Impact Investing is ‘the new black’
The first time I spotted An Overview of Impact Investing [PDF] by Canadian investment managers Phillips, Hager & North, it took the form of a slick, bound booklet inserted into the information folder for a workshop on Mission Related Investing at the recent conference of the Community Foundations of Canada. It has since crossed my path in its electronic format. I thought that I would take a closer look!
The 29-page booklet (don’t worry – nearly half is devoted to appendices, so this makes for a good lunch-hour read!) is intended as a primer for institutional investors, but a wider audience can benefit. You may have been hearing rumblings on impact investing, and wish to get a quick introduction; or as someone well familiar with the concept, you may want to pass the PDF on to colleagues who need to learn more.
The term itself was first coined by the Rockefeller Foundation. There are many definitions now floating around, with ‘impact investing’, ‘social finance’, ‘mission-related investing’, and ‘responsible investing’ tending to be used interchangeably.
This paper defines impact investing as ‘a proactive approach to investing that seeks to solve social and environmental challenges through direct investment in private companies, projects and funds, while also earning a relatively attractive financial return’.
The need for impact investing is strongly articulated by the Nonprofit Finance Fund’s Antony Bugg-Levine: ‘The math is simple: the capital required to solve all of the world’s problems is in the trillions. However, private giving is just a few hundred billion globally and foreign aid contribution is currently at $150 billion. There is a major gap, but also a $50-$100 trillion dollar opportunity by tapping into global (for-profit) capital markets.’
The writers include in their sights ethical investing, best-in-class screening, community (local) investing, program-related investing, and microfinance; and investment types that include deposits, fixed income, real estate, and hybrid investments such as social impact bonds (a UK innovation).
Interestingly, the paper delineates two different types of investors: impact first and financial first. The former 'target social or environmental good as their primary objective, above achieving a financial return'. The latter 'prioritize the financial return objective over the nonetheless desirable social / environmental objective(s)'. Impact first investors are willing to forgo market rate returns in favour of other types of returns on investment. Financial first investors are not.
These investor types are mapped within four quadrants as follows (from page 6 of the report):
It goes without saying that there exist investment tools that meet the needs of both investor types.
We cannot assume however, that the reality of these options means that there exists a ready impact investing marketplace in Canada. After providing examples of international successes (including government support; hybrid legal structures for social enterprise; and development of infrastructure, tools, and standards), the writers suggest that Canada is still taking baby steps in this space.
The point is made that ‘the social investment industry in Canada is structured with philanthropy and profit-maximization at the two ends of the financing spectrum. The existing legislative, tax, legal and regulatory frameworks that have developed over generations to support that reality presents hurdles for the development of new mechanisms better suited to impact investing.’
Far from ending on a discouraging note, Phillips, Hager & North, through their detailed descriptions of nascent Canadian options and innovators, and more developed international ones, lead me to conclude that within a very short time, we will see a systematic impact investment system developed in our own backyard.
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