums 2011 reportAccelerating the Transition towardsSustainable Investing, which sought to stimulate the integration oenvironmental, social and governance (ESG) actors into mainstreaminvestment analysis, as well as the 2011 Schwab Foundation or SocialEntrepreneurship report, The Social Investment Manual, which soughtto build absorptive capacity among prospective impact investees.

Undoubtedly, a number o leading global publications on impactinvesting have graciously laid the oundation or this. What makes this

report dierent is the World Economic Forums access to the seniormost decision-makers and portolio managers o the largest and mostinnovative investors in the world; this uniquely helped acilitate a morerealistic vantage point on the challenges in scaling the sector. Workingwith this group will also be instrumental in raising awareness andknowledge among key stakeholders or taking impact investing romthe margins into the mainstream.

We recognize there remain many sceptics o impact investing. But,we believe that the best way to develop and mature this promisingsector is through constructive criticism. So whether you believe impactinvesting will inevitably be mainstreamed or believe it to be merely abellwether or what is not working in the economy, we look orwardto hearing rom you. It is in this spirit that we oer this report not to befled in the archives o a library, but to start the journey to transorm our

fnancial paradigms or the better.

For more inormation on the Impacting Investing initiatives o the World

Economic Forum, please contact us by e-mail at impactinvesting@

weorum.org.

Michael DrexlerSenior Director,Head o InvestorsIndustriesWorld EconomicForum USA

Abigail NobleAssociate Director,Head o ImpactInvesting InitiativesWorld EconomicForum USA


4/40

4 From the Margins to the Mainstream

1.1 Executive Summary

Over the last ew years, much excitement has been generatedaround the term impact investing an investment approach thatintentionally seeks to create both fnancial return and measurable

positive social or environmental impact. Despite the buzz, there islimited consensus among mainstream investors1 and specializedniche players on what impact investing is, what asset classesare most relevant, how the ecosystem is structured and whatconstraints the sector aces. As a result, there is widespreadconusion regarding what impact investing promises and ultimatelydelivers.

This report is a result o engaging over 150 mainstream investors,business executives, philanthropic leaders and policy-makersthrough interviews, workshops and conerence calls. The overallobjective o the Mainstreaming Impact Investing initiative is toprovide an initial assessment o the sector and identiy the actorsconstraining the acceleration o capital into the feld o impact

investing. The report is divided into fve key sections.

Section 1 outlines the motivation, ocus and scope o the initiative.It concludes that theprimaryasset owners that are allocatingcapital to impact investments today include development fnanceinstitutions, amily ofces and high-net-worth individuals,2 butthat the sector can only realize its potential i other types o assetowners will allocate additional capital towards impact investments.

Section 2 defnes impact investing, and most importantly, identifesareas o conusion in an eort to clariy how impact investing isdierent rom traditional investing. It cites two examples o large-scale asset owners that are allocating capital towards investmentsthat intentionally seek to create social or environmental value in

addition to generating fnancial return.

Section 3 provides a snapshot o the state o the sector. Itidentifes the participants that are most actively involved inthe impact investing ecosystem, and describes how theseorganizations are making investments across the various assetclasses. It concludes with the observation that although the growthin impact investing has been driven largely by niche players,leading mainstream investors have now begun to allocate relativelysmall pools o capital to impact investments.

1. Introduction to theMainstreaming Impact

Investing Initiative

Section 4 describes the constraints that asset owners ace whenconsidering allocation o capital to impact investments. Mosto these constraints can be attributed to one o the our broadoverarching challenges: early-stage ecosystem, small averagedeal size, ft within asset allocation ramework and double bottomline. The objective o this section is to identiy and isolate the most

prevalent challenges so that they can begin to be addressed andovercome by leading investors in the impact investing ecosystem.

Section 5 outlines key recommendations that various participantsshould take to advance impact investing out o the marginsand into the mainstream. It concludes that mainstreamingimpact investing will require a concerted eort and collaborativecoordination among many participants, including impactinvestment unds, impact enterprises (investment targets),philanthropists and oundations, governments and fnancialintermediaries. The appendix recognizes that mainstream investorshave a potential role to play as well, and outlines ideas or howinvestors that are interested in becoming more active in the impactinvesting sector could get started.

1.2 Motivation

The intended audience o this report will be investors interestedin clariying what impact investing is and what it is not, what thecurrent sector landscape looks like and what is required or thesector to progress into the mainstream. The impetus or the WorldEconomic Forums Mainstreaming Impact Investing initiative andpublishing o this report is our-old:

First, private investment to address social challenges can create

tremendous societal change. Social issues continually presentsignifcant fscal challenges or governments o developed,emerging and rontier economies; these challenges are particularly

difcult when government budgets are declining as a result oburgeoning debt and fscal austerity.3 Philanthropic organizations while noble and needed will not be able to solve the mostpressing social problems alone due to their limited resources.Given the nature o how resources are distributed in the world,private investors have a potential role to play in addressing socialchallenges, including development o impact enterprises, economicdevelopment more broadly, and adjustment to major challengessuch as climate change, urbanization and wealth inequality. Impactinvesting oers an opportunity to creatively und projects that mayotherwise go ununded, while also helping to scale organizationswith viable business models that meet pressing social orenvironmental challenges.

1 Mainstream investors include asset owners (e.g. pension unds, insurance frms, etc.) and asset managers (e.g. private equity frms, mutual unds) that are not actively investingin impact investments nor are inormed about this emerging approach to investing.2 Statement reers to global markets, more broadly; this may not be true or all individual markets or geographies.3 Accenture and Oxord Economics projected total government spending on public services through 2025 and ound an expenditure gap ranging rom 1.3% to 5.4% o GDP orthe 10 countries included in the assessment (expenditure gap occurs when demand or public services outpaces expected delivery). (Source: Delivering Public Service or theFuture: Navigating the Shits (2012), Accenture)


5/40


To the extent that there isdemand rom my investors,we would participate inthis market.

Colin Teichholtz, Senior Portolio Manager,Pine River Capital Management, USA

Impact investing is part o ourmultiaceted commitment to responsibleinvestment; it serves as a branddistinction as well as ulls ourparticipants demand or both nancial

and social outcomes.

Amy OBrien, Managing Director, Teachers Insurance and AnnuityAssociation College Retirement Equities Fund (TIAA-CREF), USA

4 John J. Havens and Paul G. Schervish (2003): Why the $41 Trillion Wealth Transer Estimate is Still Valid: A Review o Challenges and Questions, Boston College Social WelareResearch Institute. Note: The US$ 41 trillion is the researchers low-growth scenario estimate and assumes 2% real secular growth in assets. It will result in an approximatelyUS$ 5 to 10 billion transer per annum. (Source: Arthur Wood (May 2013): Impact Investing: Potential Tool or Development, Total Impact Advisors)5 Millennials are born ater January 1982; those included in the study were Millennials rom 18 countries who have a degree and are in ull-time employment. Survey conductedby Deloitte in 2012. To learn more, visit: http://www.deloitte.com/view/en_GX/global/about/global-initiatives/world-economic-orum/annual-meeting-at-davos/8182b8e049b3c310VgnVCM300000345670aRCRD.htm#.UeRCrvlOSSo6 Nick ODonohoe, Christina Leijonhuvud, Yasemin Saltuk, Antony Bugg-Levine, and Margot Brandenburg (2010): Impact Investments: An Emerging Asset Class, JP Morgan,Rockeeller Foundation, and the Global Impact Investing Network.7 The Economist (19 May 2012): Spreading Gospels o Wealth: Americas Billionaire Giving Pledgers Are Forming a Movement; Bloomberg BusinessWeek (6 June 2013): G8Leaders Embrace Impact Investing with New Funds.8 First Afrmative Financial Network, LLC (September 2012): 2013 To Be the Year o Impact Investing.9 Usman Hayat (11 July 2013): Do Investment Proessionals Know About Impact Investing? , CFA Institute.

Second, asset management is in a state o ux. Over the next 40years, Generation X and the Millennial Generation will potentiallyinherit an estimated US$ 41 trillion rom the Baby BoomerGeneration.4 These generations have grown up in a culture thatcalls on business to play a more active role in society. In act, in arecent study o 5,000 Millennials5 across 18 countries, respondentsranked to improve society as the number one priority o business(see Figure 1). This does not imply that the next generation oinvestors will not seek market returns. Indeed, the investment

industry thrives as a result o the pursuit o investment returns, andbusinesses are not sustained without a proftable revenue model.However, the emerging generation o investors is also likely to seekachievement o social objectives in addition to fnancial returns.

