In a report issued this month, the World Economic Forum (WEF) says that conventional investors must be incorporated into the mix in order for the impact investing sector to grow significantly.
What’s the first step to doing this? The WEF says that over the next year it will identify the best practices and organizational structures that asset managers, private wealth managers and financial services institutions can implement in order to make impact investing an integral part of their strategy and operations.
“The intended goal of these efforts will be to continue to move impact investing from the margin and into the mainstream,” the WEF says in collaboration with Deloitte Touche Tohmatsu in From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors, a report released Sept. 19.
But the independent international organization also acknowledges that this needs to be done with a careful hand. The WEF notes that the “risk in attempting to accelerate the supply of capital into impact investments is the potential for good capital to chase bad deals and potentially create a bubble.”
The WEF says there must be enough investable organizations within key sectors across various geographies to justify a surge in capital flow.
LOOKING TO EXCHANGES AND INVESTMENT PLATFORMS
At the current time, there are a handful of means for investors to get involved in the social impact investment space, the WEF notes. Some of them have a familiar feel to the financial world.
Exchanges and investment platforms help address the challenge that many investors face when seeking to invest in impact enterprises: identifying investable opportunities.
While stock exchanges have been facilitating transactions for centuries, the first social stock exchange was officially launched in London in 2013. The exchange showcases publically listed impact enterprises that trade on the London Stock Exchange (LSE).
Other stock exchanges are expected to follow suit in 2013, the WEF notes. The Impact Investment Exchange (IIX), which trades out of Mauritius, aims to support listing, trading, clearing and settlement of securities issued by social enterprises across Africa and Asia.
While social stock exchanges will likely not result in rapid acceleration of mainstream capital into impact investments, they have the potential
to offer value to retail and institutional investors by providing
access to liquid securities of impact enterprises, the WEF says.
FIXED INCOME PRODUCTS
Other products include bond maturities issued by governments, corporations or financial institutions that result in capital flow to impact enterprises or projects address social or environmental challenges.
The International Finance Corporation (IFC)’s green bond, an example of a traditional bond structure, is a $1 billion three-year AAA rated green bond with an interest rate set at three-year U.S. Treasury rates. The IFC uses green bonds to finance projects that result in reduced greenhouse gas emissions in developing countries.
Unlike the IFC’s green bond, social impact bonds (SIBs) offer a fairly untraditional bond structure, and are actually more similar to structured products than bonds.
COMMODITIES AND PRIVATE EQUITY NOT SEEN AS KEY
The wide use of commodities for social impact investing is not seen as a big area of focus. The WEF says in its report that “while opportunities may exist for trading of sustainably produced commodities, it is unlikely to occur in the near future.”
And the WEF says that while direct private equity or venture capital is a common asset class for impact investment funds to target, the deal sizes are usually too small for many mainstream capital providers.
And while hedge funds involve complex investment strategies of publically traded companies, given the limited number of public listings of impact enterprises there are currently limited opportunities for hedge funds in impact investing.
WEF ACKNOWLEDGES THERE MAY BE GROWING PAINS
Indeed, many of the challenges currently seen with impact investing are attributed to the need for the sector to mature. The WEF says in its report that, in time, impact enterprises and deal sizes will grow, track records will be built and perceptions about financial performance will be realized in time.
But the WEF notes that no new market moves on commitment alone. “Institutional investors that have found successful strategies delivering on the double bottom line will need to become advocates of the sector and share best practices and critical success factors,” the WEF notes.
According to Michael Drexler, senior director, head of investors industries for WEF USA and Abigail Noble, associate director, head of impact investing initiatives for WEF USA, the WEF will listen carefully to whether market participants believe impact investing will inevitably be mainstreamed or if they think it will merely become a bellwether for what is not working in the economy.
Thoughts, anyone?
