Impact investing Definition

Size: px

Start display at page:

Download "Impact investing Definition"

Blake Hamilton
5 years ago
Views:

1 Impact investing Definition Actively placing capital in businesses and funds that generate social and/or environmental good and a range of returns, from principal to above market, to the investor Source: The Parthenon Group and Bridges Ventures. Investing for Impact: Case Studies Across Asset Classes (March 2010). 1

2 Impact floor Impact investing Combining financial returns and impact Financial return Profitmaximizers Financial floor Impact investors Philanthropists Social/environmental impact Source: Adapted from Monitor Institute, Investing for Social & Environmental Impact: A Design for Catalyzing an Emerging Industry (2009). 2

3 Impact investments across asset classes Cash Deposits Senior Loans Subordinated Loan funds Line of credit Fixed income Bonds Bond funds Asset-backed securities Public equity Screened funds Direct public equity Alternative assets Direct private equity Private equity funds VC funds Grants Recoverable grants Guarantees/ credit enhancement Belowmarket loans Community development venture capital Fund of funds Buyout funds Hedge funds Revolving loan funds Real estate Gap financing First-loss loans Philanthropic return Financial return 3

4 Responsible investment toolbox BELOW-MARKET-RATE TOOLS Grants Recoverable grants Guarantees / credit enhancement Below-market loans Revolving loan funds Gap financing First-loss loans Community development venture capital MARKET-RATE TOOLS Cash (deposits) Loans Senior Subordinated Guarantees Loan funds Line of credit Fixed income Bonds Bond funds Asset-backed securities 4

5 Top impact investment fund managers as identified by ImpactAssets Group Asset Class Focus Absolute Portfolio Management Bonds Microfinance Accion International Private equity Microfinance Bank of America Capital Access Funds Management Total assets of $250 million+ Private equity Small/medium business development Blue Orchard Finance Notes, private equity Microfinance Bridges Ventures Private equity Education, health, conservation, small/medium business development Calvert Social Investment Foundation Notes Microfinance, fair trade Developing World Markets Notes, private equity Microfinance EnerTech Capital Private equity Clean tech, alternative energy, microfinance Incofin Investment Management Notes, private equity Microfinance Nonprofit Finance Fund Notes Nonprofits Small Enterprise Investment Funds Notes, private equity Small/medium business development Triodos Investment Management Notes, private equity Microfinance, clean tech, fair trade Source: ImpactAssets 5

6 Potential invested capital to fund selected BoP businesses over the next 10 years Sector Potential invested capital required (US$ billions) Potential profit opportunity (US$ billions) Housing: Affordable urban housing $214-$786 $177-$648 Water: Clean water for rural communities $5.4-$13 $2.9-$7 Health: Maternal health $0.4-$2 $0.1-$1 Education: Primary education $4.8-$10 $2.6$11 Financial Services: Microfinance $176 Not measured Source: J.P. Morgan, Impact Investments An Emerging Asset Class, 29 November

7 Major opportunities for impact investing Affordable housing Rural water delivery RETURN IMPACT Maternal health Primary education Microfinance Sources: J.P. Morgan, Impact Investments: An emerging asset class ; GIIS 7

8 Mission-related investment (MRI) Definition Investing a foundation s endowment with the intention of: Advancing the foundation s mission Earning a market-rate financial return Using both investment and grant dollars increases impact Funds are recycled, extending reach of philanthropist 8

9 Program-related investment (PRI) Definition Concessionary investment made by foundations to support charitable activities Examples: Loans, loan guarantees, equity investments, recoverable grants, among other financial tools PRI has a legal definition for private foundations; they can use PRIs toward their annual required 5 percent payout if: Primary purpose is to advance the foundation s charitable objectives Production of income or appreciation of property is not a significant purpose Funds are not used to lobby or for political purposes 9

10 Community Reinvestment Act Definition Passed in 1977 U.S. federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderateincome neighborhoods 10

11 New Markets Tax Credit (NMTC) Definition Established in the Community Renewal Tax Relief Act of 2000 Provides investors (e.g., individuals, financial institutions, corporations) with a tax credit for investing in communities that are economically distressed or consist of low-income populations 11

12 Low-Income Housing Tax Credit (LIHTC) Definition Tax credit created under the Tax Reform Act of 1986 Gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans 12

History of Big Society Capital 2000 2007 Commission on Unclaimed Assets Social Investment Task Force launched

13 History of Big Society Capital Commission on Unclaimed Assets Social Investment Task Force launched 2006 Government sets up the Office of the Third Sector 2012 Launch of Big Society Capital Source: Sir Ronald Cohen 13

Banks to frontline organisations via intermediaries Dormant Accounts Merlin Banks Big Society

Merlin Banks: 200m Wholesale Investor Sector Champion Provide, facilitate or structure

14 What is Big Society Capital? BSC is a financial institution whose role is to channel funds from Dormant Accounts and Merlin Banks to frontline organisations via intermediaries Dormant Accounts Merlin Banks Big Society Capital Social Investment Finance Intermediaries Social Enterprises Dormant Accounts: 400m Merlin Banks: 200m Wholesale Investor Sector Champion Provide, facilitate or structure investment in social enterprises Support social enterprises in attracting capital Organisations that exist wholly or mainly to provide benefit to society Source: Sir Ronald Cohen 14

