The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism (Jossey-Bass, 2015) offers precise details on what, exactly, impact investing entails and discusses the parameters of impact investing in unprecedented detail and clarity. It presents a simple thesis: Impact investing can be done successfully. This is what success looks like, and this is what it requires. The following excerpt about market sizing has been excerpted from Chapter 2: “Raising the Curtain on Impact Investing.”
Given the breadth of activity this more inclusive understanding of impact investing encompasses, it has been difficult to size the market. In the narrowest sense, 125 respondents to a J.P. Morgan/GIIN survey in 2014 self-reported that they had made $10.6 billion of impact investments in 2013 and intended to make $12.7 billion in 2014.
Granted, this represents new investments in those two years. However, given J.P.Morgan’s particularly large megaphone, the data has left the strong impression that impact investing is a smaller market than we know it to be.
Attempts at market sizing inevitably raise the question of definition—that is, what is in and what is out. We know as a part of Collaborative Capitalism, impact investing builds on and is inclusive in some measure of the very sizable market for integrated environmental, social, and governance (ESG) factors in investment. In 2012, US SIF (the Forum for Sustainable and Responsible Investment) reported $3.31 trillion in US-domiciled assets held by 443 institutional investors, 272 money managers, and 1,043 community investment institutions applied various ESG criteria in their investment analysis and portfolio selection.
Even with the high hurdles the concepts of intentionality and accountability put in place, the following five indicative sectors of the global impact investing market provide evidence of a much larger and entrenched set of activities.
Market Sizing: 5 Sectors of the Global Impact Investing Market
1. Global Microfinance
Microfinance—the provision of small loans and other financial services to entrepreneurs and groups of entrepreneurs in places where access to banking is limited—has grown into a very significant market and is an essential mechanism for access to capital in many countries. Microfinance Information Exchange tracks data from over two thousand microfinance institutions (MFIs), the groups working with entrepreneurs on the ground, and in 2012 reported a cumulative gross loan portfolio of over $102 billion (from 1,337 reporting MFIs at the time).
In 2012 alone, funders committed at least $29 billion to support the goal of financial inclusion, of which microfinance is the largest part, an increase of 12 percent compared to 2011, according to the Consultative Group to Assist the Poor, a global network of members including more than thirty development agencies, private foundations, and national governments.
2. US Community Finance
Community finance is generally understood in the United States to encompass the work of CDFIs registered with, and subsidized by, the US Department of the Treasury for the purpose of providing banking, loans, and equity to designated low-income communities. The market is undergirded by the Community Reinvestment Act (CRA), which requires depository banks make loans and investments in underserved places where they have branches, providing a ready source of capital to CDFIs.
In recent years, however, researchers have noted a broadening of activity to encompass a range of place-based activities, including an expanded focus on such sectors as health, healthy and walkable communities, fresh food provision, and rural economic development. According to US SIF, community investing generally encompasses one of three approaches: (1) supporting needed services—for example, food access, education, child care, access to transit, access to jobs, and affordable housing; (2) supporting economic development through quality job creation and by building infrastructure; and (3) creating sustainable communities through mixed-use and mixed-income smart growth and environmentally focused community investment.
Even when limited to special-purpose vehicles like CDFIs, the market is sizable. According to US SIF, a total of 1,043 community investment institutions collectively managed $61.4 billion in 2012.
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3. Economically Targeted Investment by US Public Pension Funds
US public pension funds, the retirement systems for state and federal government employees, are huge, influential institutions. Thirteen of the forty largest institutional investors in the world are US public pension funds.
For more than twenty years, some of these funds have been making the extra effort to direct a small portion of their capital to sound investment opportunities in their local communities (that is, states where they and most of their beneficiaries reside), in an effort to generate economic development in addition to attractive financial returns—a practice known as economically targeted investment (ETI). For example, since 2008, a new law in Florida has allowed 1.5 percent of the Florida Retirement System’s $130 billion fund to be invested in Florida-based businesses in technology and other growth sectors. Fully thirty US states have laws or pension fund policies that enable ETIs. We estimate the total value of ETIs at between $10 billion and $20 billion in the United States.
4. Green Bonds
Green bonds—which link the capital raised by companies and financial institutions to environmental activities—have been attracting considerable attention and are expected to top $50 billion in 2015, according to Jim Kim, president of the World Bank.
Kim should know. In 2008, the World Bank set aside a portion of its AAA-rated bonds to be used to mitigate climate change or help affected people adapt to it, giving them the name “green bonds,” and has issued approximately $4 billion of the notes.
Eligible uses include solar and wind installations; funding for new technologies that reduce greenhouse gas emissions; rehabilitation of power plants; initiatives improving the efficiency of transportation; waste management (methane emissions) and construction of energy-efficient buildings; carbon reduction through reforestation; food security improvement and stress-resilient agricultural systems; and sustainable forest management.
More recently, a 2014 Economist article noted the following green bond news:
• On March 19, 2014, Unilever issued a £250m ($415 million) bond earmarked for reducing waste, water use, and greenhouse gas emissions.
• In November 2013, a French energy group, EDF, raised €1.4 billion ($1.9 billion), the first euro-denominated green bond from a large company.
• In 2014, Toyota is expected to raise $1.75 billion to help finance sales of car loans for hybrid and electric vehicles.
5. International Development
International development above and beyond the provision of direct aid, and in addition to microfinance, is a significant part of impact investing, led by private sector–facing national and multilateral development finance institutions (DFIs) such as the International Finance Corporation, the Inter-American Development Bank, Asian Development Bank, the Overseas Private Investment Corporation (United States), BNDES (Brazil), CDC Group (UK), DEG (Germany), and FMO (Netherlands).
These organizations typically provide long-term loans for large infrastructure projects and public-private partnerships, but also, increasingly, development through support for small and medium-sized enterprises (SMEs). The work of Overseas Private Investment Corporation (OPIC), in the United States, is prototypical of a recent surge of interest in impact investing.
In 2011, OPIC issued an impact investing request for proposals and, after having received eighty-eight responses from intermediaries, deployed $285 million to six funds. In 2014 OPIC reviewed its portfolio of investments in the period 2008–2012 through the lens of impact investing—narrowly defined as “investments with partners whose very business models aim to address social or environmental problems while generating sustainable financial returns”— and tagged 129 investments valued at $2.4 billion as impact investments.
Impact investments by all DFIs would easily be in the order of tens of billions of dollars.
The Scale of Impact Investing in Indicative Markets
- Global microfinance: $102 billion
- US community finance: $61 billion
- US economically targeted investment: $10–$20 billion
- Green bonds: $50 billion
- International development: $20 billion
Taken together, investing intentionally for measureable, positive social and environmental outcomes represents a market in the hundreds of billions of dollars—miniscule in the context of global capital markets totaling hundreds of trillions of dollars, but significant nonetheless.
The growth trajectory of the market has also been a big draw for the large institutions taking a greater interest in impact investing. According to J.P.Morgan, the profit opportunity for investments in housing, rural water delivery, maternal health, primary education, and financial services for the portion of the global population earning less than $3,000 per year will total from $183 billion to $667 billion.
Excerpted with permission of the publisher, Wiley, from The Impact Investor by Cathy Clark, Jed Emerson, and Ben Thornley. Copyright (c) 2015. All rights reserved. This book is available at all bookstores and online booksellers.
Read the next excerpt in this series: 15 Companies Making a Difference with Impact Investing
Check out the full series from The Impact Investor: Your Guide to Impact Investing