Figure 1: Primary Purpose o Business According to the Millennial Generation, % o Survey Respondents

Source: Deloitte

36% 35%33%

29%27%

25% 25%

20%

15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Improvesociety

Generateprofit

Driveinnovation

Producegoods &

services

Enhancelivilihoods

Enableprogress

Driveefficiency

Exchangegoods and

services

Createwealth

a result o their knowledge o the organizations investmentapproach. Although more work needs to be done to understandthe direct and indirect benefts that impact investing achieves orthe investor, mainstream investors agree that impact investing hasthe potential to drive a distinct competitive advantage.

Fourth, there is widespread conusion regarding what impact

investing is. Since JP Morgan and Rockeeller Foundationcollaborated on the seminal report in 2010 which claimed that

the impact investment sector could reach US$ 1 trillion by 2020,

6

a tremendous amount o buzz has been generated around theterm impact investing. It was a topic on the public panel or thefrst time at the World Economic Forum Annual Meeting 2013 inDavos, Switzerland, was a key area o ocus by David Cameron,Prime Minister o the United Kingdom, at the G8 meetings inJune 2013, and was a leading topic among the Giving Pledges2012 convening.7 Furthermore, according to a survey by FirstAfrmative Financial Network, impact investing was cited as theaspect o responsible investing that will grow the astest over thenext 12 months.8 Yet despite this buzz, the term impact investingelicits mixed, and oten inconsistent, responses rom dierentparticipants. In act, in a survey conducted by the CFA institute,66% o fnancial advisers claimed to be unaware o impact

investing.9

There is an obvious need or defned clarity about theterm itsel.

Third, impact investing oers an opportunity to carve out a distinct

competitive advantage.As part o this initiative, the researchteam interviewed a number o dierent institutional investors whoexplained that their active participation in the impact investingsector has helped to engage and motivate investment teams,signal to shareholders an emphasis on long-term value creation,

and most importantly, drive higher investor commitments as


6/40


1.3 Focus and Scope

The ocus o this report is on the supply side o the capitalequation and intends to answer the question: What constraintsdo mainstream investors ace when approaching the impactinvestment sector? In this context, mainstream investors includeasset owners (including pension unds, insurance frms, sovereignwealth unds, university endowments, oundations and amilyofces) and asset managers (including private equity frms,

mutual unds, hedge unds and asset management divisionso banks), which adhere to conventional wisdom when makinginvestment decisions and which are not actively investing in impactinvestments. Throughout the report, special emphasis is given toasset owners. It should also be noted that the ocus o the report isprimarily on the institutional investor and not the retail investor.

Although many exceptions exist, the leading asset owners that areallocating capital to impact investments today include developmentfnance institutions, amily ofces and high-net-worth individuals(Reer to Figure 2). However, relative to other sources o capital,these investors hold only a small share o the global capital pool(see Figure 3). This report will address the actors that constrainother types o asset owners rom allocating capital to impact

investments.

A risk in attempting to accelerate the supply o capital into impactinvestments is the potential or good capital to chase bad dealsand potentially create a bubble. A key question that should beasked is whether or not the sector actually needs additional capital,and whether or not a lack o access to capital is constraining thesector rom reaching its potential. There must be enoughinvestableorganizations within key sectors across various geographies tojustiy a surge in capital ow. This risk is an important one andhinges on ones defnition o impact investing, which is discussed

at length in Section 2.

Figure 2: Source o Funds or Impact Investment Fund Managers,2012

Source: GIIN, J.P. Morgan

Figure 3: Distribution o Global Asset Ownership, by Investor Type,2011

Note: Omitted rom the analysis include Mutual Funds, Asset Management Divisions o Bank andFund Managers (Private Equity, Hedge Funds, etc.)Source: OECD, Foundation Center, NACUBO, Overseas Development Institute, Deloitte Analysis

0 20 40 60 80

RetailInvestor

Fund of Funds Manager

Endowment

Foundation

Pension Fund or InsuranceCompany

Diversified FinancialInstitution / Bank

Development FinanceInstitutions

Family Office / HNWIs

Survey Score10

SovereignWealth

Funds9%

Foundations

1%InsuranceCompanies

39%Endowments

1%

PensionFunds

48%

Family Offices/HNWIs

and DFIs hold ~2.5%

of global assets

10 Survey respondents ranked their answers and scores were weighted based on the requency o selection (3 points i ranked frst, 2 points i ranked second and 1 point iranked third); the stand-alone score o each source o unds is thus less important than the relative score.

Impact investing is currently growinglinearly. In order or it to growexponentially, we need to nd a way toincorporate mainstream investors into themix.

Randall Kempner, Executive Director, Aspen Network oDevelopment Entrepreneurs, Aspen Institute, USA


7/40


Most organizations can look at theirportolio and nd areas that are creatingsocial impact; without the distinction ointention, the discussion becomeswatered down and nothing new.

Renat Heuberger, Chie Executive Ofcer and Deputy Chairman,South Pole Carbon, Switzerland

Table 1

SectorIllustrative Examples of Measurable

Social or Environmental Outcomes

AgricultureIncrease in productivity or crop yield as a

result of improved technology or training

EducationParticipation rates of girls in secondary

education in sub-Saharan Africa

EnergyNumber of individuals at the base-of-the-

pyramid who gain access to electricity

EnvironmentTonnes of CO2 equivalent offset as a result

of organizations product or service

Financial

Services

Number of micro-insurance products sold to

people with AIDS and infected with HIV

HealthReadmission rate of diabetes patients using

innovative product for monitoring health

HousingReduction in the rate of homelessnessamong major US cities

WaterNumber of individuals at the base-of-thepyramid who gain access to clean water

11 Source: World Economic Forum Mainstreaming Impact Investing Working Group12 The eight sectors in Table 1 are used by the Impact Reporting and Investment Standards (IRIS), an initiative o the Global Impact Investing Network (GIIN), to supporttransparency, credibility and accountability in impact measurement practices. IRIS is a set o standardized metrics that can be used to describe an organizations social,environmental and fnancial perormance. Like fnancial accounting standards, IRIS provides a basis or perormance reporting. To learn more, visit: http://iris.thegiin.org.

2. Denitional Alignment

Section 2 o this report attempts to provide clarity to the defnitiono impact investing. Section 2.1 outlines the defnition that wasdeveloped as part o the Mainstreaming Impact Investing initiative.A defnitional discussion o impact investing can oten lead to morequestions than answers; thus Section 2.2 clarifes common areaso conusion. As with any new and emerging sector, the defnitionis an evolving one and will be urther clarifed as the sectorprogresses and uncertainties are addressed through investments

made and lessons learned.

2.1 Clariying the Taxonomy

Impact investing is an investment approach that intentionally seeksto create both fnancial return and positive social or environmentalimpact that is actively measured.11

First, it is an investment approach and not an asset class. It is acriterion by which investments are made across asset classes.An asset class is traditionally defned as securities or investmentsthat behave similarly under varying market conditions and thatare governed by a similar set o rules and regulations. Under thisdefnition, it is clear that impact investing is an investment approach

across asset classes, or a lens through which investment decisionsare made, and not a stand-alone asset class. Certain impactinvestments (e.g. public equity security o an impact enterprise)may behave similarly to certain asset classes (e.g. public equities),while other impact investments (e.g. social impact bond) may notbehave similarly to other asset classes (e.g. corporate bond). SeeSection 3.4 or more on this point in particular.

Second, intentionality matters. Investments that are motivatedby the intention to create a social or environmental good areimpact investments. However, i the intention is solely fnancialgain, even i the investment unintentionally creates social orenvironmental value, the designation o the investment being animpact investment is less certain. For example, an investmentmade into a pharmaceutical company that manuactures lie-savingmedications solely or the purpose o generating fnancial returnswithout the intention or social impact is not an impact investment.That said, the investment may certainly be impactul, but not animpact investment by defnition.

Third, the outcomes o impact investing, including both the

fnancial return and the social and environmental impact, are

actively measured. The degree o fnancial return may vary widelyrom recovery o principal to above-market rates o return. Forurther discussion on this point, see Section 3.5. In addition tofnancial return, the investments social or environmental valuemust bemeasuredin order or the investment to be consideredan impact investment. For examples o measurable social orenvironmental impact across eight key investment sectors inimpact investing, see Table 1.12


8/40


2.2 Areas o Denitional Conusion

Realizing that a defnitional discussion o impact investing canlead to more questions than answers, this section is devoted toclariying common areas o conusion.

