There are more than a few reasons to welcome this summer’s thought-provoking publication from the GIIN and Cambridge Associates, “Introducing the Impact Investing Benchmark.” Not only are the findings of the report encouraging, but it swings open gates and invites real debate, a debate that is far more advanced than we would have had just five years ago.
I’m especially encouraged by the collaborative research behind the report, which joins Cambridge’s global financial prestige with the GIIN’s stewardship of impact investing’s legacy. What may have once seemed like strange bedfellows are now a natural fit.
Foremost in the team’s analysis is the very premise on which they approach the findings. It’s notable that this report does not assess degree of impact or measureable social effects. There are detailed and necessary studies out there counting everything from new hospital beds for low-income women to hectares of rich tropical soil being tilled for export markets, but Cambridge and the GIIN left the impact metrics discussion for another time.
This study’s valuation of high-quality managers is something we keep in the front of our minds while supporting impact through private equity and project finance here at the Overseas Private Investment Corporation (OPIC), the US Government’s development finance institution (DFI). Through more than four decades of working in the world’s emerging markets in every sector, from agriculture to clean energy to health, the thread that runs through our most impactful projects is clear-headed business visions and dependable financial practice. There’s no shortcut around talent and hard work.
And impact projects with good risk/return opportunities are more prevalent today than five years ago. Why? Because smart people are migrating to this space, because the definition of impact is more commonly accepted, and because sound investor discipline is applied the same as in other sectors. These forward-thinking leaders recognize that steady returns bring capital and capital brings scale. And of course, investment at scale means impact at scale.
Performance and discipline are easier said than done, and it would be audacious to assume the migration of talent to impact investing paired with these performance trends will be a panacea to the sector. Excessive hype is the enemy of progress.
With that in mind, I look forward to future measurements against this benchmark that can take an even broader view of impact fund returns. When ten times as many funds working in more diverse sectors produce measurable trends, the message to institutional-level capital will be even clearer: impact funds are not hothouse flowers, and the field shows market-quality performance that arrives hand-in-glove with standardized impact metrics to enhance capital’s purpose and broader effect.
Though incisive and important, no twenty-page report can cover everything. Recent studies show that DFI funding still forms the substantive bedrock of impact fund capitalization. The GIIN’s own recent studies put forth statistics that DFIs capitalize a large proportion of emerging market impact funds. By definition, DFIs work where commercial finance usually comes at inhibiting terms, so as commercial capital providers enter, what effects might we see on the return trends?
And what about the relative high performance of the small to medium-sized funds? What effect will this have on the appetite for institutional capital to move in? Understanding that not all impact funds are created equal, there’s a fruitful discussion to be had about “right-sizing” impact funds—or balancing the gathering of observable metrics as part of a business plan. At a certain point, costs of impact measurement can grow unwieldy in large, diversified capital pools. So at what fund size will institutional investors seeking impact and performance feel safe to enter the space?
These questions aside, it’s a bright future.
Eager to be involved, major investment banks and capital intermediaries are seeking traditional asset classes to build out the impact across individual or corporate portfolios. Organizations like OPIC are innovating to offer seamless financial products supporting the impact spectrum from small-scale entrepreneurs to substantial capital markets transactions. Business schools now offer impact curriculum, and bright young graduates now debate about when, not if, they will dedicate a part of their career to sustainable investment.
And even more encouraging than this is local talent arriving with local capital in developing markets. Today a young MBA graduate can take her talents back home to Dakar, Ankara, or Manila and find local equity to scale up and attract international debt finance. The playing field is not just different, but vastly more interesting and complex.
After years of trying to define ourselves and our internal measurements, we’re now moving on to refining our performance presentations for wider audiences. Studies like “Introducing the Impact Investing Benchmark” invite debate, but it’s healthy debate that matures the conversation we’re all having about impact investing.