Impact Investing
Bridging the Gap to Meet Global Needs
When it comes to financing solutions that address global poverty and inequality, there remains a persistent gap. Traditional funding sources have remained static or in some cases shrunk, just as needs have exploded worldwide. It is this gap that a growing form of financing, impact investment, intends to fill.
While 18th century economist Adam Smith identified self-interest as the “invisible hand” of the market, proponents of impact investing have dubbed it the market’s “invisible heart.” First coined in 2007, the term “impact investment” refers to “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return,” according to the Global Impact Investing Network (GIIN). Unlike socially responsible investing, which aims to do no harm, impact investing intentionally looks for investments that can do the most good.
Put together, all of global philanthropy and aid funding amounts to billions of dollars. At the same time, the costs of solving problems such as access to healthcare, affordable housing, education, nutritious food, clean water, and more, add up to trillions of dollars. These challenges have only accelerated due to climate change and shifting geopolitical forces, all of which have ratcheted up the pressure on vulnerable communities around the world.
The annual impact investor survey report, released last year by GIIN and J.P. Morgan, surveyed 146 investors and found that collectively they manage over $60 billion in impact investments. If impact investments made up just 1% of total investments worldwide, it would amount to $2 trillion. This is what makes impact investing such an intriguing option.
There exists a wide range of businesses that attract impact investment funding today, from small women-owned enterprises and cleaner, more cost-effective energy solutions, to integrated mobile offerings that support small-holder farmers. Such investments vary according to investors’ risk tolerance, time horizons and expected rates of return.
While financial returns are relatively easy to measure, tracking and measuring the social and environmental returns on investments takes a bit more finesse. The leading measurement systems that impact investors use are B Analytics’ Global Impact Investing Rating System and the Impact Reporting and Investment Standards, managed by GIIN.
Nobody believes that impact investing alone is the answer. Grant money is still needed to take the risk out of new ventures and to explore untapped opportunities. Often, however, there is quite a bit of overlap between philanthropic spending and impact investing. A ruling by the IRS last year reassured private foundations that they may use their endowments to make investments that generate below market-rate returns without jeopardizing their favorable tax status. As a result, more foundations may be expected to add impact investing to their giving portfolios.
Depending on their size, expertise and focus areas, international non-governmental organizations (INGOs) also may be uniquely positioned to incorporate impact investing into their work. Jenny Everett, the deputy director of the Aspen Network of Development Entrepreneurs, has suggested that INGOs could add the most value by financing loans in the $25,000 to $500,000 range, the smaller end of the scale from what most institutional investors would normally finance, due to the perceived risk and management such loans would require. Additionally, INGO’s can help entrepreneurs develop their skills and their business models to the point where impact investors might deem them ready for larger investments.
Washington state has a number of organizations involved with impact investing in various ways. Below are descriptions of GlobalWA members that incorporate this unique approach in their work throughout the world. Learn more about these members and others on GlobalWA’s interactive map.
Global Partnerships – Global Partnerships is a nonprofit impact-led investor whose mission is to expand opportunity for people living in poverty. It invests in social enterprises that deliver high-impact products and services to poor families and communities in Latin America, the Caribbean and Africa. Its partners provide access to financial services, healthcare, education, training, clean energy and connections to markets. This access empowers people living in poverty to create better lives for themselves and for future generations. Since 1994, Global Partnerships has impacted more than 3.6 million lives by investing $183 million in 86 partners across 13 countries. www.globalpartnerships.org
Grameen Foundation – Over the past decade, Grameen Foundation has helped fuel the growth of social enterprises that create income-generating opportunities for women and the poor, and deliver products or services that improve their lives. It has supported multiple social impact funds, and, as a founding sponsor of the Fairtrade Access Fund, a $25 million debt fund in developing countries, Grameen Foundation and its partners have enabled farmers’ organizations and members to affordably invest in processing facilities, farm improvements and new equipment. Grameen Foundation has also invested in social enterprises in Kenya. There, investments ranging from $250,000 to $750,000 have helped fill the start-up “pioneer gap,” where funding is most urgently needed. www.grameenfoundation.org/
Mercy Corps – In 2015, Mercy Corps launched its Social Venture Fund, a seed and early-stage impact investment fund, focused on capitalizing and accelerating for-profit social ventures in Kenya, Uganda, Indonesia and Nepal. Focus areas include agriculture, financial services, last-mile distribution, and youth and female employment. Social Venture Fund investments range from $50,000 to $300,000 (equity, debt or quasi-equity), and businesses selected for investment are those with the potential to scale nationally and regionally to sustainably impact over 1 million people. www.mercycorps.org/innovations/social-venture-fund
Unitus Seed Fund – Unitus Seed Fund is India’s leading venture fund supporting startups “innovating for the masses.” Since 2013, the fund has made a total of 23 investments across sectors including education, healthcare, fin-tech, agriculture, retail and e-commerce, mobile and consumer. The fund’s latest impact report shows a doubling of portfolio reach, touching more than 650,000 low-income lives across 22 states in India. Founded in 2012, Unitus Seed Fund is part of the Unitus Group, a premier financial services group operating in India and other emerging markets since 2000. Unitus Seed Fund is based in Bangalore and Seattle, and is a member of the Capria Network. http://usf.vc/
Upaya Social Ventures – Upaya creates dignified jobs for the poorest of the poor in India by investing in an ecosystem of profitable and scalable businesses in the poorest communities. Upaya runs a 24-36 month accelerator program that provides early-stage entrepreneurs with business development support and financial resources to launch and scale their businesses. The ten entrepreneurs currently in the portfolio employ over 2,500 women and men. Upaya tracks 25 social metrics, such as changes in household income, meals consumed per day, housing condition and children’s school attendance, to ensure employees are making progress out of extreme poverty. www.upayasv.org
3rd Creek Foundation – 3rd Creek Foundation (3CF) is a private family foundation dedicated to helping individuals achieve economic independence. A sister organization to 3rd Creek Investments, Inc., 3CF funds poverty alleviation programs in South Asia and East Africa through grant-making and impact investments. What makes 3CF unique is its size: 3CF makes impact investments of up to $20,000 per enterprise, reaching early stage social enterprises that often struggle to find financing. 3CF believes that employing effective, market-based solutions is key to helping individuals break out of poverty and sustainably improve livelihoods. www.3rdcreek.com/3rdcreekfoundation