IMPACT INVESTING FUNDS

Transcription

1 IMPACT INVESTING FUNDS Master Thesis - Tilburg University International Business Law LL.M. Master s Program Title: Impact Investing Funds Student Name: Igor Ferreira Guia Barros Student Number: U ANR: Supervisor: Prof. Mr. Erik P. M. Vermeulen Date: June 10, 2016 Place: Tilburg, the Netherlands 1

2 TABLE OF CONTENTS CHAPTER I: Introduction... 3 CHAPTER II: Impact Investing Field What is Impact Investing The Impact Investors Objectives Financial Returns Alongside Social and/or Environmental Impact How They Move Money Other Key Actors Philanthropists Social Entrepreneurs Governments Service Providers Measurement and Report How to Measure Social/Environmental Performance Key Third Party Systems Global Impact Investing Network GIIN Impact Reporting & Investment Standards - IRIS Global Impact Investing Rating System GIIRS New Corporate Forms Benefit Corporation B Corp Low-profit Limited Liability Company L3C Community Interest Company- CIC Data Regarding the Field Market Size and Number of Deals Geographical Regions and Sectors...44 CHAPTER III: Impact Investing Funds The Importance of Funds for the Field Development Four Key Elements of Successful Funds Impact DNA Policy Symbiosis Catalytic Capital Multilingual Leadership...57 CHAPTER IV: Looking Ahead Challenges for the Field Development Opportunities in the Field Investors Perspective Recipients Perspective Policymakers Perspective Fund Manager s Perspective Legal Advisors Perspective APPENDIX BIBLIOGRAPHY

3 CHAPTER I: Introduction More important than contribute to future debates or researches about the topic object of the present study, the aim of this thesis is to use the power of words to share the excitement about a new field that is already changing the way people do business and has a great potential to switch the future of capitalism. For many, the current global economy is based on a capitalistic system that brings the accumulation of capital either for those who are already wealthy individuals or those who come up with some innovative idea that is market disruptive and wisely create a corporation and keep driving their projects and companies at least until it reaches a maturity level of a business lifecycle. Yet, this accumulation occurs in detriment of exclusion and discard of the poor people or entire communities throughout the world. Moreover, the traditional model that prevail nowadays is that philanthropic contributions and government resources should focus on solve the social and environmental challenges around the globe such as poverty alleviation, water scarcity, global warming, and so on, while wealthy and traditional investors should invest their money in businesses whose goal is to maximize profits. To change these unfortunate features of the current capitalism and also this bifurcated world, framed on profit-maximizing investments and philanthropic contributions, there is an urgent need to encourage the spread of a new generation of business and entrepreneurs whose intentionally undertake to address social and environmental challenges in different geographies or business sectors while creating a capital structure and strategy that allow them to acquire financial sustainability and generate profit in their business, as well as to take advantage of mainstream investors in the private market, with its current trillions of dollars invested, who instead of first accumulate capital and then start doing charity to tackle the pressing social and environmental challenges carry the desire of start investing their capital with a clear purpose to achieve social and/or environmental impact alongside the generation of a financial return. To meet these demands, as narrated by Clark, Emerson and Thornley (2014) in 2007, on the banks of Lake Como in Bellagio, Italy, the term impact investing was coined at a Rockefeller Foundation meeting and defined as investing intentionally for measurable, positive social and/or environment outcomes 1. 1 Clark C., Emerson J. and Thornley B. (2014), p. 58 3

4 The people who coined the term impact investing knew that many aspects of impact investing have existed at least for decades with enterprises that, for instance, employed their capital and power to help the community or society where they were located or where their products or services had impact, however, they also believed that a new term was fundamental for a long-term field-building task. Although the impact investing field boosters made always clear that one of the reasons for the increasing of a latent necessity for a new investment approach was the inability of governments and philanthropists to solve the world s social and environmental challenges so far, due to factors such as limited resources and flexibility, they also always recognized that the markets will never be able to address these challenges without government and philanthropic support, as Bugg-Levine and Emerson (2011) stated that charity and government support are crucial and will remain so. They are just insufficient to the task at hand 2. Since 2007, this term has been remarkable successful, the field has grown in a fast pace and has gained support from a diverse set of leaders throughout the globe as diverse and influential as His Holiness Pope Francis who explicitly endorsed the field at Vatican s conference on Impact Investing for the Poor with a powerful message, as follows 3 : It is urgent that the governments throughout the world commit themselves to developing an international framework capable of promoting a market of high-impact investments, and thus to combating an economy which excludes and discards. His Holiness Pope Francis, Vatican, June 16, 2014 With this in mind, the present work unfolds in three parts in order to present an overview about the impact investing field, its actors with a special focus on impact investing funds and the most valuable practices regarding these vehicles and also to analyze the challenges for the field s growth and opportunities to surf in this new wave of making a difference while doing business. The second chapter Impact Investing Field examines the main characteristics of the field and its current practices, bringing the main concepts regarding what is impact investing, who are the key actors and their activities, with an emphasis on the impact investors. Then, the focus will be on how to measure the social and environmental impact and report impact investing performance describing the most important third party systems in terms of measurement and reporting which are fundamental for the field development. Furthermore, 2 Bugg-Levine, A. and Emerson, J. (2011), p. xi (preface) 3 Price, D. (2015), accessed on May 25,

5 the spotlight will be on the new corporate forms that are needed to create more credibility and to mitigate risk in order to spur the field s growth and make it more attractive and reliable to investors around the world, describing the three of the most relevant new corporate forms in the current international market. To finish, will be provided some updated data regarding the field, including estimation of the impact investing market size. The third chapter Impact Investing Funds goes towards the specific importance of funds for the field s growth and, based on the report Impact Investing 2.0: The Way Forward Insight from 12 Outstanding Funds, published in November 2013 as a result of a two-year research established in 2012 and carried out in partnership between InSight at Pacific Community Ventures, Center for the Advancement of Social Entrepreneurship - CASE at Duke University and ImpactAssets, an outcome that was also assessed in the book The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism (2014) written by the co-authors Cathy Clark, Jed Emerson and Ben Thornley, present four key best practices that are embedded in the twelve successful impact investing funds business strategy (funds listed below), which is applicable for companies and some of other actors in the field as well. The twelve funds studied are the following: Aavishkaar: India Micro Venture Capital Fund; ACCIÓN Texas Inc.; Bridges Ventures: Sustainable Growth Funds I and II; Business Partners Limited: Southern African SME Risk Finance Fund; Calvert Foundation: Community Investment Note; Deutsche Bank: Global Commercial Microfinance Consortium I; Elevar Equity: Unitus Equity Fund and Elevar Equity II; Huntington Capital Fund II, LP; MicroVest I, L.P, RSF Social Finance: RSF Social Investment Fund; Small Enterprise Assistance Funds (SEAF): Sichuan SME Investment Fund, L.L.C and The W.K. Kellogg Foundation: Mission Driven Investments. Finally, in the fourth chapter Looking Ahead the main final considerations will be presented, focused on the challenges that need to be tackled in order to achieve the field consolidation. Also, will be discussed some opportunities in the impact investing field that some key actors, such as investors, investment recipients, policymakers, fund managers and legal advisors, might take advantage with the purpose of being references or at least succeeded in their practice area as well as in the field. 5

6 CHAPTER II: Impact Investing Field The main objective of this chapter is to provide a comprehensive scenario of this fastgrowing field, with some fundamental concepts, aspects and data regarding impact investing, its actors, theirs activities, measurement and report of players performance in the field, as well as new special purpose corporate forms, such as the B Corporation in the United State. Before starting a relevant disclaimer about impact investing is required. Although is noticeable that in the past six years more people from diversified geographical regions, backgrounds and sectors throughout the globe have been writing much more about the impact investing field and its general aspects than before, considering that this field, with all the current features and tools available, is relatively new comparing with venture capital, for example, the interest of academics and researchers in the area is still emerging, is important to point out that only few books, reports, and in-depth articles and researchers published about this topic. In any event, the information, concepts and aspects provided in this chapter is basically withdrawn from the recent work and testimonies of some players, experts and leaders in the building of the field What is Impact Investing Defining exactly what an impact investment is has been largely known as fundamental for the field s development and the track and report of an industry performance. Then, as a take-off in this chapter we bring the impact investing definition developed by the Global Impact Investing Network (GIIN), the most popular definition and the one that has been already spread around many parts of world. For GIIN, impact investing is described as investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return 4. This definition is simple, straight and made in a way to allow every kind of people from different sectors or background to understand what it is and identify the basic factors that characterize the field. GIIN has been working over the past years to create standards and common language in order to accelerate the building of the field globally. For those who after read this definition still remain with some basic questions such as is there some specific location, characteristic or restriction regarding these investee companies, organization and funds where this investments can be made?, what kind of financial return are these investments seeking? or what do they mean with social and 4 GIIN (2016) accessed on May 25,

