Impact investment: the next frontier

At less than a decade old, impact investing is quickly gaining ground. But how can social investments gain a larger share of the financial market?

Impact investing is on the rise as millennials, corporates and startups drive demand for financial returns that generate social good. But the global market, estimated at $114bn at the end of 2016, has yet to near a tipping point that could see it leverage a much larger share of all managed investments.

“There’s a long way to go,” Michele Giddens, cofounder of the UK-based Bridges Fund Management, said at a conference hosted by The Economist earlier this month. “Of the $100 trillion invested globally, just 1 per cent goes to impact investment.”

At less than a decade old, impact investing is still a fledgling sector. But its ability to deliver healthy returns and social impact has spurred financial houses such as Goldman Sachs and BlackRock, corporates and philanthropic funds to expand in the area.

“This isn’t thinly disguised CSR [corporate social responsibility] or a marketing initiative,” said Laurie Spengler, president of global advisory firm Enclude. “Businesses are recognising real, unanticipated opportunities.”

“We have to get to tipping point with the investor community. Entrepreneurs could be that tipping point.”This is in part a response to consumers – and particularly millennials – screening for brands with a double bottom-line approach, said Emmanuel Faber, CEO of Danone, one of the world’s largest food multinationals.

“It’s the corporations that will drive change,” he told the conference. “People don’t trust brands anymore. Consumers want businesses with a social mission.”

Danone in 2015 joined with Mars in a pledge to invest €120m over 10 years in an investment fund aimed at increasing the productivity of smallholder farmers. The Livelihoods Fund for Family Farming, which spans Africa, Asia and Latin America, focuses on creating sustainable supply chains for raw materials such as cocoa, vanilla and sugar.

“Our views as entrepreneurs and leaders should shape the way we do business,” said Faber. “Our companies should reflect our values.”

Impact investment is three years away from gaining critical mass, but social startups could be a trigger for change, said Ronald Cohen, chairman of the London-based Portland Trust and the Social Impact Investment Taskforce.

“We have to get to tipping point with the investor community,” he told attendees. “Entrepreneurs could be that tipping point. Ten per cent of startups are focused on social impact.”

Some 205 investors invested $22.1bn into nearly 8,000 impact investments in 2016, and plan to increase capital invested by 17 per cent in 2017, according to a Global Impact Investing Network (GIIN) report released in May.

The vast majority of respondents said their investments had either met or exceeded their expectations for both social impact and financial performance.

A majority of respondents felt the entry of large-scale financial firms into impact investment will bring in much-needed capital, but also believed there was a risk of impact dilution associated with this trend.

“We don’t want to go into the mainstream,” Nigel Kershaw, chair of the Big Issue Group, told the conference. “We should be pulling the mainstream to us. If we bend to mainstream terms, that will stifle innovation.”