Arent all investments impactul? Cynics oten ask why the specialimpactdistinction is required at all given that investment is theengine o business growth and economic expansion, and thus

all investing is inherently impactul. While true, not all investingintentionally seeks to create positive social or environmentalvalue on the onset, beore the investment is made. Some degreeo social or environmental value may be created as a resulto all investing, but it is not always intentionally sought, whichdierentiates impact investing rom traditional investing.

What is the dierence between impact, sustainable and

responsible investing? In short, responsible investing reers to abroad array o investment practices including socially responsible,sustainable and impact investing that recognizes that thegeneration o long-term sustainable returns is dependent on stable,well-unctioning and well governed social, environmental andeconomic systems.13 Furthermore, socially responsible investing

typically reers to the screening o investments that may have somesort o negative impact to society or to the environment (negativescreen). On the other hand, sustainable investing reers to theactive incorporation o ESG criteria into the investment decision(positive screen); sustainable investing prioritizes fnancial returnsabove social or environmental returns. While certainly impactul,these activities are not impact investing by defnition given thatthey do not intentionally and explicitly set out to deliver the dualobjective o social/environmental outcomes and fnancial returns(which may be below market, at market or above market).

Do impact investments generate below-market fnancial returns?Impact investing is unique in that the investor may be willing toaccept a lower fnancial return in exchange or achievement o asocial outcome; mainstream investors have thus oten assumedthat impact investmentsalways generate below-market returns.This is not true.

Although it is too early to determine the realized returns o manyimpact investments, there are numerous instances when marketreturns are targeted in addition to social outcomes. Figure 4illustrates that 35% o impact investment unds target internalrates o return (IRR) above 20%. Like other investments, therate o return will vary based on various actors, such as sector,geography, fnancial instrument and investor type.14 Additionalwork needs to be done in order to quantiy theactualreturns thatinvestors have achieved in impact investing.

Does impact investing conict with an investment committees

fduciary responsibilities? Impact investing need not conict withfduciary responsibilities; investment committees must considerthose responsibilities as they crat strategies and processes tomanage investments that target fnancial returns and superiorsocial perormance. For most institutional investors, acceptingsocial returns that imply long-term fnancial concessions will notbe acceptable. However, as described above, impact investingdoes not imply a trade-o between social outcomes and fnancialreturns, but rather supports the simultaneous dual objective oboth social impact and fnancial impact.15 In certain instances,social objectives may in act create long-term sustainable fnancialreturns.

Figure 4: Targeted Net Internal Rate o Return (IRR) o ImpactInvestment Funds

Note: (1) 176 unds were assessed in April 2013 (2) Targeted returns are notnecessarily an indication o realized returns, (3) The targeted returns above represent asignifcant range o investment instruments, including but not limited to private equity,venture capital, real estate, fxed income, etc.Source: GIIN, ImpactBase, Deloitte Analysis

35%

12%

35%

18%Less than 6%

6% - 10%

11% - 20%

Greater than 20%

13

United Nations Principles or Responsible Investment. To learn more, visit: http://www.unpri.org/introducing-responsible-investment.14 For example, the investment return over the last 15 years was 11.6% or US Private Equity, compared to 24.7% or US Venture Capital, and 4.5% or public equities (S&P500) (Source: Cambridge Associates LLC (July 2013): US Private Equity and Venture Capital Funds Outpaced Public Equities in the Final Quarter o 2012).15 Some investors (e.g. Vital Capital) have had success by having two separate teams (i.e. one or fnancials and one or impact) manage the investment rom initial screeningthrough investment committee approval.


9/40


Table 2: Spectrum o Business Model Risk

Some investors may well be willing, orindeed require, some trade-o betweenreturn and impact. Others will seek outopportunities where return ullycompensates or risk. Both play

important roles. While the ormer canprovide higher-risk capital to und earlystage social ventures, small scaleentrepreneurs, etc., the latter can providecapital at much greater scale to undsustainable growth.

Manuel Lewin, Head, Responsible Investment, InvestmentManagement, Zurich Insurance Group, Switzerland

Spotlight on the Denition

Are there enough investable deals in impact investing?

One key area o debate among practitioners within the impactinvesting sector relates to whether investments made bymainstream investors should be considered impact investmentsat all. This point o view argues that it is the lack o commercialor mainstream capital that distinguishes impact investing

rom traditional investing, and that impact investors can bemost catalytic by providing early-stage risk capital that helpsentrepreneurs de-risk business models that may not be consideredinvestable by commercial capital. Once these business modelsare de-risked, entrepreneurs can scale these models by tappingcommercial capital (at which time, according to this point o view,the investment is no longer an impact investment).

This report broadens the lens and argues that impact investmentsare all investments that intentionally seek to create measurablesocial or environmental value, regardless o the stage o maturityo the enterprise. There are ways or investors to be catalytic insectors and geographies and among populations where businessmodels have already begun the process o being de-risked and

where traditional investors may already be active or more likely tobecome active. Table 2 outlines a spectrum o business model riskand the generalized characteristics at each stage. Organizationswith revenue models that have not yet been proven will likely notbe able to attract commercial or mainstream capital and will likelyrequire subsidized capital and technical assistance (Stage: HighRisk).

On the other hand, organizations with proven revenue models andde-risked business models will likely be better equipped to attractcommercial or mainstream capital (Stage: Limited Risk). Thisreport includes all organizations across the entire risk spectrumoutlined in Table 2 within the defnition o impact investing so longas the investments are intentionally made to achieve social and

environmental objectives and the progress towards achieving thoseobjectives is actively measured and reported.

Note: This spotlight intentionally ocuses at the frm-level; there is a case to be madeor dierent types o capital to be provided at the sector-level as well. OmidyarNetwork makes a compelling case or the need or sector-level ocus and investmentin order to achieve the greatest reach and have the greatest impact. To learn more,

reerence: Priming the Pump (September 2012), Omidyar Network.

High Business-

Model Risk

Low Business-

Model Risk

Limited Business-

Model Risk

Description

Business model has not been

de-risked

Revenue and profitability

have not been generated

Business model has begun to

be de-risked

Revenue and profitability are

volatile

Business model has been

effectively de-risked

Revenue and profitability are

proven and stable

Presence of

Commercial Capital

Commercial capital is largely

absent in these markets

Some commercial capital is

active in certain sectors

Commercial capital is actively

investing in these markets

In Order to Scale

Business Model

Technical assistance

(including human capital)

Market / capacity building

Both technical assistance

and capital infusion

Capital infusion

Expertise and human capital


10/40


This section attempts to evaluate the current state o the impactinvestment sector. Section 3.1 assesses the growth estimatesor the sector and compares these to the rates o growth thatsustainable investing displayed over the last 20 years. Section 3.2describes participants that are active in the impact investmentecosystem. Section 3.3 provides two examples o institutionalinvestors that are incorporating an impact investing approachinto their portolio management practices, and Section 3.4describes how impact investments are made across the variousasset classes. Section 3.5 attempts to gauge the sentiment omainstream asset owners towards impact investing and presentsresponses to a survey conducted by Deloitte o one key type omainstream asset owner: US-based pension unds. In summary,while the impact investment sector is still early stage and will needto grow aggressively in order to meet growth rate expectations,leading mainstream investors have begun to allocate capitalto investments creating social and environmental value. Moreimportantly, these investors expect to increase their allocation ocapital to impact investments in uture years.

3.1 Harnessing the Hype

Since the term was frm coined in 2007, many leading proponentso impact investing have estimated the potential size o the sector.In 2009, the Monitor Institute estimated that the impact investmentmarket could potentially reach US$ 500 billion by 2020 (or 1%o total managed assets, estimated at US$ 50 trillion).16 In 2010,JP Morgan and Rockeeller Foundation sized the bottom-o-the-pyramid market opportunity across fve sectors and estimated thatthe impact investment sector could reach US$ 400 billion to US$1 trillion by 202017. And in 2012, the Calvert Foundation ormed anestimate through a representative survey o investment managers,applying prospective adoption rates to a global investmentmanagement industry o US$ 26 trillion, and reached a marketpotential o US$ 650 billion.18

3. Impact Investment SectorAssessment

At a present conservative market size o approximately US$25 billion,19 the impact investment sector will need to grow byapproximately 53% annually to reach US$ 500 billion or 69%annually to reach US$ 1 trillion by the year 2020 a potentiallydifcult eat given that the sustainable investing market in theUnited States grew by 11% per year since 1995 (see Figure 5).20

Although sustainable investing is not the same as impact investingand the growth dynamics could be very dierent, ew sectorshave sustained growth rates above 50% per year.21 In order or theimpact investment sector to realize its potential, mainstream assetowners and asset managers will need to begin to allocate a portiono their portolios to the sector.