7 environmental impact?, GIIN provides some extra general and direct answers to speed up the understanding by complementing the definition above saying that 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 as well as that the impact investment market provides capital to address the world s most pressing challenges in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education. 5 The GIIN definition and answers make it clear that impact investing is a new field that is somewhere in between philanthropism and mainstream investments, blending the philanthropic and public sector social consciousness to achieve goals related to provide social welfare, equal access to basic services, community development and so on, with the private sector and traditional investors business principles of seeking exclusively on achieving financial returns with their business or investments. In other words, this new field aims to bring the business and financial expertise and huge amount of capital of the private sector and its experts and traditional investors to work in a collaborative partnership with the public sector and also philanthropic organizations in order to tackle these global complex challenges with intention while also generating an financial return for their investments. The complexity and worldwide characteristics of these challenges expose the increasing need of a huge amount of money and collaborative efforts among all the sectors of the modern society, including governments, private enterprises, philanthropists, nongovernmental organizations and wealthy individuals, since is impossible to get closer to solve any of these problems if these sectors work alone, as the history has been showing by highlighting the constant efforts of governments and charity to tackle these challenges and failing to solve throughout all these past decades. That is why this new way to approach the capitalism in the field of impact investing has been accumulating more and more people around the world excited about entering in the field and engaging in its building and consolidation. Specifically regarding the GIIN s explanation that these impact investments target a range of returns from below market to market rate, depending upon the circumstances we would like to add that the circumstances which the financial return expected depends on are basically what kind of investment is being done, besides, of course, the performance of the investee fund or company, and we will provide further details about it in the sub-chapter below. For this moment, according to Paul Brest and Kelly Born (2013) within the field of 5 GIIN (2016), accessed on May 25,

8 impact investing, we include concessionary investments, which sacrifice some financial returns to achieve social benefits, and non-concessionary investments, which expect risk-adjusted market returns or better 6, the understanding about these types of investments is that to target below market rate returns the investor should be willing to do a concessionary investment, opposed to the non-concessionary investments that intentionally seeks risk-adjusted market rate returns 7 or higher. Before get into the core characteristics of impact investing, is important to bring three other definitions of impact investing. Paul Brest and Kelly Born (2013) understand that the practice of impacting investing is actively placing capital in enterprises that generate social or environmental goods, services, or ancillary benefits such as creating good jobs, with expected financial returns ranging from the highly concessionary to above market 8, Bugg- Levine and Emerson (2011) define impact investing as investment strategies that generate financial return while intentionally improving social and environmental conditions 9, and, according to Clark, Emerson and Thornley (2014) Impact Investing is capital management in pursuit of appropriate levels of financial return with the simultaneous and intentional creation of measurable social and environmental impacts. 10 However, considering that all of them have small variations and carry the same core message we will keep supporting the GIIN s definition due to its most straightforward approach, in our opinion. As all the new fields or sectors that arise in our society, impact investing has some key characteristics that make it easier to identify internationally. GIIN affirms that the four core elements of impact investing include intentionality, investment with return expectations, range of return expectation across a range of asset classes, and impact measurement. 11 The first element is intentionality. The fact that an investor s intention to have a positive social or environmental impact through investments is essential to impact investing 12 6 Brest, P. and Born, K. (2013), accessed on May 25, As defined by the CASE Foundation, September 2014, in A Short Guide to Impact Investing, p.44, risk-adjusted returns means a concept that refines an investment s return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating, complementing that risk-adjusted returns are applied to individual securities and investment funds and portfolios. 8 Brest, P. and Born, K. (2013), accessed on May 25, 2016, however, they acknowledge they borrowed this definition liberally from the definition used in the report Investing for Impact: Case Studies Across Asset Classes, Bridges Ventures, The Parthenon Group, and Global Impact Investing Network, p Bugg-Levine, A. and Emerson, J. (2011), p Clark C., Emerson J. and Thornley B. (2014), p GIIN (2016), accessed on May 25, Ibid 8

9 is the basic difference between this new investment approach and other types of investments that also create social and environmental impact such as socially responsible investing and ethical investing. These impact investments have a proactive ultimate intention to generate positive social or environmental impact. Bugg-Levine and Emerson (2011) corroborate with this saying that simply putting capital to work in a poor country does not qualify an investor as an impact investor. Funds and firms earning a seat at the impact investment table focus on strategies that intentionally seek to uplift rather than exploit poor customers and treat impact reporting as a central business management practice not an afterthought for external reporting and marketing. 13 The second feature is that impact investing are still investments, not donations or charity, and as investments they hold an expectation to generate a financial return on capital or, at minimum, a return of capital 14. Another element is also related to the return expectation and is the large range of financial return expectations these investments have, varying from a below-market return to a risk-adjusted market rate, depending first on the intention of the investor (make a concessionary or a non-concessionary investment) and then the asset classes these investors will choose in order to seek for the return expectations they aim with impact investing, including, for example, cash, loans and equity, as illustrated below: Figure 1: Impact investing return expectations related to asset class choice Source: GIIN, The last main characteristic of impact investing is accountability what comes in the form of impact measurement and report. GIIN affirms that the impact investor has an explicit commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field Bugg-Levine, A. and Emerson, J. (2011), p GIIN (2016), accessed on May 25, Ibid 9

10 Regardless variations existing in impact measurement accordingly to investors goals and purpose, GIIN also provides some indicators, affirming that best practices for impact investing evaluation must include clearly established and stated social and environmental objectives to the relevant stakeholders; establish performance metrics and targets with regard to these objectives using standardized metrics wherever it is possible; monitoring and management of the performance of investees against these metrics/targets; and reporting on social and environmental performance to relevant stakeholders. 16 After an overview about what constitutes impact investing, we move to the terrain of key actors in the impact investing field, starting with the impact investors and the most relevant aspects regarding them The Impact Investors The impact investing universe, as with traditional investment or any market, cover a large number and diversity of actors and, more specifically, investors who varies in terms of nature of motivations, objectives, different types of risk appetite and financial expectations, assets, and so on, in such a way that they can be either individual or institutional investors and also divided between investors who own the assets that are being invested with an impact purpose, and who manage those assets. To make it easy to identify, we list here some of these investors, making clear that this list is not an exhaustive list, but an indicative one: Corporations Family offices Individuals investors, especially high-net-worth individuals Impact investing Funds Pension funds Fund managers Banks/Diversified financial institutions Insurance companies Foundations Development finance institutions (DFIs) 16 GIIN (2016), accessed on May 25,

11 To illustrate the indicative list above, we bring two examples of impact investors, one located in Brazil and another in the Netherlands: Impact Investing Fund Vox Capital Vox Capital, Brazil s first impact investing fund, is a Brazilian venture capital fund focused on innovative and groundbreaking businesses serving the Brazilian base of the pyramid population (80% of the population or 160 million people) with solutions that have a positive impact on improve their standard of living. We are focused on sectors with a more direct impact on reducing urban poverty, such as: education, health, housing, financial services and employment. Since 2009, Vox Capital has done 11 direct investments, has raised over USD 30 million. 17 Development Finance Institution FMO FMO has invested in the private sector in developing countries and emerging markets for more than 46 years. FMO mission is to empower entrepreneurs to build a better world. FMO invests in sectors where it believes its contribution can have the highest long-term impact: financial institutions, energy and agribusiness. Alongside partners, FMO invests in the infrastructure, manufacturing and services sectors. Founded in 1970, FMO is a public-private partnership with an investment portfolio of EUR 9.2 billion spanning over 85 countries, which makes FMO one of the larger bilateral private sector development banks globally. 18 Although criticized after the recently growth in the amount of information and reports available regarding business strategy and performance in the field 19, during the very beginning stage of the field building, the first default classification of impact investors applied globally was able to describe them according to their intention when deciding to carry out impact investments and was brought in a report from the Monitor Institute written by Freireich and Fulton in 2009 (as cited in E.T. Jackson and Associates Ltd., 2012). The first group, classified as impact-first investors, are those that have specific social or environmental return expectation and also have some flexibility related to their expected financial returns 20, being example of this kind of investors commonly foundations and family offices. The second, the financial-first investors have a financial return floor, and use impact 17 accessed on May 25, accessed on May 25, In the report Executive Summary of the study Impact Investing 2.0: The Way Forward Insight from 12 Outstanding Funds, Executive Summary elaborated in 2013 in partnership between PCV Insight, CASE at Duke University and ImpactAssets, the co-authors states as opposed to being financial-first or impact-first, successful funds place financial and social objectives on an equal footing by establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment., p E.T. Jackson and Associates Ltd. (2012), p

12 outcomes as a secondary premise for investment decisions 21. Usually banks, pension funds and sovereign wealth funds are financial-first investors. To exemplify the binary classification above, we bring two different impact investors from the United States: Impact-First Investor RSF Social Finance RSF Social Finance (RSF) is a financial services organization dedicated to transforming the way the world works with money. In partnership with its investors and donors, RSF has made over USD 275 million in loans and USD 100 million in grants since 1984 to for-profit and non-profit social enterprises working in the areas of Food & Agriculture, Education & the Arts, and Ecological Stewardship. 22 Financial-First Investor J.P. Morgan Social Finance (Arm of JPMorgan Chase & Co.) J.P. Morgan's Social Finance business was launched in 2007 to serve the growing market for impact investments in direct response to client interest and the increasing recognition that innovative business models can complement limited public sector and philanthropic resources by delivering market-based solutions to achieve sustainable and scalable social and environmental impact. The group publishes research to provide thought leadership to the market, commits J.P. Morgan capital to impact investments, and provides investment services to its clients Objectives Based on the fact that impact investments are investments made with the intention to generate social and/or environmental impact while producing some financial return, the impact investing field offers a wide range of opportunities for the investors, and considering that impact investors variety is also high, it seems to be obvious that the objectives will vary considerably. When these investors start to analyze impact investments options and set their investment objectives they consider factors such as business sectors (usually related to basic needs as agriculture, housing and water or basic services such as education, health, energy and financial services), geographical regions (Africa, Latin America, Asia, Middle East and India as most common), social and/or environmental impact objectives, financial exposure, return 21 E.T. Jackson and Associates Ltd. (2012), p accessed on May 25, accessed on May 25,

