What It Means to Be an Impact Investor
By Tessa Hebb, Director, Carleton Centre for Community Innovation, Carleton University and Advisory Board Member, The Conference Board Initiative on Corporate Philanthropy
In the first report from The Conference Board’s Giving Thoughts series, Paul Brest and Kelly Born outlined the various concepts of “impact” in impact investing, adding an important publication to the limited academic work in the field. The report highlighted some key points about investor intent, points that were also outlined in a special issue of the Journal of Sustainable Finance and Investment in 2013.
Impact investing is considered an important step in creating innovative ways to address social needs while at the same time generating financial return. Often institutional investors (both asset owners and asset managers) believe that impact investing simply refers to microfinance. While impact investing includes micro-finance opportunities, it is much more than providing small loans to individuals in developing countries.
Impact investing occurs any time there is a deliberate decision to achieve both a financial return and an ancillary social and/or environmental benefit from the investment opportunity. It spans multiple asset classes that include real estate, private equity, infrastructure, public equities and fixed income. Some, including Nick O’Donohoe, Christina Leijonhufvud and Yasemin Saltuk, go so far as to suggest that impact investing is an emerging asset class in itself.
The conceptual framework that underpins impact investing is best captured by the “Blended Value Proposition” first articulated by Jed Emerson in the early 2000s. This proposition states: “All organizations, whether for-profit or not, create value that consists of economic, social and environmental value components—and that investors (whether market-rate, charitable or some mix of the two) simultaneously generate all three forms of value through providing capital to organizations.” Understanding the concept of blended value is key to understanding the implications of impact investing for both the providers of capital and its recipients.
Impact-first investors
The Monitor Institute notes that those who seek social and environmental impact above financial return are called “impact-first” investors. Paul and Kelly refer to these investors as “concessionary socially motivated” investors. Whatever the term, these investors are prepared to take lower returns on their capital in order to achieve the social and environmental impacts they seek. Such investors are generally found in the philanthropic community.
U.S. foundations such as the Ford Foundation and Rockefeller Foundation have long been making these types of investments (also known as Program Related Investments - PRIs). While most PRIs require the principal to be repaid, the cost of capital for the investee is well below market-rates. A great example is the below-market Calvert Foundation’s Community Investment Notes. Below-market investments enable organizations to launch new initiatives, generate earned income, and gain a track record. Such investment reinforces the shift from “donation” to investment for both the investor and the investee.
Finance-first investors
In contrast, a “finance-first” impact investor—or “nonconcessionary socially motivated” investor—is seeking a market rate risk-adjusted return on investment and is willing to take less social and environmental return to achieve this financial outcome. Institutional investors with fiduciary duty are not allowed to give up financial return for corollary benefit. These “finance first” impact investors must first judge their investments on financial merits and only then can they consider additional social and/ or environmental returns.
This does not mean that they are unable to find socially impactful deals, but rather that financial returns cannot be sacrificed to achieve positive social and environmental outcomes. A good example of “finance first” impact investing is market-rate mortgages that enable affordable housing projects to be built, or clean technology firms that encourage a shift to renewable energy sources, or investment in infrastructure that provides communities with clean water, sewage systems and sustainable transportation.
Such investors include many large public-sector pension funds which make targeted investments in urban revitalization and affordable housing such as the CalPERS. Recently, foundations such as the Heron Foundation have begun to direct their core endowment portfolio toward their mission with the expectation that these investments will generate market-rate returns alongside positive social and environmental impacts.
In Balancing Risk and Return in Urban Investing, Lisa Hagerman and I state that these investments are first judged on their financial return and appropriate asset class and only when these are deemed acceptable are the additional social and/or environmental outcomes factored into the investment selection. Because impact investments generate positive externalities, they are often encouraged by governments who may also be active partners in the investment and are able to structure these opportunities to mitigate risk and provide solid financial return.
Building the impact investing market
The special edition of the Journal of Sustainable Finance and Investment provided six academic articles that address key issues in developing impact investing from a niche market activity to one adopted by large institutional investors. We frame impact investing in its broadest terms, from investment in micro-finance and social enterprise development at one end of the spectrum, to global infrastructure at the other.
We argue that seeking positive social and/or environmental returns in addition to financial returns is a viable option for investors large and small.
Impact investing is a key aspect of responsible investing and positive ESG considerations, but to grow beyond the current characterization of microfinance, a fully coordinated marketplace will be required. In partnership with government, impact investing is unlocking new and innovative ways to solve some of the world’s most pressing problems, while simultaneously providing the financial returns required by investors.
About the author:
Tessa Hebb
Director
Carleton Centre for Community Innovation
Carleton University
Dr. Hebb is the Director of the Carleton Centre for Community Innovation, and Executive Director of 1125@Carleton, Carleton University, Canada. Her research focuses on Responsible Investment and Impact Investment, and is funded by the Social Sciences and Humanities Research Council, Government of Canada. The Carleton Centre for Community Innovation is a leading knowledge producer on these topics together with non-profit and philanthropic leadership, northern communities and community economic development. 1125@Carleton is a collaboration and innovation work space at Carleton University. Dr. Hebb received her Doctorate from Oxford University.
