September 27, 2018; Oregon Business
Impact investing, as NPQ has noted, is growing. Yet, as Caleb Diehl writes in Oregon Business, “Big questions loom on the horizon. How should investors measure environmental or social impact? How can they prove their investments are sincere?”
Panelists at a summit hosted by cleantech incubator Vertue Lab in Portland, Oregon debated such questions. Abhilash Mudaliar, research director at the nonprofit Global Impact Investing Network (GIIN) was one of the panelists. He was joined by David Griest, who is a managing director at SJF Ventures (based in Durham, North Carolina) and Elizabeth Carey, finance fund manager at the Oregon Community Foundation.
Mudaliar warned of the risks of “impact-washing.” As Diehl explains, “Like greenwashers, impact-washers promote ostensibly sustainable investments without measuring the social or environmental impact.” According to Mudaliar, impact-washing is not widespread yet, but he says there is a high possibility that it could become more common, as the field grows.
One reason for concern, notes Diehl, is that, “A set of expectations and standard measurements for impact have yet to be developed.” The result, notes Mudaliar, is that there is no clear answer to the question, “What do you need to show to prove you’re an impact investor?”
The number of firms that offer impact investing opportunities has expanded over time. Once, small niche community development venture funds were the main practitioners. While assets under management of such funds increasing from $402 million in 2000 to $2.3 billion by 2013, they have clearly grown, but are but a sliver of the impact investing market.
SJF Ventures—the “SJF” originally stood for sustainable jobs fund—is a veteran in this field. In 2016, SJF raised a $125-million fund. That sounds large, but is still modest by venture capital standards. A standard “deal” for SJF from that fund is in the $3-10 million range—so if a firm needs less than $3 million, it’s out. The average revenue of a median-sized business is $390,000, so this is not a trivial issue.
Evidently, there are many smaller firms that achieve social and environmental goals while turning a profit, but if they are too small, these firms must find their capital elsewhere. What kind of firms are large enough to benefit from impact investment? Often, what impact investing means in practice is investment in green technologies. But many of the firms may not be particularly socially committed in other ways. Some firms, like SJF, seek investments that obtain social and environmental returns; others more narrowly focus on green industries.
Firms like SJF are a small part of the growing impact investing market. GIIN has estimated that impact investments worldwide now total $228 billion, twice the level of just one year before. Among the new entrants to the field, Diehl notes, is Bain Capital, which has launched a $390 million Double Impact Fund.
One challenge of impact investing is not just risk, but time. Often, companies seeking social and environmental returns actually earn solid financial returns, but they may not earn enough quickly enough to buy out investors for a number of years. In response to this dilemma, Griest tells Diehl that some funds are turning to a “patient capital model,” meaning an offering that is longer than the traditional 10-year venture capital lifespan. “The tricky part is finding [investors] who are patient as well,” Griest says. Carey notes that her foundation too struggles “with showing return while taking outsize risks.”
However, Diehl contends, “If investors can be convinced to ride out the uncertainties, impact investments often outperform the traditional profit-centered approach.”
Where is the movement now? “It’s become more popular but it’s still very much a drop in the ocean,” Mudaliar notes. While impact investing totaled $228 billion last year, there were $84.9 trillion in investments under management globally as of 2016, says PricewaterhouseCoopers. In other words, impact investment is still only one-quarter of one percent of all investment.
“We need to have an impact on all investing beyond just growing impact investing,” Mudaliar concludes.—Steve Dubb