13 expectations and investment structures. By looking into these factors they can limit their scope and establish the investment portfolio they are willing to build and manage. For those who are not familiar with what constitute an impact objective, GIIN reports in its 2016 Annual Impact Investor Survey collected data from 158 impact investors via a very recent survey carried out between December 2015 and February 2016 regarding their different impact objectives divided between social and environmental themes 24. The most commonly targeted social impact themes (Figure 2) were access to finance (109 respondents or 68%), employment generation (94 respondents or 60%), and health improvement (82 respondents or 52%). Figure 2: Social impact objectives targeted Source: GINN (2016), p.33, With regard to targeted environmental impact themes (Figure 3), the most popular among respondents is renewable energy (74 respondents, 47% of total sample), followed by energy efficiency (66 respondents or 42%) and clean technology (61 respondents or 39%). Figure 3: Environmental impact objectives targeted Source: GINN (2016), p.33, 24 GIIN (2016), 13

14 For better understanding, besides the dualistic classification of impact investors as impact-first or financial-first presented by Freireich and Fulton in 2009, we are going to provide two other distinct analysis that are used to separate investor into categories according to their objectives, business strategy and impact in their market sector. First, the sector based approach proposed by Omidyar Network (ON) describes three categories of impact investors 25, as illustrated below: Figure 4: Types of impact investors by a sector based approach Source: Omidyar Network (September 2012), p.8 ming%20the%20pump_omidyar%20network_sept_2012.pdf Market Innovators: Entrepreneurs and teams that believe in a product or service well before its profit potential is obvious to most established investors. According to ON, the market innovators has a relevant impact in the advancing of a sector by de-risking the generic model of an innovation or product. Some of them, but not all, will be able to scale up on their own firms. The expected returns of these investors can range from higher revenue generating non-profit, such as microfinance pioneers did in the 1970s, to generation of market rates of returns commonly recognized such as Bridge Academies International did. ON also point out that returns are highly uncertain for market innovators, and these investors should have a longterm view, considering these investees can last many years to become commercially viable, and be socially motivated to take appropriate risks and invest not only financial capital required but also their knowledge and expertise, to help these entrepreneurs grow and scale up their innovative ideas. ON mention a concern related to the lack of impact investors who are willing to dedicate time, energy and money in market innovators entrepreneurs. ON brings the example of Bridge International Academies, a pioneering low-cost, high quality education for poor 25 Bannick, M. and Goldman (2012), p. 8-10, Omidyar Network 14

15 schoolchildren in Kenya, using a school in a box model that standardizes innovations in service delivery for easy replication, company that was the first of its kind there, took a high risk and, in the end, managed to de-risk the market and scaled up attracting more mainstream investors in the scaling process whilst Bridge s early investors were more philanthropic intent motivated, without market returns expectations. Market Scalers: These are more mature enterprises that enter a sector after the market innovators de-risked the generic model. Their contribution is in the acceleration of a sector s growth by scaling up individually and they also tend to refine and enhance the generic model. The return expectations here are more likely to earn risk-adjusted market rates of return than market innovators, but still take too risky in the opinion of some mainstream investors. ON emphasizes that the returns potential can be more precisely understood by investors with local and/or deep sector knowledge and also approaches an issue regarding the fact that if these market scalers investor are financially successful, they are likely to raise concerns and debates about mission drift and appropriate levels of profitability as happened with the commercial microfinance sector which succeeded serving disadvantaged populations. ON exemplifies these market scalers enterprises by telling the story of the Indian microfinance firm Equitas, which entered in the market in 2007 and scaled from zero to one million plus customers and from one to 40 million dollars in revenue in less than five years, entering in the market around 30 years after Grameen Bank that took 15 years to reach its first million customers with its pioneering model of microfinance. Market Infrastructure: These players contribute to a sector s advance by addressing common needs of industry players in a collective form, helping to build a supportive ecosystem for entrepreneurial innovation. According to ON, the market infrastructure players are often able to find ways to generate revenue from the services they provide, and sometimes can even make some reasonable profit with their activities, however, is quite unusual to see them performing huge profits. ON raises a concern related that a lack of infrastructure can disrupt an otherwise burgeoning sector, and that many times the infrastructure needs to be developed at a national level stating that it happened in India and the microfinance institutions there, due to a lack of credit bureau serving them, ended up with over-indebtedness problem, which was one of the main reasons to the microfinance crisis in the state of Andhra Pradesh. As one of the examples of market infrastructure players, ON brings GSMA s Development Fund which plays a role of industry association and works to increase access to mobile financial services to the poor, among other goals. 15

16 The second approach is the one presented by Sean Greene in 2014 through CASE Foundation s Short Guide to Impact Investing, which in analyzing the dual classification of impact investors between impact-first and finance-first as too limiting proposed the following four different profiles and strategies regarding impact investors, based on an insight on how investors have struck a balance between return expectation, how much impact they seek and risk exposure they are willing to have 26 : Blended strategies: Investors who are willing to take lower financial returns, or perhaps higher risks for an expected return, in order to have impact. These investors consider the blended social and financial return. It means that the financial return they are waving is equivalent to philanthropy. Due to this understanding, Greene analyses that delivering good financial returns along with impact may mean more risk, or at least more patience or more hands-on involvement and support, which may or may not be compensated, raising the question of whether is possible to get more impact with an investing approach or with pure philanthropy. Market rate, with impact: These type of investors look at these investments like any other, with the expectation of market rate return, but then filter for social as well. Greene exemplify these investors by telling the story of Ironwood Capital, a mezzanine fund that invests more than 50 percent of its fund in women- or minority-owned companies or in companies located in low to moderate income areas. Sector-focused: To explain what sector-focused investor means, Greene brings the important role played by The Omidyar Network (ON), that has articulated a compelling strategy of how sector-based investing can be very impactful in priming the pump for marketbased solutions. Thus, these investors are the ones who make early investments in a targeted sector in order to facilitate this sector to yield dramatic innovations that provide benefits to the sector as a whole, rather than the return accruing to one specific company. In other words, the sector-focused investors are making the early investments in the sector innovators that ultimately may yield market rate opportunities. Impact Alpha: This category of investors reject the tradeoff between social impact and financial return rather than seeing returns or impact they see returns from impact. They target investments with sustainable business models with intrinsic focus on a product or service that delivers social impact, and complement that if the businesses succeed they can deliver financial and social returns at scale. These kind of investors are affirming that impact may 26 Greene, S., (2014), p , the CASE Foundation 16

17 represent a key insight that the majority of market players don t yet fully realize or take advantage, raising the possibility of market beating returns. To exemplify impact alpha investors, Greene brings Equilibrium Capital, a fund pursuing this strategy in the real assets space. To sum up, the wide range of investment opportunities that can bring both impact and financial returns and also investors from different business sectors and practices engaging in the field create a tough job in terms of defining precisely the types of objectives that these impacts investors have when carrying out their investments. What we know so far is that all these types of classifications offer a different point of view or approach in terms of objectives and the choice between one or more of them will depends on the interests, goals and expectations of these investors themselves or the other players in the field that may collect info about the investors or the investments performed to help the fields growth and future consolidation. To this end, Saltuk at al. (2011) stated that the nature of this perceived relationship between impact and financial returns also points to the varied investment approaches investors take. Financially, some invest equity, while others make loans or facilitate third-party investment by providing guarantees. With respect to impact, some promote general economic growth or the delivery of products or services to underserved populations, while others are focused on addressing environmental issues for the broader population. 27 In order to analyze this situation quantitatively, Saltuk asked in 2011, fiftytwo survey participants about their investment thesis regarding the relationship between impact and financial returns (Figure 5). Saltuk reported that 46% of the impact investors indicated that they balance both financial return and impact in defining their investment thesis, while 33% optimize impact while setting a financial floor and the remaining 21% optimize financial returns with an impact floor. 28 Figure 5: Investment thesis Source: J.P.Morgan and GIIN (2011), p.10 o%20impact%20investment%20market2.pdf 27 Saltuk, Y., et al. (2011), p. 10, J.P. Morgan and GIIN 28 Ibid 17

18 With regard to the survey concerning primary impact objective, it worths adding two recent surveys. First, GINN survey with 158 impact investors showed that 48% of the respondents prioritize social impact, 47% affirmed they consider both in equal measure, while only 5% focus more on environmental impact (Figure 6). Figure 6: Primary impact objectives Source: GINN (2016), p.32, Second, the IRIS Data Brief with focus on impact objectives released in September 2015 assessed data from 445 organizations, reporting that 100 (almost 22%) have social-only objectives, 112 (roughly 25%) focus primarily in environmental-only objectives, and 233 (approximately 52%) consider both types of objectives (Figure 7). IRIS concluded that organizations in the sample with only social objectives tend to be slightly older, have higher earned revenue, and have more employees when compared either with environmental-only organizations or organizations with both types of objectives, what can be verified by the median numbers in these three categories. 29 Figure 7: General Characteristics of Organizations by Impact Objectives Source: IRIS and GIIN (2015), p. 05, 29 IRIS and GIIN (2015), p