16 Jessica Freireich and Katherine Fulton (2009): Investing or Social and Environmental Impact, Monitor Institute.17 Nick ODonohoe, Christina Leijonhuvud, Yasemin Saltuk, Antony Bugg-Levine, and Margot Brandenburg (2010): Impact Investments: An Emerging Asset Class, J.P. Morgan,Rockeeller Foundation, and the Global Impact Investing Network.18 Calvert Foundation (2012), Gateways to Impact.19 According to Perspectives on Progress: The Impact Investor Survey (J.P. Morgan and the Global Impact Investing Network), 51 impact investment unds each expect to raisean average o US$ 112 million in 2013 (median o $US 60 million); given there are approximately 250 global impact investing unds, a crude estimate o the market size is likelybetween US$ 15 and US $28 billion. This is likely a low estimate given it only includes certain asset classes (e.g. venture capital, private equity, etc.) and excludes others (e.g.green bonds, inrastructure, etc.). Furthermore, CGAP estimates that in 2011 cross-border unders committed at least US$ 25 billion to microfnance and fnancial services to thepoor (see: Current Trends in Cross-Border Funding or Microfnance (December 2012), CGAP). Although not all o these investments would be considering impact investments, itconfrms that an existing market size o US$ 25 billion may be understated.20 The impact investment sector is starting rom a smaller base so it may be possible or it to achieve the implied growth rate.21 Since 2003, social network game development grew by 134% per year; e-book publishing by 88% per year; social networking sites by 74% per year; and online ashionsample sales by 56% per year. Source: Top 10 Fastest Growing Industries (April 2013): IBISWorld.

$639

$1,185

$2,159$2,323

$2,164$2,164

$2,711

$3,069

$3,744

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

1995 1997 1999 2001 2003 2005 2007 2010 2012

Billions($USD)

ESG Incorporation Shareholder Resolutions

Total Sustainable Investing

CAGR (17years) = 11.0%



Figure 5: Sustainable Investing in the United States, 1995-2012

Source: US SIF Foundations 2012 Report on Sustainable and Responsible InvestingTrends


11/40


22 US SIF Foundation (2012): Report on Sustainable and Responsible Investing Trends in the United States.23 UN Principles or Responsible Investment (UNPRI) (April, 2013): PRI Fact Sheet Key Achievements, http://www.unpri.org/news/pri-act-sheet.

72% 72%67% 67% 64%

53%

22%

0%

20%

40%

60%

80%

Client Demand Mission Social Benefit Risk Returns Fiduciary Duty Regulatory /Legislative

Along with aggressive growth expectations, interest in sociallyconscious investment strategies is indeed growing. The USSIF Foundations2012 Report on Sustainable and ResponsibleInvesting Trends revealed that client demand is the number onereason why more money managers are incorporating ESG criteriainto their investments (See Figure 6). According to the same report,11.3% o assets under management in the US were engaged insustainable and responsible investing practices in 2012.22 Similarly,the United Nations Principles or Responsible Investment (UNPRI)

initiative reports that its signatories hold approximately 15% o theworlds investable assets.23 Although as Section 2.2 described,sustainable investing and responsible investing are not the same asimpact investing, trends in these markets can provide indications othe potential trends or impact investing.

There seems to be powerul but latentdemand among retail investors or impactinvestments. But many investors arewaiting or their clients to ask or it. Myguess is i you build it, they will come.

Elizabeth Littlefeld, President and Chie Executive Ofcer,Overseas Private Investment Corporation (OPIC), USA

Figure 6: Reasons or Incorporating ESG Criteria into Investments, % o Money Managers Surveyed

Source: US SIF 2012 Trends Report, n = 129


12/40


3.2 Impact Investment Ecosystem: The Landscape

Today

In order or the impact investment market to reach its potential,the ecosystem will need to progress rom the margins and intothe mainstream. Some mainstream investors are already making aplay in impact investing. To note a ew examples, Credit Suisse israising a US$ 500 million und o unds that will invest in agriculturalopportunities in Arica, Deutsche Bank successully closed a US$

15 million Eye Fund or ophthalmological treatment in 2010, JPMorgan established a Social Finance unit in 2007 that actively co-invests in impact investment unds, and UBS developed an internalposition dedicated to developing impact investment products orits clients. Despite these eorts, the ecosystem is still quite earlystage, ragmented and largely comprised o niche players.

Although the impact investment ecosystem is best understood atthe country and sector level,24 the Mainstreaming Impact Investinginitiative analysed the ecosystem globally to better understandwhere common gaps and pain points exist. Each segment o theecosystem, graphically illustrated in Figure 7, is described below.

Figure 7: The Impact Investment Ecosystem

Financial

Services

Tracks flow of capital

Tracks relationship

Key

Capital Providers

stegraTtnemtsevnI

Fund Managers

Investment

Funds

Depository

Institutions

FinancialIntermediaries

Wealth

AdvisorsDirect Investment

Investment Return

Fees

Debt

Capital

Principal &

Interest

Debt Capital

Principal & Interest

Investment

Net Return

Investment

Gross Return

Financial

Services

Fees

Technical Assistance

Fees

Pension /Sovereign Funds

Endowments /Foundations

InsuranceCompanies

Hedge Funds /Mutual Funds

Retail Clients(< $100K)

Mass Affluent($100K-$1MM)

HNWIs($1MM-$50MM)

UHNWIs($50MM-$100MM)

Family Office($100MM-$1B)

Billionaires(>$1B)

DevelopmentFinance

Institutions (DFIs)

Other Intermediaries(Consultants, Lawyers,

Service Providers)

Capital Providers: As illustrated in Figure 2 on page 6, the capitalproviders that are most active in the impact investment sectorare high-net-worth individuals and amily ofces. High-net-worthindividuals and amily ofces have exibility and a high level odiscretion when making investment decisions. In many instances,they will have more autonomy than other capital providers;similarly, they oten have ewer stakeholders to manage. Oten,one or two amily members may drive the investment decision asopposed to a ormal investment committee. Even larger amily

ofces have experienced increasing demand or impact investmentoerings. For example, BSW Wealth Partners, an independentwealth adviser and multiamily ofce, grew its assets undermanagement rom US$ 225 million to US$ 736 million in 10 yearsater deciding to oer an impact investment alternative in all assetclasses.25

Development fnance institutions are also leading capitalproviders in the impact investment market. Generally, theypreer to be catalytic and provide anchor unding, and thus aremost active or frst-time unds or investments. For example,the Arican Development Bank (ADB) Group provided a US$100 million anchor investment into Credit Suisses $US 500million Agvance Arica Fund as a means to catalyse investment

24 For example, Root Change conducted an ecosystem mapping exercise in Mexico (called the Mexican Impact Investing Sector Mapping Project) and identifed organizationsworking in impact investing in Mexico, mapped their relationships and captured data about the market such as available capital, best practices, etc. To learn more, visit: http://www.giimap.org.25 Leila Boulton (April 23, 2013): MFO Thrives on Impact Investing Focus.


13/40


26 Arican Development Bank Group (May 22, 2013): ADB Sponsors Fund o Funds or Agribusiness in Arica Board Approves Equity Investment o USD 100 Million inAgvance Arica.27 Inter-American Development Bank (June 18, 2008): IDB partners with IGNIA venture capital und to address needs o regions poor.28 To learn more, visit: http://www.thegiin.org/cgi-bin/iowa/resources/spotlight/58.html.29 Beth Healy (July 30, 2013): Harvard Endowment Adds Adviser Position, The Boston Globe.30 Mubadala Development Company PJSC (April 11, 2013), page 5.31 Khazanah Nasional Media Statement (April 5, 2013), page 4.32 To learn more, visit: http://www.prudential.com/view/page/public/12848.33 Christine Marie Nielsen (April 26, 2013): Investment Banks Embrace Socially Responsible Investing, TraderPlanet.

into the agribusiness sector in Arica.26 Similarly, the Inter-American Development Bank invested $US 25 million in IGNIAto spark investment into business models that serve low-incomecommunities in Latin America and the Caribbean.27 Many impactinvestment unds experience some resistance raising capitalrom development fnance institutions or second and third undswhen their investment is no longer catalytic or a specifc sector orgeography.

