GIIN’s Ragin: Impact investing meets financial and philanthropic expectations
Luther Ragin, CEO of the Global Impact Investing Network (GIIN) and former CIO of the F.B. Heron Foundation, argues that impact investing meets financial and philanthropic expectations.
Is impact investing – investing with the aim of generating tangible social and environmental benefits alongside a financial return – a viable strategy? The practice has its skeptics, but even the unconvinced must recognise the growing list of successful investments and initiatives that point squarely at a burgeoning marketplace.
Impact investing has been practiced by some investors for decades, but over the last five years its prominence has been elevated as a result of a coordinated, global effort to develop a standardised marketplace.
These efforts reached a new milestone last June when UK Prime Minister David Cameron hosted the G8 Impact Investing Forum, where political and financial leaders gathered to promote collaborative support of the practice. Alongside the G8’s efforts, over 90 major institutions pledged their support of the leaders’ commitment to advancing the industry.
This recent attention and increasingly formalised market has brought a new awareness among institutional investors, some of whom have voiced a natural skepticism about the ability of impact investments to generate robust financial returns.
As track records are beginning to mount, they are demonstrating that impact investments can meet the financial objectives of institutional and high net worth investors.
In a recent survey of nearly 100 institutions with impact investments by JP Morgan and the Global Impact Investing Network (GIIN), 89 percent of investors reported that their impact investment portfolios were currently either exceeding or meeting their financial expectations.
The same survey showed that 65 percent of respondents are targeting market-rate returns, competitive with accepted asset class benchmarks. So, how do these reportedly market-rate impact investments stack up?
Over the last few years, the GIIN has tracked several impact investing funds across a range of asset classes, sectors and regions that have performed competitively against industry-recognised benchmarks.
These investments demonstrate that impact investments can and do achieve competitive financial returns. For example, a $1.5 billion U.S. bond fund directed at supporting the creation of low-income housing and community development was ranked in the top quartile of Morningstar’s Intermediate Term Bond Category for 5-year risk-adjusted returns, as of December 31, 2012. The same fund outperformed its benchmark, the Barclays US Aggregate Bond Index, in 2012.
Another example is a $75 million venture capital fund aimed at spurring economic and environmental development in the Bay Area of Northern California, which has consistently ranked in the top quartile of the Cambridge Associates list of 2004 vintage funds and outperformed Cambridge’s U.S. Venture Capital Index.
Both these funds – and many others in our impact investment database – have track records of five years or longer. And as impact investments demonstrate market-rate returns, more investors are exploring and committing capital to the market.
In January 2014, the GIIN’s ImpactBase database of impact investment funds reported $17 billion in committed capital for impact investments, across 281 funds and products.
Major institutional investors continue to announce new impact investing allocations and initiatives. Over the last year, we’ve seen a $250 million Social Impact Fund sponsored by Goldman Sachs, a $500 million affordable housing REIT profiled at the Clinton Global Initiative, five UK pension funds detail plans for a £250 million initiative to invest in opportunities that help local communities tackle wider economic issues, as well as high-profile initiatives launched by UBS, and Morgan Stanley.
But what about those investors who reported that they did not expect market-rate returns from their impact investments? While impact investments, by definition, are designed to achieve a positive return, the specific financial expectations vary widely, based on the underlying motivation of the investor and the economics of a given investment.
Some investors specifically seek investments that are structured to generate financial returns below benchmarks for particular asset classes (i.e. below-market rate returns), and when they do so, such returns are not an indication of underperformance.
Many impact investors accept below-market returns to test new and challenging markets, to support higher risk early-stage social enterprises, to provide credit enhancement that reduces financial risk for commercial investors thereby increasing the pool of capital available for social and environmental objectives, or to provide financing on terms that best enables the underlying enterprise to achieve its social mission.
But, for those investors with a desire to generate market-rate returns in impact investing, the track record of success is growing, providing a data-driven counterpoint to skeptics. Together with growing investor confidence and global collaboration, the realised market-rate returns for many impact investments are demonstrating a broader spectrum of investment opportunities.