19 Financial Returns Alongside Social and/or Environmental Impact Impact investments financial return expectations and corresponding financial performance vary significantly across the world since these investments are carried out in diverse regions such as develop markets and emerging markets, encompass different sectors, from education to microfinance, and can take form of different instrument types such as equity, debt, cash, and so on. This diversification in financial return expectations is addressed by GIIN which explains that some of impact investors intentionally invest for concessionary returns in order to maximize impact or to catalyze additional investment capital by accepting a riskier position in a deal. Others pursue market-competitive and market-beating returns, some of whom are bound to do so by fiduciary responsibility. 30 GIIN illustrates it by a survey carried out in 2015/2016 with 158 investors which shows (Figure 8) that most investors surveyed pursue competitive, risk-adjusted market rate returns (59%). Figure 8: Target financial returns Source: GINN (2016), p.03, The researches carried out recently in order to answer questions such as How do impact investments perform on financial terms relative to other investments? as well as the reports of funds and other players regarding their impact investment financial performs show that although the variation is high and obviously, as happened with traditional markets assets, some investments performed below market rates, other assets in determined sectors and regions presented financial returns that competed and, in some opportunities, outperformed market rates. 30 GIIN (2016), accessed on May 25,

20 In the data examined by Greene (2014) to write CASE Foundation s Short Guide to Impact Investing 31, he states that in the public markets, where has been done a significant research on socially responsible investing, the overall message is very clear social investing strategies perform pretty closely to the market as a whole. In terms of private markets, despite of the fact that there is less data and research on this, compared to public markets, he assess data published by two individual investors, the Kellogg Foundation and the KL Felicitas Foundation, on a portion of their returns. According to Greene, KL Felicitas moved from a two percent allocation to impact investments in 2006 to more than 85 percent by And a report published in 2013 that covered half of the foundation s holdings (in cash, fixed-income, public equities and hedge funds), concluded that impact investments can compete with, and at times outperform, traditional asset class strategies while pursuing meaningful and measurable social and environmental results.. However, he notes that the 2013 report did not include results from KL Felicitas investments in private equity, real assets or so-called impact first investments made in the foundation s grant portfolio. 32 Greene also analyzes, what he considers an important benchmark, how actual returns are performing relative to the expectations of investors or fund managers themselves. To provide data specifically about it, he shares the research released by J.P. Morgan and GIIN in early 2013, which tracked the progress of close to 100 investors (public and private), who in aggregate manage over $35 billion of impact investments, two-thirds of whom were pursuing market rate returns. Of those surveyed by J.P. Morgan and GIIN: 68 percent said their investments were meeting their expectations for both social and financial returns; another 21 percent said their investments were outperforming ; and the majority of investors reported they had at least one home run an investment that significantly outperformed expectations while delivering the intended impact. Finally, the report suggested that organizations investing at significant dollar levels are satisfied with their financial returns, what is clearly an important evidence of the impact investing sector s ability to deliver results at scale. 33 One of the most recent data found about impact investors performance is in the Impact Investing 2.0 report and the following book The Impact Investor, which shows that the majority of the twelve funds listed in Chapter I above have performed well relative to their 31 Greene, S., (2014), p. 36, the CASE Foundation 32 Ibid 33 Ibid 20

21 investors financial return expectations, and also that none of the investors of all twelve funds has never lost a dime from their investments. Regarding the expected returns of the twelve funds investors, Clark, Emerson and Thornley (2014) reported that seven of the twelve funds have commercial investors and were seeking a risk-adjusted market rate of financial return. They usually had market benchmarks against which to judge their performance and were expected to exceed them. For the other five funds, the accountabilities were no less stringent: providing to investors the interest rates they had promised and maintaining the appropriate risk and capital profile in order to enable that outcome. 34 In the financial performance of the twelve funds presented below (Figure 9), is possible to separate these funds into three categories for the purpose of examining their performance. In the aggregate, emerging market equity, hybrid and debt funds showed a net internal rate of return from 3 to 22 percent, developed market equity and hybrid funds returned from 10 to 14 percent, and social debt funds returned 0 to 3 percent, without ever losing their investors a dime in the words of Clark, Emerson and Thornley (2014). 35 Figure 9: Fund Investors and Financial Performance of the Twelve Funds Source: Clark C., Emerson J. and Thornley B. (2014), p Clark C., Emerson J. and Thornley B. (2014), p Ibid 21

22 To give specific examples of these twelve funds, Greene (2014) analyzed two of them in CASE Foundation s Short Guide to Impact Investing 36 : Elevar Equity, in San Francisco, CA, and Bangalore, India, reported a 21 percent internal rate of return (IRR) for its $24 million Unitus Equity Fund, though much of that came from the controversial IPO of SKS Microfinance in India ; and Huntington Capital Fund II, in San Diego, CA, a growth capital or mezzanine fund, reported a 13.8 percent net IRR on its investments in small and medium businesses in underserved areas of the western U.S. To conclude, the most updated data regarding field financial performance relative to expectations is provided by GIIN in its 2015/2016 survey spanning 158 organizations (Figure 10). The respondents reported that portfolio performance is overwhelmingly meeting or exceeding investor expectations for both social and environmental impact (99%) and financial return (89%), in investments executed in emerging markets, developed markets, and the market as a whole. Figure 10: Performance relative to expectations Source: GIIN, 36 Greene, S., (2014), p. 37, the CASE Foundation 22

23 How They Move Money Impact investors move their money or, in other words, carry out their investments, in many different forms commonly used, applying varied funding structures such as equity, debt, cash deposits, guarantees, grants and real assets. These forms are also common in traditional investments and in impact investments are utilized generally to help a business to grow. Concerning to equity and debt investments, the most common in impact investments, Saltuk (2011) explained equity investments allow the investor to put capital into the organization without requiring regular dividend or interest payments, but dilute the ownership stake. Debt investments, on the other hand, will usually require regular coupon payments but will not dilute ownership. 37 In the same line, to help people to understand more about these financing forms, in a Credit Suisse report written by Catherine Clark in partnership with other co-authors in , was presented a table with a variety of financing instrument that social entrepreneurs rely on for funding, with some general info regarding duration of the investment, annual payments, repayment and implications of that type of investment for the social enterprise, the recipient of that money (Figure 11). Figure 11: Comparison of financing instruments Source: Credit Suisse (January 2012), p. 08, trepreneurship_is_redefining_the_meaning_of_return 37 Saltuk, Y., et al. (2011), p. 11, J.P.Morgan and GIIN 38 Clark et al. (2012), p. 08, Credit Suisse and Schwab Foundation for Social Entrepreneurship 23

24 Is possible to see in the table the variations such as in the duration of these investments, which range from short-term, in case of grants, to unlimited for equity capital investments. Also the implications in the recipient of the investments are quite different, and can be verified, for instance, that grants, debt capital and hybrid capital have no dilution of ownership, while equity capital imply dilution of ownership and in mezzanine capital investments the dilution occurs only if converted into equity. Clark et al. (2012) calls attention to the fact that ultimately, any investment in a social enterprise is only as successful as the business receiving the money, which is why it is of critical importance to select the right mix of financing tools relative to the company s stage in its life cycle. 39 In analyzing the impact investing field achievements until that date, E.T. Jackson and Associates Ltd., in the report prepared to The Rockefeller Foundation in 2012, recognized that overall, there has been a significant acceleration of capital commitments toward impact investing and gave relevant insight when assessing the numbers below, regarding the reported investment related to the period between 2010 and 2011 across types of investment structure (Figure 12). Figure 12: Number and Type of Reported Impact Investments, 2010 and 2011 Source: E.T. Jackson and Associates Ltd., (July 2012), p. xiii, Impact-Full-Summary.pdf 39 Clark et al. (2012), p. 08, Credit Suisse and Schwab Foundation for Social Entrepreneurship 24

25 E.T. Jackson and Associates Ltd. in analyzing the deployment of capital in impact investments during 2010 and 2011 argued that the period saw foundations, financial institutions and impact investment funds play leading roles in unlocking capital adding that impact investing funds have had important modeling and inspirational effects on the growing field, as have a number of foundations that are deploying both their endowment capital and their program funds in a variety of types of impact investing. Specifically regarding the global market in north part of the world, they stated that high net worth individuals and family offices have also emerged as key actors in impact investing. However, the engagement of institutional investors pension funds, sovereign wealth funds and major corporations has proceeded more slowly, concluding that the exceptions are the aid-funded international development financial institutions, which have begun to play a more robust role in the impact investing marketplace in the Global South. 40 GINN survey carried out in 2015/2016 with 158 impact investors regarding what instruments 41 they use to allocate capital in impact investments presents data demonstrating that private equity and private debt are, indeed, the most common instruments used in impact investing, deployed by 110 and 89 respondents, respectively, followed by equity-like debt used by 55 respondents (Figure 13). However, the overall allocation to private debt is much higher than that to private equity, reflecting the fact that some larger investors allocate much more of their capital to private debt. 42 Figure 13: Number of respondents with allocations using an instrument Source: GINN (2016), p.19, Regardless all these reports and numbers released recently, it is also important to point out two examples of actors that have been playing an important role in the field building as well as one innovative investment structure that have been tapped in the recent years by impact investors: 40 E.T. Jackson and Associates Ltd., (July 2012), p. xiii 41 A list of definitions regarding all these instruments and provided by GIIN to the respondents can be found in the Appendix. 42 GIIN (2016), p