Foundations are a natural ft or impact investing given theirconcerted ocus on addressing key social-sector challenges.Programme-related investments (PRIs) in the United States investments made that accomplish a charitable purpose and arethus counted towards a oundations mandatory giving weredesigned with the intention o allowing private oundations to investa portion o their endowment in investments that align closely withtheir mission. Similarly, mission-related investments (MRIs) areinvestments o endowment unds that align with the oundationsmission and that target market returns. The key distinction is MRIscannot be counted towards part o the oundations mandatory 5%disbursement, while PRIs can. However, adoption o both PRIs andMRIs is limited; only 14% o oundations surveyed in 2011 holdMRIs, and just 7% hold PRIs. A 2013 survey by Indiana University

oers one potential reason: PRIs are not widely understood byoundation leaders. Furthermore, there is oten a communicationand operational barrier between the investment committee andthe programme side o most oundations. As a result, even leadingproponents o impact investing may not be investing more than5% to 10% o their endowment in impact investments. As always,notable exceptions exist. The KL Felicitas Foundation allocatesover 85% o its portolio to impact investments, and the F.B. HeronFoundation plans to invest 100% o its endowment to achieve itsmission.

Pension unds, insurance companies and other liability-constrained

investors are much less active investors in the impact investmentsector, especially with respect to those investments that may

deliver below-market risk adjusted fnancial returns. I there is anexpected trade-o between proft and purpose, liability-constrainedinvestors will not invest given their fduciary responsibilities.However, in instances when there is no expected trade-o, certainliability-constrained investors are beginning to allocate capitalto impact investments. Section 1 highlighted both PGGM andZurich Insurance as notable exceptions. TIAA-CREF is a notableUS-based exception that actively invests in corporate social realestate (e.g. aordable housing and sustainable development),global microfnance and insurance, and community banks.28 Asthe constraints that are described in Section 4 are addressed,more liability-constrained investors will potentially consider impactinvesting as a viable investment approach. The potential or theimpact investment sector to scale is contingent upon appealing to

these investors in a more compelling way.

University endowments, although representing only a very smallportion o global assets under management, are not activein impact investing. This is likely driven by the misperceptionregarding the returns that impact investments generate andbecause the primary objective o the investment committee is topreserve and grow the endowment to und uture generationso education (indeed animpactulcause). However, universityendowments may begin to incorporate socially responsibleinvestment strategies into their investment process when the

right impetus emerges, perhaps indicating that with the rightimpetus, university endowments might begin to allocate capitaltowards impact investments. For example, in 2013 the HarvardManagement Company appointed a vice-president or sustainableinvesting who is directed to overseeing the ESG-aspects oHarvard Universitys endowment investments. The position waspotentially created in part as a response to student and alumnidemand or the Harvard Management Company to managethe Harvard endowment with greater sensitivity to social andenvironmental considerations.29

Sovereign wealth unds, in general, ocus on local and nationaldevelopment and invest to ensure that long-term growthprospects are achieved. In addition, many sovereign wealth unds

establish clear social or environmental objectives. For example,the Mubadala Development Company, established in 2002and owned by the Government o Abu Dhabi, seeks to createsocio-economic benefts or citizens o Abu Dhabi.30 KhazanahNasional Berhad, the Government o Malaysias investment und,is committed to supporting important social and developmentalissues such as poverty alleviation and humanitarian support in localcommunities.31 However, despite one-o examples, sovereignwealth unds inrequently allocate capital to impact investmentunds and products given the constraints and challengesaddressed in Section 4.

Investment Funds: A common way or mainstream investors toinvest in impact enterprises is through impact investment unds.

These unds are dierentiated by their institutional context, targetsector or geography, use o subsidy and return expectations.Certain unds, such as Bridges Ventures and Bamboo Finance,make small to mid-cap growth equity investments across variousimpact sectors and are not afliated with larger institutions. Otherunds are afliated with large banks or development institutions,such as Prudential Social Investments US$ 300 million undocused on aordable housing, access to quality education andcommunity development32 and UBSs US$ 100 million impactinvestment und ocused on small enterprises in developingcountries.33 Similarly, certain unds ocus on specifc sectors,such as LeapFrog Investments ocus on fnancial services, whileother unds ocus on a certain theme in a specifc region, suchas Vital Capitals ocus on integrated community building in sub-

Saharan Arica via investments in aordable housing, collaborativeagriculture, inrastructure, healthcare and education. Generallythese unds target market returns, although many are structuredas non-proft organizations and make a mix o grants, subsidizedloans and equity investments typically into undercapitalized sectorsin rontier markets. They also oten provide pioneer unding andseed capital. Select examples o such organizations include:Acumen, Calvert Foundation, LGT Venture Philanthropy and RootCapital.


14/40


Impact investment und-o-und structures have also emerged inrecent years that may appeal to larger institutional investors giventheir relative size and opportunity or diversifcation. For example,Sarona Asset Management, a boutique investment frm basedin Canada, invests in private equity unds in high-impact sectorsin rontier and emerging markets.34 It has gained traction raisingunds rom small UK-based pension unds given Saronas fnancingstructures which include governmental guarantees on a certainportion o the portolio.

Although aggregate data on these unds is largely unavailable, JPMorgan and the Global Impact Investing Network (GIIN) conductan annual survey o impact investment organizations and capturedresponses rom 99 organizations in 2013, over hal o which wereund managers.35 In terms o geographical ocus, the majorityinvests in sub-Saharan Arica, Latin America and the Caribbean,and the United States and Canada (see Figure 8). Regardingsector investment ocus, the majority o unds invest in ood andagriculture impact enterprises, while the investment ocus o other

sectors is airly evenly distributed (see Figure 9). In terms o stageo company development that impact investment unds preer, themajority invest in growth stage companies (see Figure 10).

Figure 8: Investment Focus, Geography,% o Survey Respondents

Figure 9: Investment Focus, Sector,% o Survey Respondents

Figure 10: Investment Focus, Stage oCompany Development, % o SurveyRespondents

5%

10%

13%

16%

22%

26%

27%

32%

32%

34%

Oceana

Middle East & NorthAfrica

Europe (ExcludingEastern)

Eastern Europe,Russia, Central Asia

Global

South Asia

East & SoutheastAsia

U.S. & Canada

Latin America &Caribbean

Sub-Saharan Africa

30%

31%

36%

43%

44%

45%

46%

47%

51%

57%

Other

Info. &Communication

Tech.

Water & Sanitation

Energy

Housing

Education

Microfinance

Financial Services(Exclucing

Microfinance)

Healthcare

Food & Agriculture

9%

18%

33%

51%

78%

Mature, PublicCompanies

Seed / Start-upStage

Mature, PrivateCompanies

Venture Stage

Growth Stage

34To learn more, visit: http://saronaund.com.35 Yasemin Saltuk, Amit Bouri, Abhilash Mudaliar, and Min Pease (2013): Perspectives on Progress: The Impact Investor Survey, J.P. Morgan and the Global Impact InvestingNetwork.

Note: Respondents chose all that apply.Source: GIIN, J.P. Morgan (January 2013)


15/40


Figure 11: Geographical Location o Impact Enterprises

Source: GIIN, Iris Data Brie (2013)

Table 3: Sector Afliation o Impact Enterprises

Note: Higher percentage o Financial Services is drive by organizations rom the Microfnance Inormation Exchange (MIX) reporting data to the GIIN; may not be representativeo the global impact market.Source: GIIN, Iris Data Brie (2013)

East Asia& Pacific

12%

South Asia13% Middle

East &

NorthAfrica

3%Sub-

Saharan

Africa22%

Europe &Central

Asia13%

LatinAmerica &

theCaribbean

26%

NorthAmerica

11%

36 Global Impact Investing Network (2013): IRIS Data Brie: Focus on Employment.37 Although mainstream investors will likely invest in unds and enterprises that employ or-proft business models.

