Allocations to impact investing make up a small but rapidly growing part of the global sustainable and responsible investment market. In the DACH region alone allocations to impact investment augmented by 47 per cent between 2014 and 2015 according to the market report by sustainable investment industry association Forum Nachhaltiges Investment (FNG). I made an educated - and some would say optimistic - guess about 10 trends that I believe will shape the next generation of impact investing (check out Berenberg aspects No 17 for an in-depth analysis):
- Trend 1: A wider range of investors will be attracted to the impact investing field. This includes foundations that divest from fossil fuels and other harmful sectors and activities and use their endowment capital to multiply the impact of their grant making activities as well as faith based organisations that follow the Popes calls for engaging in impact and sustainable investing. It also includes pension funds, insurer and other institutional investors, some pushed by stricter government regulations, some drawn by increased market opportunities and wish for a diversified portfolio. Also noteworthy even though admittedly still small in volume is the increased interest of corporations to move beyond CSR and integrate impact strategies in their corporate venturing activities.
- Trend 2: Impact investing will become more accessible to non-institutional investors and individual citizens. Angel investors, high-network individuals and family offices, that have pioneered venture capital and impact investing approaches in many countries, receive support by an increasing number of peer networks. Depending on the regulatory environment, we expect that retail financial markets and crowdfunding platforms will soon offer a greater variety of products and services to individual citizens.
- Trend 3: Energy and agriculture investment will attract highest level of impact investing – with significant regional variations. In developing and emerging countries impact investing opportunities will be greatest where they provide access to basic services (water, energy, health, education), financial services and strengthen the agriculture sectors, whereas in developed countries more attention is on community development, housing, work integration including integration of refugees and other models that promote social cohesion. Globally, biodiversity and conservation finance is a sector that has been attracting more attention. Across sectors, gender lens investing has been making its case more strongly than ever before, and technology will continue to play a disruptive role across sectors. Once regulations are clarified, cross boarder investing has the potential to help investees replicate and scale across boarders and to open up new investment opportunities for impact investors in more advanced impact investing markets.
- Trend 4: Emerging markets remain an important destinations for – and a growing source of impact investing capital. Motivations of impact investors from developed countries to engage in developing and emerging countries remain strong (currently around 50% of allocations according to the 2016 GIIN Impact Investor Survey). Unnoticed by many, there is also the other side of the coin: increasing interest by investors based and/or originating from developing and emerging countries not only with the motivation but also with the skills, financial resources and local networks to make a real difference in their countries of origin (e.g. the foundation of Nigerian business man Tony Elumelu, pioneering Indian impact investor Aavishkaar or diaspora initiatives like Homestrings).
- Trend 5: Platforms and specialist intermediaries to strengthen market infrastructure and impact investing product development. We will increasingly see the emerging of “infrapreneurs”, platforms and exchanges to match investment opportunities and facilitate intermediation and collaboration as well as stronger financial intermediation through investment vehicles that aggregate investment opportunities, the development of innovative financial products such as social impact bonds (or pay for success notes, or Social Impact Incentives ) or the use of financial instruments that better respond to the hybrid nature of those organizations looking for funding (e.g. mezzanine finance, venture debt).
- Trend 6: Increased evidence for financial performance in impact investing. Recent research on the aggregated financial performance in impact investing showed that impact investing has the ability to achieve comparable returns to impact neutral investors (or even outperform them as in the case of samples with developing and emerging country focus) (e.g. GIIN and Cambridge Associates, Wharton Social Impact Initiative). However, critics argued in response to these studies that impact needs to be evaluated too, and a more segmented research approach was needed to take into account the variety of investment strategies, include those that do not target market rate returns.
- Trend 7: Continuous progress to refine and standardize impact measurement and certification. Efforts to improve the availability and quality of impact data, to harmonise methodologies and share practices have come a long way thanks to a pioneering individuals, organisations and fund managers as well as more recently, several international cross-disciplinary working groups (e.g. EC GECES, G7 SIITF). Future developments in this field will encourage investors to critically review their own role and impact, fostering a culture of learning, sharing and strategy development, identifying collective impact in collaborative interventions as well as planning for and assessment of indirect and/or systemic impact.
- Trend 8: Hybrid and blended financing mechanism catalyse private capital and provide for suitable forms of financing. Syndication, blended and hybrid finance mechanism applied by investorswith different risk-return-impact profiles that mix public sector and philanthropic concessional with non-concessional finance are likely to become even more important in the near future. While practiced in international development finance for years (see recent Danida report on private capital for sustainable development), hybrid and blended strategies are still less frequently applied in most developed countries.
- Trend 9: ”Leadership” increasingly recognised as critical success factor in impact investing. Researchers identified the ability of leaders and staff of an impact investor to communicate and operate across departments, markets and traditional silos and draw on multiple perspectives (multilingual leadership as defined by Clark, C et al in The Impact Investor) as one of the most critical resource of successful impact investors. As addressing and financing social challenges is not possible in isolation, cross-disciplinary and collective leadership skills are as important for impact driven entrepreneurs as they are for impact investors and some leadership program provide for this (e.g. Finance for Change, Finance Innovation Lab).
- Trend 10: Governments can play a crucial role in impact investing – if they engage. There are examples around the world who governments engaged in a variety of ways to shape local and international impact investment markets: as market builder, as commissioner of public services, as regulators, as (co) investors or as accreditor. Impact investing has also become part of the international policy agenda e.g. at the World Economic Forum, or the G7 Meetings hosted by the UK Government in 2013.
This is the summary of the in-depth analysis Impact Investing 2.0. Global drivers and Trends published in cooperation with the Hamburg based investment and private banking company Joh. Berenberg, Gossler & Co. in August 2016 (access the German version here and the English Version here).