26 Actors moving money Family offices: These investment companies created to manage the assets of highand ultra-high-net-worth individuals-those with investible assets in excess of USD 100 million 43 have been played an important pioneering role in the evolution of impact investing so far and are also significant for the continuous evolution of the field. According to Clark, Emerson and Thornley (2014) the role of family office has been important in two ways. First, as accredited investors, they have functioned as a significant part of the private sector capital to complement impact investing of both private and public development finance entities. For example, they buy microfinance debt and invest in impact investing funds and/or provide much of the bridge capital linking public sector initiatives with private sector capital markets. Second, is related to what they call as Total Portfolio Management approach, investors managing their total net worth-100 percent as opposed to simply 5 or 10 percent for charitable giving- as impact investors. By practicing this approach they show to other potential impact investors how asset owners may invest capital across a continuum of strategies and instrumentsphilantropic capital to near-market-rate and market-rate capita-all managed on an integrated basis with regard to an appropriate level of financial return for any given asset class together with the intentional management of impact returns. 44. The family offices of ebay founder Pierre Omidyar and ebay s first employee Jeff Skoll are two examples of relevant impact investors to the field. Investment Banks: These financial intermediaries that provide and perform a range of services to their clients have increasingly made impact investments as well as brought more investors to the field after realized that there is a great opportunity in engaging in this new field. As mentioned by Bugg-Levine and Emerson (2011) an unpublished Rockefeller Foundation research in 2010 identified more than forty institutions globally that were offering investment banking services to impact investors and social enterprises 45. They also brought some facts to exemplify that, for instance, Deutsch Bank Americas have placed hundreds of millions of dollars into community development loans, deploying a range of capital from grants to concessionary loans to market rate investments 46 and in 2010 Citibank Microfinance linked up with its community development arm to create an integrated capability to pursue impact investments targeting low-income customers across emerging market and the United States Clark C., Emerson J. and Thornley B. (2014), p Ibid. p Bugg-Levine, A. and Emerson, J. (2011), p Ibid, p Bugg-Levine, A. and Emerson, J. (2011), p

27 Innovative investment structure moving money Social Impact Bonds (SIBs): These bonds, also known as pay-for-success bonds, are bonds that have been structured by United Kingdom (UK) Government, and have been increasingly used since in 2011, especially in the United States (US) and UK. According to UK guidance on SIBs, these bonds are designed to help reform public service delivery. SIBs improve the social outcomes of publicly funded services by making funding conditional on achieving results. Investors pay for the project at the start, and then receive payments based on the results achieved by the project. and add that rather than focusing on inputs (eg number of doctors) or outputs (eg number of operations), SIBs are based on achieving social outcomes (eg improved health). The outcomes are predefined and measurable. 48 Bugg-Levine and Emerson (2011) point out about SIBs that by raising the initial bond from private investors, the structure places the risk of success onto the investors, allowing private investors to do what they do best: take calculated risk in pursuit of profit. In turn, the government will pay only for verifiable results and will profit from keeping the additional savings. 49 Recently, Clark, Emerson and Thornley (2014) state that SIBs provide a new tool to help governments finance social outcomes through private investment in efforts to address homelessness, adult recidivism, juvenile delinquency, preschool readiness, environmental sustainability, and other issues and mention at that date in the United Kingdom there are more than fourteen SIBs completed or in development and that they are also being completed or in development in at least nine other countries around the globe. 50 To bring a real life example, Bugg-Levine and Emerson (2011) outlined in their book the history of the first SIB, which was agreed to between the U.K. Ministry of Justice and the impact investment advisor Social Finance in Through this investment vehicle, private investors have invested approximately $8 million, which is going to nonprofit organizations working to help recently released convicts stay out of jail. The British government has agreed to pay bondholders on a sliding scale: the fewer prisoners who reoffend, the more money the private investors will receive, with a capped annual return of 13 percent., analyzing that the payment to investors will represent only a fraction of the money the government will save from having these former offenders stay out of jail accessed on June 3, Bugg-Levine, A. and Emerson, J. (2011), p Clark C., Emerson J. and Thornley B. (2014), p Bugg-Levine, A. and Emerson, J. (2011), p

28 2.3. Other Key Actors Besides impact investors, especially the impact investing funds who are the ultimate focus of this work, there are other actors who play an important role in the field Philanthropists Philanthropy, popular known as private initiatives that focus on public good, improvement in the quality of human life and charitable giving to benefit society and achieve their social and environmental goals have been changing in the recent years. Some philanthropists have been realizing that the traditional approach of these entities was not being powerful enough to address market failures and solve the world most pressing issues such as environmental damage and poverty, and have been changing their mindset to start directing a greater focus on results on creating sustainable (and measurable) social change. 52 When we turn the spotlight to the impact investing field, we see philanthropists working as high risk takers supporting early stage social entrepreneurs, providing grants and other financial supports that make the link and risk reduction work needed for other types of impact investors to close deals that otherwise they would not do. In this way, they are not only supporting charities as they have been doing in the past but also playing a leading role in taking higher financial risks in order to catalyze impact and the impact investing market, bringing other players to the field, especially the for-profit businesses, to provide additional money and complementary expertise required to achieve impact results at scale. Sir Ronald Cohen, chair of Social Impact Investment Taskforce established by the G8, emphasizes the special role of philanthropy in impact investing, in The Impact Investor book s foreword, as follows 53 : Philanthropic foundations have a special role to play in driving innovation in nonprofit organizations, and are gradually rising to the challenge. Some foundations now seek to measure outcomes from their grant activities, by way of qualitative if not quantitative criteria. Some are beginning to see impact investment as a very focused complement to philanthropic grants. Some are using their endowments to attract investors, as the Rockefeller, Bloomberg, and Pritzker Foundations have done by taking first-loss positions ahead of third parties. Some charitable foundations are beginning to see themselves as the natural drivers of impact investment, especially the kind that carries the greatest financial risk and the potential for the highest social return. They think it natural to achieve their social objectives through some direct investment from their endowments. 52 Clark et al. (2012), Glossary of Terms, Credit Suisse and Schwab Foundation for Social Entrepreneurship 53 Clark C., Emerson J. and Thornley B. (2014), Foreword xvii 28

29 A real example of philanthropy influence in impact investing market is in the United States where the so called program-related investments (PRIs), created by a US regulation, have been generating a huge flow of philanthropic capital for impact investments. Clark, Emerson and Thornley (2014) describes PRIs as a category of below-market-rate charitable investments that count toward a foundation s annually mandated philanthropic spending, memorialized in the US tax code. The law was created in 1969 in response to the desire of foundations to make long-term, low-cost, and/or higher-risk investments in support of their mission. The capital returned from PRIs must be recycled into other charitable purposes, whether reinvested as a PRI or awarded as a grant Social Entrepreneurs Perhaps the most important actors in the impact investing field, social entrepreneurs are the core of impact investing field because there are the recipients of impact investing and the ones who carry passion, perseverance and creativity as well as create businesses to pursue their mission, solve a problem, sometimes even change the world, and leave a sound legacy for the future generations. These entrepreneurs generally create a strategy and a business model (social enterprises) to canalize their knowledge in order to blend business practices and their financial tools with philanthropic objectives to develop innovative solutions for the purpose of tackle issues and/or market failures existing in their communities or in the society, in general. And their determination in this mission is capable of send compelling messages to the different sources of capital around the world, gathering impact investors looking for an opportunity to do good. Bugg-Levine and Emerson (2011) provided a short definition for social entrepreneurs as those who lead both for-profit and nonprofit ventures, and they advance business models that can use earned income as well as grant revenue. 55 Yet, Nick O Donohoe defined social enterprises as the ones that balance a social mission with financial viability and sustainability, existing between the public sector and private markets in both the developed and developing world. 56 Judith Rodin (President of The Rockefeller Foundation) and Margot Brandenburg (Former Senior Associate Director of mentioned foundation) presented an excellent brief analysis about 54 Clark C., Emerson J. and Thornley B. (2014), p Bugg-Levine, A. and Emerson, J. (2011), p. 265, Note 1 56 Clark C., Emerson J. and Thornley B. (2014), p

30 the critical role of social enterprises for the impact investing field in the article 7 Things We ve Learned about Impact Investing in 7 Years (June 2014) when they firmly affirmed that impact enterprises are at the heart of impact investing, including a real world example to solidify their understanding and concluding that there is more impact investors than social entrepreneurs to absorb the available capital, as follows 57 : Impact enterprises more traditionally referred to as social enterprises combine passion with good ideas. They are creating jobs, providing critical goods and services, and creating social and environmental benefits. Without these enterprises and other, non-enterprise destinations for capital such community facilities and sustainably managed natural resources impact investors could not translate their dollars into their desired impacts. For example, an impact investor who wanted to help improve sanitation in Africa could not do so much without enterprises, such as Ecotact, which developed a waterless toilet that is funded through modest user fees and local advertising. More work is needed to build a robust pipeline of impact enterprises to absorb the incoming capital. To illustrate, we bring a summary, prepared by Sean Greene for CASE Foundation s Short Guide to Impact Investing (with data provided by ImpactSpace), of one of these social enterprises that have done a great job and attracted capital from diverse types of impact investors 58 : Revolution Foods Description: Revolution Foods, a B Corp, is disrupting the $25 billion dollar school lunch market in the United States. It provides more than 1 million healthy, nutritionally-balanced meals with natural ingredients to K-12 schools every week at prices in line with traditional lunch suppliers. Notable Investors: W.K. Kellogg Foundation, Catamount Ventures, City of Oakland, DBL Investment Partners Impact Geographies: United States Social Impact Objectives: Community Development, Food Security, Health Improvement Governments It is not a surprise for anybody that the government is an essential player in the impact investing field building likewise it was for many other new market which need support to reach global scale and relevance. Governments around the world have begun to understand they have failed to solve social and environmental problems so far, even counting on philanthropy 57 Rodin, J. and Brandenburg, M. (2014), accessed on May 25, Greene, S., (2014), p. 07, the CASE Foundation 30