Investment Targets: The investment targets or impact enterpriseswithin the impact investment ecosystem span multiple geographiesand sectors. Figure 11 and Table 3 outline the geographical andsector afliation o the organizations that contributed data to theGlobal Impact Investing Networks IRIS initiative.36

Impact enterprises may employ a or-proft or not-or-proftbusiness model,37 consider themselves to be a social enterpriseor traditional business with a social mission, and serve thedestitute working poor at the base o the economic pyramid or theaspiring middle class. Despite these dierentiating actors, impactenterprises all commonly seek social or environmental objectivesand aggressively measure and report their progress on meeting

these objectives. In many instances, the social or environmentalobjective is intrinsic to the business model and there is no conictbetween the social and fnancial returns. In these instances, thebusiness indicators are the same as the social indicators (e.g. aninsurer that serves people living with HIV/AIDs). However, or otherimpact enterprises, the social or environmental objectives maycomplement the business model but are intentionally integratedin (e.g. a subsidization model in which the profts rom a or-proftprivate school subsidize the educational expenses or low-incomestudents). In both cases, the economic activity drives the social orenvironmental impact.


16/40


To view examples o impact enterprises or social entrepreneurs,several organizations maintain databases, including Ashoka,38

Echoing Green,39 Global Impact Investing Rating System,40the Schwab Foundation or Social Entrepreneurship,41 SkollFoundation,42 Unreasonable Institute,43 among others.

Intermediaries: Eective intermediaries can help to create liquidity,reduce risk, lower transaction and inormation costs, and acilitatepayment mechanisms (see Figure 12). Intermediaries play a pivotal

role in creating products, vehicles and investment structuresthat meet the needs o mainstream investors. In mainstreamfnance, fnancial intermediaries are traditionally the middlemenin transactions and usually include investment banks, advisers,brokers and exchanges. In the impact investment sector, thecurrent landscape o intermediaries largely comprises smalland specialized players. As described earlier, many investmentbanks are making a play in impact investing Goldman SachsUrban Investment Group, JP Morgans Social Finance Group andMorgan Stanleys Global Sustainable Finance Group are just aew examples but ew banks structure the impact investmenttransactions within their existing commercial banking operationsor reasons described in Section 4. Following are the categorieso impact investment intermediaries in the impact investment

ecosystem today.

38 To learn more, visit: https://www.ashoka.org/ellows.39 To learn more, visit: http://www.echoinggreen.org.40 To learn more, visit: http://www.giirs.org/company-search.41 To learn more, visit: http://www.schwabound.org/entrepreneurs.42 To learn more, visit: http://www.skolloundation.org.43 To learn more, visit: http://unreasonableinstitute.org.44 To learn more, visit: http://www.socialstockexchange.com.45 To learn more, visit: http://www.asiaiix.com/product-oerings-and-operations.

Exchanges/Platorms: Exchanges and investment platormshelp address the challenge that many investors ace whenseeking to invest in impact enterprises: identiying investableopportunities. While stock exchanges have been acilitatingtransactions or centuries, the frst SocialStock Exchange wasofcially launched in London in 2013; it showcases publically listedimpact enterprises that trade on the London Stock Exchange.44Other stock exchanges are expected to ollow suit in 2013; theImpact Investment Exchange (IIX), which trades out o Mauritius,

will support listing, trading, clearing and settlement o securitiesissued by social enterprises across Arica and Asia.45 Whilesocial stock exchanges will likely not result in rapid acceleration omainstream capital into impact investments, they have the potentialto oer value to retail and institutional investors by providingaccess to liquid securities o impact enterprises. In addition toexchanges, there are many platorms that serve as inormationresources, aggregating investment data, reporting leading impactinvestment unds and providing databases that are searchable bysector, geography and asset classes. For example, ImpactBase, adatabase managed by GIIN, provides an opportunity or accreditedinvestors to search unds, view profles and contact undmanagers. Platorms like this are playing a crucial role in acilitatingtransactions as the impact investment sector grows.

Figure 12: Benefts o Financial Intermediaries

Source: Deloitte

Financial Intermediaries

- Brokers- Dealers- Commercial Banks- Investment Banks- Advisers- Exchanges- Clearing Houses

Lower Costs

- Minimize information costs- Enable lower transactional

costs

- Provide infrastructure forbuying and selling

3

msinahceMtnemyaPedivorP

- Facilitate settlement ofexchanges

- Facilitate easy exchange of

assets

4

Create Liquidity

- Maintain constant flow ofcapital in the economy

- Match needs of issuers and

investors in terms of maturity,risk, etc.

1

Reduce Risk

- Bear risk on behalf ofinvestors

- Transform risk by risk-

spreading and pooling- Allocate assets effectively

2


17/40


46 Social Impact Bonds are a pay-or-success contract in which a private investor provides the investment capital to und an intervention to address a social challenge (i.e.recidivism, homelessness, unemployment, etc.). The investor is paid a fnancial return based on the savings actually achieved as a result o a successul intervention. To learnmore, visit: http://www.socialfnance.org.uk/work/sibs.47 To learn more, visit: http://www.bcorporation.net/what-are-b-corps.48

To learn more, visit: http://giirs.org.49To learn more, visit: http://www.echoinggreen.org.50 Hope Consulting (2010): Money or Good: Impact Investing Overview.51 To learn more, visit: http://www.morganstanley.com/globalcitizen/pd/investing-with-impact.pd.52 To learn more, visit: http://www.charitybank.org/sites/deault/fles/pd/Charity%20Bank%20Annual%20Review%202011.pd.53 To learn more, visit: http://report.triodos.co.uk/en/2012/servicepages/downloads/fles/annual_report_triodos_ar12.pd.54 For urther inormation on the GABVs principles, visit: http://www.gabv.org/about-us/our-principles.

Advisers: Impact investment advisers provide consulting andstructuring services to asset managers and asset owners and helpestablish impact investing programmes, build impact investmentportolios and develop impact investment strategies across assetclasses. Certain advisers will also structure products, acilitatetransactions and create fnancial innovation in the sector. Althoughmost advisers are niche players and specialize in servicing certainsegments o the market (e.g. private oundations), there are notableinstances where leading fnancial innovations have emerged rom

these intermediaries. For example, Social Finance UK, a leadingimpact investment intermediary, launched the frst ever socialimpact bond in 2010, an innovation that has since been adopted inthe United States, Canada, Australia and the United Kingdom.46

Networks: Networks provide resources and services to grow theentire impact investment ecosystem. These may be organizationsthat convene other organizations in the sector to help promotebest practices, create partnerships and increase the scale o thesector (e.g. GIIN, ANDE, etc.). In addition to convening, manynetworks members co-invest in impact investment opportunitiesin an eort to pool capital and spread risk (e.g. Toniic, InvestorsCircle, etc.).

Rating and Certifcation Organizations: Rating and certifcationorganizations help veriy the social and environmental perormanceo impact enterprises or impact unds, thereby reducing risk byproviding objective certifcation and rating or impact investors. Forexample, B Lab a non-proft organization based in the UnitedStates certifes businesses i they meet rigorous standardso social and environmental perormance, accountability andtransparency. Currently, there are approximately 760 CertifedB Corps rom 27 countries and 60 industries.47 Similarly, theGIIRS reviews and evaluates the social and environmental impacto companies and unds, and assigns them a score based oncertain criteria across 15 categories. The standardized scoringsystem allows investors to benchmark and compare the socialand environmental perormance o various unds and companies.

Currently, there are approximately 450 GIIRS-rated companies in40 countries and 52 GIIRS-rated unds with a combined US$ 2.7billion in assets under management.48 Many organizations tracksocial and environmental perormanceindependently, throughworking with a subject-matter expert or by developing internalproprietary standards and sotware solutions. For example, PacifcCommunity Ventures (PCV) works with the Caliornia PublicEmployees Retirement System on the Caliornia Initiative and theCaliornia Endowment to track the social and environmental impacto the US$ 250 million Caliornia FreshWorks Funds. Similarly,Abraaj Capital built a sustainability index to measure perormanceyear over year and to compare companies in dierent sectorsacross markets, in a consistent manner. The index covers sixareas o sustainable private sector development, and tracks more

than 70 quantitative and qualitative data points or over 90% oinvestments that the group makes.