15 Examples of projects funded by BSC Source: Sir Ronald Cohen ThinkForward (Private Equity Foundation with Tomorrow s People New Horizons (Triodos with Greater Merseyside Connections Partnership) Social Stock Exchange Licence Fund (FranchisingWorks) Community Generation Fund (Finance South East) Target impact Working with 600 young people in Tower Hamlets over 3 years to prevent them from becoming NEET (not in education, employment or training) Working with 3900 young people in Merseyside over 3.5 years, with the aim to prevent them becoming NEET Build critical market infrastructure for social investments, enabling greater flow of funds into the sector Establish 200 franchise businesses over 5 years, which will create 800 jobs and constitute a track record of franchising as a means of tackling unemployment Support 11 communities across the UK which are small and less advantaged to develop renewable energy projects Target return 6.5% IRR for success rate of at least 80% Base case of 3900 outcomes achieves 9.4% IRR Coupon 3% pa, convertible to equity Forecast IRR of 12% Estimated IRR of 3%, up to 5% when fund is scaled up 15

16 Impact investments Definition Investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return Source: GIIN 16

17 Impact investments Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances. Source: GIIN 17

18 Characteristics of an impact investment Means of impact Agriculture Financial services Housing Basic needs and services Education Health Energy Water Process High quality job creation Utilizing BOP+ suppliers Energy efficiency Facilitating asset accumulation Source: GIIN 18

19 Who is involved? Development finance institutions Private foundations Financial institutions Pension fund managers Corporates & HNWIs IFC Gates J.P. Morgan TIAA-CREF Starbucks EBRD OPIC Omidyar Network Rockefeller Esmée Fairbairn Citibank Prudential Deutsche Bank PGGM Danone Sainsbury Source: GIIN 19

Impact investing: global examples Education First capitalized by a high-net-worth venture capitalist, the Indian School Finance Company provides loans to effective low-cost private schools so that

Foundation, and The Ford Foundation in order to attract mainstream investment banks J.P.

20 Impact investing: global examples Education First capitalized by a high-net-worth venture capitalist, the Indian School Finance Company provides loans to effective low-cost private schools so that they can expand their capacity to serve students in urban slums Urban Affordable Housing Smaller, subordinated debt and guarantee Investments were made by the City of New York, The Rockefeller Foundation, and The Ford Foundation in order to attract mainstream investment banks J.P. Morgan, Bank of America, and HSBC to capitalize which is paying for 30,000 affordable housing units in New York City. Sustainable Agriculture Impact investing fund Acumen Fund made a $2.1 million debt and equity investment in Western Seed Company of Kenya, which provides hybrid seeds that produce a 300% increase in crop yield for smallholder farmers. Source: GIIN 20

21 How big is impact investing? All Investing $60 Trillion If impact investing grows to ~1% of total managed assets, the result would be ~$600B of capital channeled towards social and environmental impact Impact Investing in 5 10 years? ~$600 Billion US Philanthropy $600 Billion Source: GIIN 21

22 Mission-related investing continuum Below-Market Investments Market-Rate Investments Source: The F.B. Heron Foundation 22

23 The Global Impact Investing Network (GIIN) Not-for-profit organization dedicated to increasing the scale and effectiveness of impact investing. Builds critical infrastructure and develops activities, education, and research that can increase the scale and effectiveness of impact investing around the world. Source: GIIN 23

24 Addressing industry challenges Many investors are not aware of impact investing 1 Outreach Search costs are high due to diversity and fragmentation of market 2 Impact Investment Funds Database Global impact investment industry lacks leadership, organization, and connectivity 3 Investors Council Investors and investees lack a consistent way of measuring social and environmental performance 4 Impact Reporting & Investment Standards (IRIS) Source: GIIN 24

25 Outreach: research and education The GIIN creates content and disseminates research to promote impact investing and advance best practices Increase Awareness Newsletter Investor Spotlight Data-Driven Research Online Resource Center Media Social Media Traditional Source: GIIN 25

26 IMPACTBASE The global, online directory of impact investment funds & products Online, informational database Early search tool Accredited investors subscribe for access Fund managers profile their impact investment vehicles and firm GIIN managed and curated Source: GIIN 26

27 IMPACTBASE Impact investment database 575+ subscribers 72% quarterly growth 1 in 3 logged-in over last 30 days 150 funds & products 16% quarterly growth ~$7.3B in committed capital, all vehicles $9B+ targeted, open vehicles Source: GIIN 27

28 GIIN: Investors council members Capital Stewardship Program Source: GIIN 28

29 IRIS Impact Reporting and Investment Standards A set of metrics that can be used to describe an organizations social, environmental, and financial performance Source: GIIN 29

30 A common language Without IRIS Company A Company B Company C Full Time Employees Full Time Employees Employees Same term, different definitions Same definition, different terms With IRIS Company A Company B Company C Full Time Employees Full Time Employees Full Time Employees Consistent terms & definitions across companies Source: GIIN 30

31 Impact reporting and investment standards My Metrics Your Metrics Full Time Employees = Full Time Employees GHG Emissions Reduced = GHG Emissions Reduced Source: GIIN 31

32 Impact reporting and investment standards First Performance Data Report Source: GIIN 32

33 33

Using Finance to Fight Global Poverty. Global Conference 2010

Using Finance to Fight Global Poverty Global Conference 2010 Using Finance to Fight Global Poverty Monday, April 26, 2010; 9:30-10:45 AM Moderator: Betsy Zeidman, Research Fellow and Director of the Center