31 support, and have been showing a great disposition to take advantage of the private sector to tackle these challenges in a more effective way. Governments are the most powerful player. They can boost and bolster impact investing with more tools than the other players because governments are able to not only make investments but also provide tax incentives and regulation/legislation to build the necessary infrastructure to solidify the field and spur the markets and industries to turn their eyes to this new field, what is the key to increase the amount of capital directed to impact investing, the number of entrepreneurs committed with high impact businesses, as well as of other players providing services in a larger quantity and with higher quality, ensuring strong and healthy competition. Rodin and Brandenburg (2014) also gave their important insights regarding the fundamental role of governments in the decisions of impact investors and, ultimately, in the fields growth 59 : Governments play a critical role in the decisions of impact investors. It might not be immediately obvious to the average investor, but governments can make their lives easier or harder, depending on the kind of environment they create for impact investing. Some of the ways that governments can enable impact investing include introducing benefit corporation legislation, providing lower corporate income taxes for high-impact businesses, funding incubators 60, and making equity investments. To exemplify governments importance, Clark, Emerson and Thornley (2014) describe the government work to develop impact investing market in Ghana, Africa, through Ghana Venture Capital Trust Fund 61. The Venture Capital Trust Fund (VCTF) was created by the government of Ghana in 2004 with the goal of providing financial resources for the development and promotion of venture capital financing for small and medium-sized Enterprises (SMEs). The VCTF has deployed $17 million, financing forty-eight SMEs through five intermediary funds, in addition to providing technical assistance for investors and entrepreneurs. The VCTF also received a $150,000 grant from the Rockefeller Foundation in 2012 to develop the impact investing market in Ghana, which was used to establish the Ghana Institute for Responsible Investment and to map the market. Among the most relevant discussions about policy engagement in impact investing has been the so called special purpose legal vehicles (e.g., the benefit corporation), what will be better addressed in the sub-chapter 2.5 (New Corporate Forms). Furthermore, the successful 59 Rodin, J. and Brandenburg, M. (2014), accessed on May 25, Business incubator basically is a type of company or organization focused on accelerating the growth and success of companies by providing a range of services and business support, such as coaching, network, money and structure. 61 Clark C., Emerson J. and Thornley B. (2014), p

32 partnership between impact investors, social entrepreneurs and governments will be further discussed in the sub-chapter (Policy Symbiosis) Service Providers There are a wide variety of service providers in the impact investing field. These professionals are willing to make the difference through a range of tools such as their legal, financial or business knowledge, network, qualified teams to conduct in-depth research, capacity, willingness and time to find solutions that mitigate risk and also to improve quality and transparency in tracking and reporting impact performance. Sometimes these service providers can even help in the form of subsidy as the one that White & Case LLP International Law Firm gave to the Deutsche Bank s Global Commercial Microfinance Consortium I. According to Clark, Emerson and Thornley (2014) throughout the development process, the consortium received subsidy through services provided internally at Deutsche Bank (such as HR, credit control, and legal). The largest subsidy that the consortium received was not internal, but was instead from one of its service providers: White and Case, the consortium s external legal counsel, offered a 66 percent discount on its services, which amounted to significant savings over the life of the fund equivalent to over 15 percent of the total management fees collected. 62 In terms of consulting and investment advisory firms, we can highlight the work of Social Finance, established in 2007 with the purpose of building a social investment market in the UK. The firm offers a range of investment advisory and consulting services from developing and operation of SIBs and other financial instruments to consultancy to social enterprises seeking investment capital or trade opportunities. 63 In the research area, Duke University pioneering stands out with CASE, The Center for the Advancement of Social Entrepreneurship founded at the Fuqua School of Business at Duke by J. Gregory Dees and Beth Battle Anderson in According to Clark, Emerson and Thornley (2014), CASE is an award-winning research and education center that prepares leaders and organizations with the business tools needed to create lasting social change. CASE has educated more than a thousand MBA students working across the globe to drive social impact from within companies, nonprofits, and government. As a field builder, CASE has also worked with hundreds of organizations to help define, promote, and propel the field of social entrepreneurship, and 62 Clark C., Emerson J. and Thornley B. (2014), p Ibid, p

33 has created distributed multisector partnerships focused on ways to help change the ecosystems social entrepreneurs need to succeed Measurement and Report Probably if there is something that all the players in the impact investing field would recognize as an essential component of the field and fundamental to its growth, it would be the performance measurement of impact investments. In contrast to financial return measurement, how to track and measure impact and reporting it in a proper and clear way to stakeholders with different interests such as investors, governments, social entrepreneurs, service providers, among others, as well as the market and the society (including customers and members of communities affected by the impact generated by a business) is a much harder task that increasingly organizations, researchers and diverse stakeholders have been willing to make a contribution or play a leading role. These pioneers made a lot of progress in the last few years providing much more research and data on products and impact performance as well as creating a more sophisticated impact measurement practice, especially third party systems and organizations that have worked tirelessly to standardize metrics for tracking, measuring and reporting impact. GIIN s CEO Amit Bouri in the 2016 Annual Impact Investor Survey informed that 99% of the respondents reported that they measure impact, with 65% using metrics aligned with Impact Reporting & Investment Standards IRIS, the GIIN S catalog of social and environmental metrics. 65 The higher number of impact investments track record certainly has attracted more investors and other stakeholders to the field. However, there are still numerous challenges regarding it to be addressed such as: resource limitation at the investee and/or investor levels (including lack of appropriate staff, time, and budget, as well as desire to avoid interfering with day-to-day operations); aggregating metrics from diverse investees and from investors with diverse requirements; collecting data that is accurate and timely; moving beyond outputs to measure things like outcomes, impact, and additionality 66 ; selecting relevant metrics to track 64 Ibid, p GIIN (2016), p. III 66 The measurement of additionality means verifying if an investment increased or not (and if yes, in what extent) the quantity or quality of the enterprise s social output beyond what would otherwise have occurred, as defined by Paul Brest and Kelly Born in Unpacking the Impact in Impact Investing at accessed on May 25,

34 progress against investment goals (relevance to investors and/or investees) and capturing intangible results that are not readily quantifiable. 67 In the next sub-chapters, it will be presented some practices and tools that impact investors and their investees have been using to measure their impact as well as some key initiatives that are building the field s frameworks and standards for measurement and report How to Measure Social/Environmental Performance The different impact investors interested in measuring impact performance are motivated by a number of reasons including, for instance, understand the social/environmental performance of their investments is part of their mission, desire to better understand and improve the impact performance of their investments, have a contractual commitment to their stakeholders on social/environmental performance, belief that this performance data has business value (i.e. can improve financial performance of portfolio companies and inform future investment decisions), marketing purposes brings the necessity to communicate their impact, rise of external pressure (e.g. due to changing rules, stakeholder monitoring) to track social/environmental performance, among other motivations. 68 Measuring impact is a tough task and there is still a lot of work in progress regarding it. One of these works O Donohoe et al. (2010) brought a helpful tool to define what is impact and then be able to effectively measure if there is an impact and, if yes, in what extent an impact has been attained (Figure 14). O Donohoe defines social impact as a broader set of outcomes, such as increased income and assets for the poor, improved basic welfare for people in need, and mitigation of climate change 69, which can be attributed to a particular organizations activity. However, according to him, this social outcomes attribution is often hard to make because these outcomes are more likely to be influenced by external factors. Figure 14: Impact Value Chain 67 GIIN (2016), p Ibid, p O Donohoe et al. (2010), p. 79, J.P. Morgan and Rockefeller Foundation Source: J.P.Morgan and Rockefeller Foundation (2010), p.72 pact_investments_nov2010.pdf 34

35 As can be verified by the figure above, a venture (normally social enterprise) itself will have impact in their activities only if it produces social outcomes (changes to social systems) that would not otherwise have happened anyway. Unfortunately, impact evaluation of outcomes demand a rigorous, onerous and expensive work in practice, and most of impact investors still focus on measuring activities or outputs instead of running control groups to measure the real impact, because the former is a simpler and more cost effective way of measuring than the latter. O Donohoe et al. (2010) gives an example of impact evaluation of a bednet manufacturer, arguing that it might entail a multi-year study on the incidence of malaria among target customers, with a control group to understand what would have happened to those customers if the company had not sold them bednets in order to measure the real value, instead of simply measure the number of bednets sold, what is the companies output. Another form of approaching measuring impact is proposed by Brest and Born (2013). They introduce three basic parameters of impact: enterprise impact, investment impact, and nonmonetary impact. Enterprise impact is the social value of the goods, services, or other benefits provided by the investee enterprise, being the enterprise able to have impact in several ways but two ways are fundamental: product impact, the impact of goods and services produced by the enterprise (such as providing anti-malaria bed nets or clean water); operational impact is the impact of the enterprise s management practices on its employees health and economic security, its effect on jobs or other aspects of the well-being of the community in which it operates, or the environmental effects of its supply chain and operations. They conclude that the assessment of this impact is also based on the distinction between outputs and outcomes, being the first known as the product or service produced by an enterprise, and the last as the effect of the output improving people s lives. 70 Investment impact is understood as particular investor s financial contribution to the social value created by an enterprise and to achieve that an investment must increase the quantity or quality of the enterprise s social output beyond what would otherwise have occurred. Assuming that, an investment will have impact if it provides more capital, or capital at lower cost, than the enterprise would otherwise get. 71 To complete, nonmonetary impact reflects the various contributions, besides dollars, that investors, fund managers, and others may make to the enterprise s social value, being practical examples of improvement of an enterprise s social value nonmonetary benefits such 70 Brest, P. and Born, K. (2013), accessed on May 25, Ibid 35