Accelerators:Accelerators help early-stage impact enterprises byproviding mentorship, incubation and technical assistance. Manyaccelerators also provide seed capital or growth equity to help theenterprise become sel-sustaining. For example, Echoing Greenprovides competitive ellowships to select social entrepreneurs oup to US$ 90,000 over two years to support the launch o theirorganization. In addition, ellowship recipients receive accessto strategic and fnancial support rom Echoing Greens diversecommunity and advisory board.49

Wealth Advisers: Wealth advisers provide high-net-worthindividuals and amily ofces with inormation about investmentstrategies, products and portolio structures, leveraging theinvestment platorms described above. However, relatively ewadvisers are knowledgeable about the impact investment undsand products available on the market today. In a survey conductedo over 4,000 US-based high-net-worth individuals, 50% orespondents claimed that their advisers do not recommend impactinvestment products; however, 48% o respondents claimedthat they are interested in these opportunities.50 This interest isexpected to increase as mainstream investors begin to buildplatorms that advisers can use or assessing impact investmentopportunities. For example, Morgan Stanley launched its Investing

with Impact platorm in 2012, which provides access to a suiteo investment vehicles that have been evaluated or both fnancialreturn potential and social impact.51 As client demand grows orimpact investment products, other mainstream fnancial institutionswill likely ollow suit, driving more capital into impact investments.

Depository Institutions: Depository Institutions provide debtcapital to impact enterprises. Similar to other banks, depositoryinstitutions specializing in impact investing receive retail depositsand administer loans; however, the dierentiating actor is theytypically lend to impact enterprises and the loan sizes are typicallysmaller than traditional commercial loans. A ew European lendersare pioneers in the impact investment sector. Charity Bank,headquartered in England, has lent 165 million to over 1,000

charities since 2002.52 Similarly, Triodos Bank, headquartered in theNetherlands and with over 8 billion in assets under management,seeks to enable individuals, institutions, and businesses, to usemoney more consciously in ways that beneft people and theenvironment, and promote sustainable development.53 Althoughanecdotal examples, these banks exist in a broader ecosystemo banks committed to lending to organizations that seek toachieve social and environmental objectives. For example, theGlobal Alliance or Banking on Values (GABV) is a membershiporganization comprising banks that comply with sustainablebanking principles.54 However, like other intermediaries, depositoryinstitutions in the impact investment sector are still small, nicheplayers relative to large, multinational commercial banks.


18/40


3.3 Case Studies: Examples o Mainstream

Investors in Impact Investing

As described in Section 1.2, mainstream investors inrequentlyallocate capital with the intention o generating measurable socialor environmental value. Section 4 will describe why this is thecase. However, growing numbers o institutional investors areincorporating an impact investing approach into their portoliomanagement practices; two examples are described below.

PGGM, a Dutch cooperative pension und service provider,invests part o its assets under management in investmentsthat not only contribute fnancially to the return o the portolio,but are also intended to generate measurable societal addedvalue. PGGM calls these targeted Environmental, Social, andGovernance (ESG) investments. For example, investments havebeen made in clean tech, sustainable orestry, renewable energyand listed sustainable companies. Most o these investmentsare over 100 million commitments. PGGM does not have adedicated impact investment team, but seeks these investmentsthroughout the portolio. A responsible investment department

supports the investment teams with defning what constitutesan impact investment and coordinates the impact measuremento these investments. Apart rom more mainstream responsibleinvestment key perormance indicators (KPIs), such as votingor all shareholders meetings and applying exclusion policy toall portolios, PGGM also has a KPI with some o its clients toannually increase the euro amount o total impact investments.Barriers that PGGM encounters to increase the number o targetedESG investments are the small und sizes, limited investmentscope (regions, sectors) o the unds, frst time unds withoutprior experience, and mixing asset classes within a und. PGGM,however, is looking or ways to overcome these barriers to providea valuable uture or its members and the clients benefciaries; orexample, it is looking at designing new mandates or new impact

investment products.

As a global insurance company, Zurich is directly exposed tomany o the pressing social and environmental challenges oour time, such as the potential eects o climate change or theintensive use o scarce natural resources. Zurich has a directinterest in sustainable economic growth, and the development oresilient communities. Zurich is looking to impact investments asone way to address these issues by having a targeted, positiveand measurable impact on society and the environment, butalso generating a fnancial return commensurate with risks. Suchinvestment opportunities do exist across asset classes, but toan insurance investor, the fxed income space is o particular

relevance. Green Bonds are one o the initial ocus areas, andZurich is actively working to support the development o thismarket. At the same time, Zurich is currently looking into possibleapproaches in the credit and private equity space, taking a cross-asset class view o impact investing. In this process, strongsupport rom executive leaders and dedicated responsibility arevery important. At Zurich, a small team with senior leadership isresponsible to coordinate impact investing and other responsibleinvestment activities, such as ESG integration, in closecollaboration with internal and external asset management teamsand asset class experts. In the end, responsible investment cannotbe a little something on the side at Zurich it is embedded inthe wider investment management philosophy, approach andorganization.

3.4 Impact Investing Across Asset ClassesInvestors interested in understandinghowto begin allocatingcapital to impact investments will frst need clarity about whichasset classes are most relevant or impact investing. While thenotion o impact investing may have originated in private equityand venture capital, many other asset classes oer impactinvestment opportunities; however in most cases, systematicmeasurement o social and environmental impact has only

begun to emerge in areas outside o impact private equity andmicrofnance. Most inrastructure investors, or instance, may notbe able to systematically assess how much clean water and low-carbon energy has been provided (a notable exception is obviouslysectors where development fnance institutions are active as theyemploy very stringent targets regarding social and environmentalobjectives).

This report sets out to assess the impact investing landscape andhelp mainstream investors understand the sector and investmentopportunities that it oers; select examples o impact investments

across asset classes are described below.55

Impact investors need to ask themselves,What bucket does this t into? It is akey question that must be asked in orderto help mainstream investors understandwhich asset class the investment alignswith.

David Chen, Co-Founder and Principal, Equilibrium Capital Group,USA

55 For more detailed examples o impact investments across asset classes, see Investing or Impact: Case Studies Across Asset Classes (March 2010) by Bridges Ventures,The Parthenon Group and GIIN. Also see Handbook on Responsible Investment Across Asset Classes (by David Wood and Belinda Ho), which is ocused on responsibleinvestment more broadly.


19/40


56 To learn more, visit: http://www.triodos.com/en/about-triodos-bank/what-we-do.57 To learn more, visit: http://www.ic.org/wps/wcm/connect/40d57a004851d833b735c046daa89/Green+Bond+April+2013.pd?MOD=AJPERES.

Table 6

Cash & Cash

Equivalents

Fixed

Income

Infrastructure Investment

Funds

Public

Equities

Real Estate Other Real

Assets

Investment Approach Across Asset Classes

Cash/Cash Equivalents: Investments o cash assets (such as

certifcates o deposit, savings accounts, and money market

accounts) into community banks and local fnancial institutions

that make investments specifcally into organizations that are

intentionally seeking social or environmental objectives. Forexample, Triodos Bank oers a range o liquid oerings toindividual, business and institutional customers and only lendsto and invests in organizations that beneft people and the

environment.

56

Fixed Income:Bonds with maturities ranging rom short term (lessthan one year) to long term (fve to more than 30 years) issued

by governments, corporations or fnancial institutions that result

in capital ow to impact enterprises or projects that address

social or environmental challenges. These include traditionaland untraditional bond structures. The International FinanceCorporation (IFC)s green bond, an example o a traditional bondstructure, is a US$ 1 billion three-year AAA rated green bond with

an interest rate set at three-year US treasury rates. The IFC usesgreen bonds to fnance projects that result in reduced greenhousegas emissions in developing countries.57 Unlike the IFCs greenbond, social impact bonds (SIBs) oer a airly untraditional bondstructure, and are actually more similar to structured products thanbonds.

Spotlight on Social Impact Bonds

Social impact bonds (SIBs), introduced in Section 3.2, are a pay-or-success contract in which a private investor provides the investmentcapital to und an intervention to address a social challenge, typically related to behavioural change (e.g. recidivism, homelessness,childhood obesity, etc.). The investor is paid a fnancial return based on the savings actually achieved as a result o a successulintervention (e.g. ewer people in prison save the government money; the government pays the investor out o these savings). SIBs areoten structured such that a private oundation guarantees a portion o the initial principle invested by the investor, allowing philanthropists

an opportunity to leverage their balance sheet or more impact (they only pay i the intervention is unsuccessul).

SIBs have gained momentum in recent years because they oer an opportunity to translate socially desirable goals into measurableeconomic returns; cash ow is generated as a direct result o a social outcome. In this regard, SIBs are highly structured products thatrequire a sophisticated and stable legal ramework over a long time rame and thus can be challenging to implement in rontier markets,making SIBs an extremely unique orm o fxed income. Furthermore, they are difcult to scale and typically have high transactions costs.


