We're excited to launch our partnership with Arabella Advisor's blog, sharing content today and in the continuing series, from guest bloggers and their experts. Arabella Advisors are EPIP Institutional Members and leaders in the field. Below, Arabella Advisors' Cynthia Muller shares her expertise. Whether you are an expert on the issue, or still trying to figure out what it means, this blog post brings forward some of the key questions and trends in this economic force that is here to stay. Thanks to Arabella Advisors and Cynthia Muller!
Post by Cynthia Muller, Arabella Advisors, guest blogger.
Impact investing is no longer the new kid on the block. Thanks to the work of a variety of pioneers, it has become a recognized approach and—increasingly—a crucial tool that philanthropists, government funders, and other investors look to incorporate as they explore potential paths to the social and environmental change they seek. Leaders like the Ford Foundation, the Omidyar Network, the F.B. Heron Foundation, the MacArthur Foundation, the Rockefeller Foundation, and others have helped pave the way, building the impact investing ecosystem by sharing lessons they’ve learned over the years—even the hard ones—and by finding ways to invest alongside other investors.
While the field is still answering a variety of key questions—including what does and doesn’t constitute social impact, how to measure and compare returns, and where investors should go to find opportunities—we have moved beyond the “venture” phase of impact investing’s development. It is maturing from idea to proven concept, ready to scale and show returns. Simply put: we now know enough to say that impact investing works. Not in every case and not always as expected, but it works in the ways that traditional grant making and investing both work: when done well, it delivers significant—and potentially huge—long-term value.
As the impact investing field continues to mature and grow, we expect to see four key trends take hold:
1. Increasing investment by smaller foundations and family offices, and increasing engagement from wealth advisors
By some estimates, more than $40 trillion will transfer from baby boomers to millennials over the next 30 years, the largest wealth transfer in history. Whether or not those estimates prove accurate, it’s clear that a change is coming. Already, family offices and wealth advisors are reporting more interest in impact investing from clients, at least some of it driven by the increasing prominence of women and millennials. Women are inheriting more wealth and as such making more investment decisions, and studies show that they are more interested in investing in society and the environment. As for millennials: according to the 2014 Deloitte Millennial survey, nearly 30 percent believe business’s number one priority should be to improve society. Even as the tools of impact investing are becoming better established, demand for them is growing among the people who increasingly drive decision making within foundations and family offices—which in turn drives deeper engagement from wealth advisors who are keen to provide top-notch service to their clients.
2. Increasing clustering of investments in particular sectors
Of course, few (if any) investors are looking for generic “impact.” Rather, they are looking to use their investments to drive outcomes related to the causes they care about: climate change, education, health care, etc. So it’s no surprise that as the impact investing field matures, investors and their investments increasingly cluster around particular sectors. Take the environment, for example. One recent conservation report from NatureVest and EKO Asset Management highlights $23.4 billion in documented impact investing transactions between 2009 and 2013. Meanwhile, the Divest-Invest campaign has captured headlines recently, as at least some major funders have promised to get out of oil and gas investments and into clean energy ones. It’s one of many field campaigns now helping to motivate investors to seek out climate-related investments. We expect the momentum for climate-related investments to increase as more products and offerings become available, and we expect to see similar movement on education and health care investing.
3. Multi-stakeholder collaborations
While the motivations for impact investing differ from investor to investor, many have shared objectives (hence the clustering mentioned above), and different players now see value in executing impact investments together through new and/or expanding partnerships. Along these lines, it’s particularly exciting to see that impact investing has begun to expand beyond a core group of foundations and other socially oriented investors to attract a wider array of actors. Banks, corporations, and even pension funds are seeking ways to invest with different partners so that their investments yield social as well as financial returns. The tremendous growth in interest in and activities related to pay-for-performance contracts—such as social impact bonds and development impact bonds—is a key example. Investors see these as potential tools to engage multiple stakeholders from different sectors to leverage government and private resources to generate social impact along with financial returns. Expect to see much more written about these structures and best practices related to them in the coming year.
4. More data
Performance data—actual returns—represent perhaps the field’s most important piece of missing information. For more funders and investors to routinely engage in impact investing, they will need to see a more complete track record, generated through better systems for tracking and broader reporting of both financial and social returns. We expect to see a growing number of industry reports highlighting trends on investment performance. Also expect to see more foundations and individuals sharing the characteristics and performance of their portfolios. Building on great primers and how-to guides from the Case Foundation, World Economic Forum, and others, the field is now moving past merely sharing what impact investing is and beginning to identify concrete practices for how investors can develop and execute their own strategies. As our shared base of knowledge and best practices continues to grow, we can streamline the investment process, reduce transaction costs, and continue to make impact investing more widely accessible.
While impact investing alone obviously won’t solve the world’s problems or replace the need for traditional grant making, it is a powerful and increasingly established approach to driving long-term impact and sustainable change. More foundations and other funders will use it to go beyond grant making in the coming year and long after, putting a wide variety of new financial instruments to work in service of their missions.
Cynthia Muller leads Arabella Advisors’ impact investing practice. She helps individual and institutional clients understand the field of impact investing, develop strategies, and structure investments to accomplish their social and environmental goals. She tweets from @cynmull.
This article originally appeared on Arabella’s Greater Good blog.
Arabella Advisors helps philanthropists and investors who are serious about impact achieve the greatest good with their resources. We recently joined with Exponent Philanthropy and Mission Investors Exchange to create a comprehensive guide, “Essentials of Impact Investing: A Guide for Small-Staffed Foundations” to help funders of all sizes set themselves up for success.
Arabella is looking for passionate, socially minded individuals to join our team. To learn more about our employment opportunities, please visit our careers page.