36 as finding and promoting impact investment opportunities; aggregating capital and providing other investment services; providing technical and governance assistance to enterprises, and helping them build strategic relationships. 72 To complement, there is an important work made by Sean Greene through the Short Guide to Impact Investing, published by the CASE Foundation in 2014, in terms of measurement practices. He created a spectrum from Impact Motivated to Impact Certified that identify increasing levels of intent, measurement and transparency, recognizing also middle ground companies who are Impact Committed, high-impact companies that do not subscribe to formal assessments of their metrics, what can help more impact enterprises go to the next level of impact measurement commitment achieving Impact Certified status (Figure 15). 73 As Greene said, his intention with this work is to create a clear line for a minimum standard and respond to the market, by offering a basic framework that will help more people get into the game and evolve over time based on market signals and how investors allocate their dollars, rather than waiting for a perfect system. Figure 15: Impact Investing Spectrum Source: the CASE Foundation (2014), p Brest, P. and Born, K. (2013), accessed on May 25, Greene, S., (2014), p. 12, the CASE Foundation 36

37 Key Third Party Systems As well observed by Rodin and Brandenburg (2014) impact measurement and rating systems are among the most critical support mechanisms needed for successful impact investing, adding that these systems not only help mission-focused investors and fund managers assess the social and environmental performance of their investments, but also enable impact enterprises to measure and improve their operations and services. 74 Nowadays, effective measurement systems such as the Global Impact Investing Rating System (GIIRS) and the Impact Reporting & Investment Standards (IRIS), the last one created by Global Impact Investing Network (GIIN), are leading the field s framework building task. In this manner, continued refinement of these systems and their tools will only increase impact investors confidence and enterprises performance in the field Global Impact Investing Network GIIN GIIN was conceived in October 2007, when the Rockefeller Foundation gathered a small group of investors to discuss the needs of the emergent impact investing industry. In June 2008, a broader group of 40 investors from around the world met and decided, among a number of initiatives, to create a global network of leading impact investors. Just over a year later, the GIIN was formally constituted as an independent organization. 76 The GIIN is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, which builds critical infrastructure and supports activities, education, and research that help accelerate the development of a coherent impact investing industry. 77 GIIN is also generally known as a community of investors and other service providers, which plays a leading role as an advocate for impact investing and is home of the IRIS Impact Reporting & Investment Standards IRIS IRIS, launched by GIIN in 2009, is the catalog of generally accepted performance metrics that leading impact investors use to measure social, environmental, and financial success. IRIS is a powerful tool to measure the performance of an organization, offering over 559 metrics for 74 Rodin, J. and Brandenburg, M. (2014), accessed on May 25, Ibid 76 accessed on June 7, Ibid 37

38 financial performance, operational performance, product performance, sector performance and social/environmental objective performance. 78 This set of measurement standards are available free and online, and carry the core intention in develop a common language to describe the social outputs these impact investments and activities can generate. Bugg-Levine and Emerson (2011) explains that if an impact investor seeks to improve health for poor people, IRIS defines what words like clinic, hospital, and patient treated mean so that an impact report for one health care investment can be consistent with the impact report of a different one. 79 The survey conducted by GIIN between 2015 and 2016 shows many impact investors use a combination of standardized and custom metrics to build a measurement system that fits their goals and investment strategies, with roughly equal numbers of respondents using proprietary metrics and frameworks (103) as those using metrics aligned with IRIS (102, or 65% of the total sample in both cases). 80 Clark, Emerson and Thornley (2014) state that IRIS metrics are being used both by companies to assess their performance and by investors looking to understand the relative impact of their capital and track the impact of its investees operations. They also add that IRIS offer a coherent and relevant set of metrics focused on understanding how capital as an input creates the output of social and environmental performance concluding that these metrics are themselves the foundation on which the GIIRS is based Global Impact Investing Rating System GIIRS GIIRS Ratings, non-profit B Lab s subsidiary, are essential references for impact measurement in impact investing. GIIRS Ratings are rigorous, comprehensive, and comparable ratings of a company or a fund s social and environmental impact. 82 GIIRS is an important third-party tool for investors with intention to assess and compare the social and environmental performance of both companies and impact investing funds, offering a holistic and transparent rating system and allowing investors to compare data across sectors, regions and organizational sizes. According to Clark, Emerson and Thornley (2014) GIIRS has created a Morningstar-like social and environmental rating system for impact investors 78 IRIS and GIIN (2016), accessed on June 7, Bugg-Levine, A. and Emerson, J. (2011), p GIIN (2016), p Clark C., Emerson J. and Thornley B. (2014), p accessed on June 7,

39 designed to standardize the tracking and reporting of impact and facilitate greater flows of capital. 83 Clark et al. (2012) explained GIIRS Ratings method, describing that GIIRS is to impact investments and funds as Morningstar is to mutual funds. It provides funds with an impact rating, giving them one to five stars based primarily on an overall assessment of their companies impact practices and performance. The survey consists of about 160 questions divided into five impact areas: Governance, Workers, Community, Environment, and Sociallyor Environmentally-focused Business Models. A company can do well in one area and not in others, and this performance is explicit to the investor. To earn a five-star rating, however, the company has to have strong practices in most of the impact areas above, concluding that GIIRS allows powerful comparisons and enables companies to include customized key performance indicators as part of their reports New Corporate Forms In this new worldwide movement field that offers a middle way between traditional business and charitable giving, the mainstream division into nonprofit or profit no longer makes sense. New rules are required to change the current capitalism. To this end, as a continuous development of corporate forms, the emergence of a new corporate form that ensures the social entrepreneurs are going to lock in mission and pursue impact with long-term vision without the risk of diverting from this purpose at any time while allowing these entrepreneurs to have flexibility in the their operations, raise impact investment capital from different types of impact investors offering protections to diversified financial interests, is more than essential. These new corporate forms are also important to allow the market to identify the difference between a real good impact businesses from a good marketing. In this sense, Sir Ronald Cohen, in The Impact Investor book s foreword, brings an important insight regarding the role of these new special purpose corporate forms, as follows 85 : For what are becoming known as profit-with-purpose companies, sometimes known as for-profit social enterprises, an important challenge will be locking in mission through special purpose corporate forms, such as the B Corporation in the United States. Socially driven investors want assurance that these businesses will not abandon their mission. Corporate structures that enable entrepreneurs and investors to know that the mission of the business will be locked in beyond a sale of the business are an increasing feature alongside the presence of measureable social objectives. 83 Clark C., Emerson J. and Thornley B. (2014), p Clark et al. (2012), p. 34, Credit Suisse and Schwab Foundation for Social Entrepreneurship 85 Clark C., Emerson J. and Thornley B. (2014), Foreword xvi 39

40 Initiatives as Benefit Corporation (B Corp) and Low-profit Limited Liability Company (L3C) in the United States as well as Community Interest Company (CIC) in the United Kingdom are leading the way for others Benefit Corporation B Corp B Corps are for-profit enterprises certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Currently, there is a growing group of more than 1,600 Certified B Corps from 42 countries and over 120 industries working together to redefine success in business. 86 As exposed in B Corp s website, this is a new legal tool to create a solid foundation for long term mission alignment and value creation. It protects mission through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven life post-ipo. 87 This corporate form has stakeholders needs embedded into their business strategy offering advantages for the different kind of stakeholder, from consumers to shareholders and directors, such as reduced director liability, expanded stockholder rights, reputation for leadership, advantage in attracting talent and increased access to private investment capital. 88 B Lab s Cofounder, Andrew Kassoy, exposes in New Rules For a New Capitalism that B Corp s legal form carry in their core three main components: the corporate purpose to create general public benefit in addition to shareholder value; expansion in directors fiduciary duty to include consideration of the effect of decisions on shareholders and employees, suppliers, customers, community and the environment; and B Corp obligation to publish a benefit report in accordance with third-party standards for defining, reporting, and assessing social and environmental performance. 89 follows 90 : Clark, Emerson and Thornley (2014) corroborate with their opinion about B Corps, as Going beyond the many product certifications, such as LEED for buildings or ISO standards for labor, which audit the footprint of a specific product, the founders of B Lab, the nonprofit that manages the B Corporation certifications, wanted to provide a company certification as a transparent and comparable holistic record of an entire company s social and environmental impact. The goal was to create a trustworthy signal 86 accessed on June 7, accessed on June 7, accessed on June 7, Bugg-Levine, A. and Emerson, J. (2011), p Clark C., Emerson J. and Thornley B. (2014), p