20/40


Investment Funds (Private Equity and Venture Capital):Investmentsmade into third-party managed unds that make debt and equity

investments into impact enterprises. Private equity is the mostcommon investment instrument used by impact investmentunds (see Figure 13).58 However, institutional investors otenfnd the direct deal sizes to be too small (see Section 4 ormore inormation), so will thus invest through investment unds.There are approximately 250 impact investment unds listedin ImpactBase, which presents oerings across asset classes,

sectors and geographies. For example, LeapFrog Investmentsmakes equityinvestments into impact enterprises that providefnancial services to low-income populations. It has a diverse seto investors including large-scale institutional investors (e.g. TIAA-CREF), development fnancial institutions (e.g. IFC), investmentbanks (e.g. JP Morgan) and philanthropic investment frms (e.g.Omidyar Network).59 LeapFrog is just one example that illustratesthe diversity o und oerings in ImpactBase.

Public Equities:Investments made into impact enterprises thatare publically traded. Given the early stage o the sector, ewpublically listed organizations exist that intentionally seek andmeasure social outcomes in addition to profts; however, notableexceptions do exist. Londons Social Stock Exchange (SSE),

introduced in Section 3.2, lists 11 publically listed companies thatmeet its criteria to be considered a social impact business.60Anadditional 12 companies are currently pending admission into theSSE. Although the number o publically listed impact enterprises iscurrently quite small, mainstream investors will have greater abilityto fnd liquid trading opportunities o impact enterprises as retaildemand increases and new social stock exchanges are created(such as IIX launched in Singapore in June 201361).

Real Estate:Investments made into sustainably managedproperties, or properties currently in development in regeneration

areas or among low-income populations, and in which social

and environmental objectives are intentionally sought, such as

smart growth, green buildings, urban regeneration, and aordable

housing. For example, Vital Capital has committed over US$200 million to build 40,000 aordable houses in six provincesthroughout Angola. The investment seeks to not only provideaordable housing units or the local population, but also provide

a ull spectrum o the necessary elements or a vibrant lie,including clean water, sanitation, power, education, social servicesand health services. These combine or better employmentopportunities, cohesion and empowerment in an integratedcommunity environment. In addition to measurable improvementsin the quality o lie o the residents, the IRR is on track to achievethe +20% target.

Inrastructure:Investments into the acilities and structures requiredor the eective operation o an economy and society, usually

involving the provision o essential physical structures and services

to populations at the bottom o the economic pyramid. Forexample, with fnancing rom a group o investors and the Kenyangovernment, the ADB fnanced a 115 million investment in

wind power in Kenyas Lake Turkana region. The project providesclean energy, reduces energy costs to consumers and connectslandlocked regions to the rest o the country through improvedinrastructure.62 Impact investments in inrastructure appeal toinstitutional investors given the size and scale oten associated withthese transactions.

Figure 13: Instruments Used by Impact Investment Funds, % o Survey Respondents

Source: GIIN,J.P. Morgan (2013)

83%66%

44%

18% 15% 14% 13% 11%0%

20%

40%

60%

80%

100%

Private

Equity

Private

Debt

Equity-

like

Debt

Guarantee Deposits

& Cash

Public

Debt

Real

Assets

Public

Equity

58 Figure 13 represents the percentage o survey respondents and not the actual dollars allocated by the investment unds; additional work needs to be done to better

understand the allocation o capital by investment unds and i it is more heavily weighted to private equity.59 To learn more, visit: http://www.leaproginvest.com/l/about/investors.60 To learn more, visit: http://www.socialstockexchange.com/impact-report.61 To learn more, visit: http://www.asiaiix.com/2013/05/nexii-and-iix-integrating-global-eorts-or-greater-impact.62 To learn more, visit: http://www.adb.org/en/news-and-events/article/adb-acilitates-energy-diversifcation-and-access-to-clean-energy-with-the-approval-o-a-eur115-million-loan-to-turkana-wind-power-project-in-kenya-11704.


21/40


Figure 14: US-Based Pension Funds Perception o Impact Investing

Note: Figure 14 visually represents respondents answer to the question: Please provide the frst two or three words that come to mind when you hear the term impactinvesting.

Other Real Assets:Identifable and tangible assets, whose value isderived rom physical properties, managed to produce long-term

value to society and the environment, as assets are not depleted

or damaged, such as sustainable orestry and agriculture. Forexample, Equilibrium Capital manages US$ 500 million and investsexclusively in real assets (e.g. croplands, orestry, and agriculturaland ood waste). The frm applies a sustainable alpha strategy inwhich assets are stewarded over the long term and considerationsacross the entire ecosystem (e.g. community and environment) are

included in the investment decision-making process.

63

Remaining Asset Classes: The most commonly targeted assetclasses or impact investing are described above; intentionallyomitted asset classes include commodities, direct private equity/venture capital, and hedge unds. These asset classes are lesscommon impact investment targets by mainstream institutionalinvestors. Commodities involve investments made into basicresources that are used in the production o other goods andservices. While opportunities may exist or trading o sustainablyproduced commodities, it is unlikely to occur in the near uture.Direct private equity/venture capital64 is a common asset class orimpact investment unds to target, but the deal sizes are usuallytoo small or most o the mainstream capital providers described

in Section 3.2. Hedge unds involve complex investment strategieso publically traded companies; given the limited number opublic listings o impact enterprises, there are currently limitedopportunities or hedge unds in impact investing.

63 To learn more, visit: http://www.eq-cap.com.64 Including direct investments into unlisted companies (direct private equity) or into early-stage companies (direct venture capital).65 Figure only includes countries reporting retirement asset values to the OECD.66 Organisation or Economic Co-operation and Development (OECD), assessed August, 2013; fgure includes total o all pension unds in the United States or 2011 (latestavailable data).67 50 pension unds responded to the survey with assets under management (AUM) totaling US$ 800 billion.68 80% o the total AUM o respondents is held by pension unds or public-sector employees, 6% by Pension unds or private-sector employees, 5% by aith-based pensionunds and 9% by other pension unds.69 Respondents were asked the ollowing question: Which o the ollowing statements most closely captures how social or environmental actors are incorporated into the

investment decision o your pension und? Answer choices were: (1) Social and environmental actors are not considered, (2) The investment decision applies a negative screen(i.e. screens out certain companies or industries given the nature o their business), (3) The investment decision applies a positive screen (i.e. intentionally invests in certaincompanies or industries or social, environmental, or governance reasons) BUT ONLY i the investment does not sacrifce expected fnancial returns , and (4) The investmentdecision applies a positive screen (i.e. intentionally invests in certain companies or industries or social, environmental, or governance reasons) AND is willing to sacrifceexpected fnancial returns in exchange or social or environmental outcomes on a select allocation o the portolio. Respondents who selected either #3 or #4 (19% o totalrespondents) were then asked: Do you actively measure and report your social and/or environmental perormance? Those respondents who answered Yes are considered tobe actively making impact investments (6% o respondents).

3.5 Voice o the Mainstream Institutional Investor

A survey was conducted o US-based pension unds in an eort tounderstand why certain investors are more active than others in theimpact investment sector. Although urther assessment should beconducted o other types o investors (e.g. insurance companies,sovereign wealth unds, university endowments, etc.), US-basedpension unds hold approximately US$ 17 trillion in assets, or~60% o global pension assets65, and thereore represent a

signifcant pool o global capital.66

O the total respondents,67

68%are pension unds or public sector employees, 18% or private-sector employees, 10% are aith-based pension unds and 4%are other types o pension unds.68The survey results indicate thatUS-based pension unds are generally unamiliar and conused bythe term impact investing.

Almost all (81%) o the respondents have heard o the termbeore, but most eel that it is another term or responsible orsustainable investing (36%) or that it is a noble way to lose money(32%). Only 9% elt that impact investing is a viable investmentapproach. As such, only 6% o respondents are currentlymaking impact investments today (see Figure 15).69 Many othe reasons are described in Section 4, but one reason relates

to investors perception about fnancial returns. Mainstreaminvestors and impact investors have varying expectations aboutthe fnancial return that impact investments achieve; 60% o surveyrespondents expect the rate o return o an impact investment tob

World Economic Forum, "From the Margins to the Main Stream", Sep 19, 2013.

Documents

Transcript of World Economic Forum, "From the Margins to the Main Stream", Sep 19, 2013.