41 to employees and investors that a company was not just greenwashing its intentions. B Lab also insisted on the need for legal protections for these companies dedicated to stakeholder interests, to protect them from the strict interpretations of fiduciary duty that have become the norm for the last few decades. With regard to the B Corp legislation in the United States, according to B Lab, so far 31 states had passed legislation allowing companies to incorporate as B Corps within their state, including New York, California, and, significantly, Delaware, which holds the largest share of all new business incorporations. 91 Andrew Kassoy understands that two factors have spurred support for the passage of B Corp legislation. First, this approach allows businesses and their investors to opt in to higher standards rather than imposing new regulations on all companies. Second, it provides policymakers an inexpensive way to restore public confidence in business and to spur economic development and bring quality jobs to their districts Low-profit Limited Liability Company L3C The L3C is a more narrowly designed special purpose vehicle but still a legal corporate form arisen in the United States providing a useful structure for companies with a central purpose to provide a social good, which facilitates investments in social impact businesses from for-profit companies, since it was created specifically to prequalify companies for Program- Related Investments under the U.S. private foundations regulation. Bugg-Levine and Emerson (2011) analyze that although a L3C is not constrained in its ability to make profits or to share profits with shareholders, because it has been created with a very focused purpose as described above, incorporating as an LC3 constrains the range of profit-seeking activity a company can pursue and, in practice, the returns it can offer investors, what can discourage some entrepreneurs and investors to engage in this structure Community Interest Company - CIC CIC is a new limited company created by the United Kingdom (UK) government in The CIC is a social enterprise that is tied in terms of structure (with some restrictions) in order to assure that it will pursue social impact on June 7, Bugg-Levine, A. and Emerson, J. (2011), p Ibid, p

42 CICs are one of the fastest growing community oriented enterprise movements in UK. Nearly 1 in every 200 new companies in 2015 was a CIC, and as of May 2016 there are more than 12,000 CICs registered in UK. 94 CIC legislation was introduced under the Companies Act 2006 and subject to that Act and UK s company law generally. CICs present basically two characteristics: the assets owned by the company are held in an asset lock which secures those assets to applications for the good use of community; and limitations applied to dividend and interest payments made to shareholders and investors ensure a profit can be made, but the primary focus remains on achieving benefit for the community. 95 Bugg-Levine and Emerson (2011) affirm that CIC corporate form allow for-profit entities and their entrepreneurs to pursue a social mission without the risk of violating the fiduciary responsibility to maximize financial return. However, they point out that CIC regulation still reflects its origins in a fundamental mistrust of the profit motive. The equity value of a CIC is prelocked and unavailable for distribution, though the government has raised the ceiling on dividends to 20 percent annually in order to better balance the profit and social motives Data Regarding the Field It is important to bring some fresh data regarding impact investing for a better understanding of the dimension and potential of this field. Considering impact investing is a relatively new field with all the features described in this work as well as this new term is used to describe investments made across many asset classes, sectors, and regions, the market size has not yet been fully quantified. 97 However, the GIIN is the main source of updated data about the field and provides data regarding many indicators, including market size, number of deals in a year, assets under management (AUM) by geographical regions and sectors. GIIN s 2016 Annual Impact Investor Survey captured data from 158 impact investors collected via a distributed between December 2015 and February 2016 regarding questions in related to their activities since inception, specifically in 2015 as well as plans for GIIN s data indicate that the market is substantial, with significant potential for growth accessed on June 7, Ibid 96 Bugg-Levine, A. and Emerson, J. (2011), p GIIN (2016), on June 7,

43 Some field boosters affirm that the market has a growth potential to reach at least USD1 trillion of impact investments worldwide in the next five years when they compare it with the more than USD 200 trillion of total global capital markets investments Market Size and Number of Deals Starting with market size estimations, GIIN reports that collectively, as of the end of 2015, 156 respondents managed USD 77.4 billion in impact investing assets in many different geographies, sectors, and asset classes 98. Furthermore, the respondents reported that the capital committed for impact investments since inception corresponds to USD billion in capital, at an average of USD 735 million and median of USD 87 million. It is worth noting that USD 43.8 billion (38% of total capital committed since inception) has been committed by just three respondents. 99 Clark, Emerson and Thornley (2014) introduce another form of estimating the market size of impact investing field, adding numbers from five indicative markets of the global impact investing market, finding a market size of around USD 250 billion, as summarized below: Figure 16: Market Size considering five indicative sectors Source: Clark C., Emerson J. and Thornley B. (2014), p. 66. Moving to number of deals, GIIN s survey verify that, in total, respondents committed more than USD 15 billion capital to 7,551 impact investing deals in 2015 and, in 2016, plan to increase capital committed by 16% to USD 17.7 billion and number of deals by 55% to 11,722. GIIN adds that among 97 organizations that provided complete information in both 2015 s and 2016 s surveys, capital committed decreased slightly (by 7%), while the number of deals completed increased by 2% GIIN (2016), p. XI 99 Ibid, p Ibid, p. X 43

44 Geographical Regions and Sectors In terms of AUM by geographical regions, GIIN reports from their 156 respondents used in the sample that capital flows from developed markets where organizations managing 92% of sample AUM are headquartered to emerging markets, where roughly half the assets are allocated. 101 Moreover, more than 50 respondents have impact investing allocations in each of Sub- Saharan Africa, North America, Latin America and the Caribbean (including Mexico), South Asia, and East and Southeast Asia. The top geographies in terms of amount of capital allocated are North America (38%), Sub-Saharan Africa (15%), and Latin America and the Caribbean (including Mexico) with 9%. 102 The report shows that there is strong interest in Sub-Saharan Africa, with 40 respondents planning to increase allocations there during 2016, with many also planning to increase their capital allocated to East and Southeast Asia (30), South Asia (25) and Latin America and the Caribbean (including Mexico) (23) during this current year. 103 In relation to asset allocations by sectors, GIIN reports from their 156 respondents that there is diversity in sectors of activity, with at least 60 respondents active in each of food & agriculture, healthcare, housing, energy, education, microfinance, and other financial services. The largest sectors by asset allocation are housing (24%), microfinance (14%), energy (13%), and other financial services (10%). 104 The sector to which the largest number of respondents plan to increase allocations during 2016 is food & agriculture (53 respondents), followed by energy with 43 respondents and healthcare with 41 respondents GIIN (2016), p. XI 102 Ibid 103 Ibid 104 Ibid, p. XII 105 Ibid 44

45 CHAPTER III: Impact Investing Funds This chapter aims to analyze the specific importance of funds for the impact investing as one of the most, if not the greater player in terms of relevance for the field s growth from now on in order to reach global scale. Then, looking inside these funds, will be presented an overview regarding the four key practical elements found in the most successful impact investing funds, as assessed and reported by InSight at Pacific Community Ventures (PCV Insight), Center for the Advancement of Social Entrepreneurship - CASE at Duke University (CASE at Duke) and ImpactAssets on the report Impact Investing 2.0: The Way Forward Insight from 12 Outstanding Funds published in November 2013, as well as analyzed by Cathy Clark, Jed Emerson and Ben Thornley in the book The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism (2014). The main reasons for the choice of this report as part of this work regarding impact investing funds are the following: it is completely focused on impact investing funds and their performance, is a very recent research that provides useful and interesting insights, probably the largest and deepest research carried out regarding players and their performance in the impact investing field and the institutions and their teams who conducted the research and report the results have a good reputation, play an important role in the field and are apparently very talented and were very committed and involved in contributing for the field s growth with this research The Importance of Funds for the Field Development For a better understanding of how a new investment field will raise the huge amount of capital needed as well as reach the levels and scale of investments required to grow this field until the maturity level or maybe change the current capitalism or even become the new mainstream investment market of the future, certainly focus on the impact investing funds ecosystem is the best way to do that and the reason is not difficult to comprehend. By analyzing the impact investing ecosystem illustration (Figure 17) created by World Economic Forum (as cited in Clark C., Emerson J. and Thornley B., 2014) is quite simples to perceive that funds are the players who interact directly with largest numbers of enterprises and individuals in relations such as raise of capital from all the types of investors, hiring intermediaries and distinct service providers to offer financial, legal or business consulting, and negotiations with enterprises from various sectors and geographical regions to discuss business strategy, performance or capital deployment/commitment. Yet, these funds still have ultimate 45

46 responsibility for intentionally achieve social and environmental impact while provide financial return for their investors, what distinguish them as impact investing funds. Figure 17: Impact Investment Ecosystem Source: Clark C., Emerson J. and Thornley B. (2014), p. 76. As Clark, Emerson and Thornley (2014) state funds are in the heart of impact investing system and when impact investing funds succeed many important results follow that, for instance, investors increase their investment, replicable financial structures emerge for new pools of fund capital, entrepreneurs have clear guideposts of what to expect of investment, and secondary markets more naturally emerge, emphasizing also that as with many investment markets, funds will continue to be the primary vehicle for deploying the largest volumes of capital. 106 To conclude, funds are also a significant player in terms of accountability practices. The impact investing fund structure is based on transparency and disclosure of information regarding fund existence and activities, including, for example, business strategy, portfolio investments and its financial performance, management fees, costs with intermediaries and service providers, especially legal costs, allocation of capital and dividends; clear expectations for social and environmental impact and reasonable financial return; and activism in terms of internal corporate governance practices (including sometimes, offering incentives for fund managers to engage strongly in achieving impact by tying their variable remuneration to positive impact achievement) and governance regarding their investees. 106 Clark C., Emerson J. and Thornley B. (2014), p