Bridges ventures investing for impact
The family offices and large asset managers we spoke to in the United Kingdom are especially excited about investing in businesses that put profits first and see social impact as a coproduct of their work. One example is the Gym Group, a UK company offering affordable health clubs to low-income people whom the wider gym industry generally does not serve.
With capital from the impact-investment firm Bridges Ventures, the gym expanded to more than 35 locations in under five years and returned more than 20 times its original investment. A range of well-defined offerings. Another sign that the impact-investment industry has matured would be the availability of specialized products.
Just as some mutual funds and exchange-traded funds concentrate on geographies, industries, and asset classes, so should impact investors come up with targeted offerings. Focusing on distinct social and environmental themes can help when it comes to setting goals for how much nonfinancial impact a fund will make. Thematic funds should also be easier for investors to compare. Impact investors have set up funds devoted to education , and healthcare is emerging as another focus area.
A high degree of professionalism. More capital will flow into impact funds when they consistently offer investors the same quality of service as other investment funds. Some impact funds have operated for more than five years and have established sound, disciplined processes. However, UK investors told us they have concerns about newer funds, pointing to shortcomings in areas like financial modeling, business-plan preparation, and the evaluation of management, which can be a major risk in impact-investment portfolios.
Funds may also need to offer more competitive pay packages to attract top financial talent. UK investors credit Bridges Ventures with setting high standards for professionalism and paving the way for other firms.
Bridges was founded in to finance companies that serve the most deprived 25 percent of the UK population. The firm has consistently developed investment funds with progressive features. For one of its funds, Bridges created a way to invest in social enterprises whose legal structures make it difficult for them to accept outside financing. Many impact-oriented investment firms will also need to combine novel financing mechanisms with professional investment practices to appeal to a wider range of limited partners and increase the assets they manage.
Priorities for making an impact—on impact investing The investors we spoke with made clear that the global impact-investing market has some way to go before it achieves these four hallmarks of maturity. Resource revolution Learn more Clarifying impact-measurement standards. Looking at a dozen impact-investing funds that publicly disclose how they measure impact, we found that a majority employ more than one impact-measurement framework.
Fund managers tend to use multiple frameworks because no single framework has metrics for all the social or environmental impacts covered by their portfolios, or even by individual funds. This practice burdens prospective investors with interpreting and comparing the various metrics that fund managers apply. Fund managers, investors, and industry bodies must devise a set of metrics for social and environmental results and use these measures consistently. For example, investors that wish to finance improvements in educational outcomes should be able to look at several education-focused impact funds and compare them in terms of the same educational metrics.
Professionalizing the practice of impact investing. Many impact-fund managers need proven operating processes but lack the resources to create them or train employees accordingly. Investors can help by convening impact-fund managers to share knowledge. For example, the ImPact is a coalition of investment firms that have pledged to share what they learn about impact investing.
Impact-fund managers willingly exchange ideas, particularly with newer funds, to help the entire industry gain standing among limited partners. The flow of knowledge has enabled the industry to become more sophisticated and to establish more consistent standards. Major investment-industry associations could also lend credibility to impact investing by defining the competencies needed by impact-fund managers and developing certification programs.
Supporting social enterprises and impact-oriented businesses. Government agencies and large companies can expand markets for impact-oriented businesses and social enterprises by changing procurement practices in their favor and help them scale. Social-sector CEOs also need better training , as well as seasoned board members to guide them as their organizations grow.
Investors and impact-fund managers can help in these respects, in addition to providing capital. One example is a program being run by the UK not-for-profit OnPurpose with support from the Centerbridge Foundation to provide leadership development training for social-sector CEOs. Improving marketing practices and product development. To provide the clarity that practitioners have been calling for, the Platform has created a regularly updated web tool that explains the core actions of impact management and links to the resources that support organisations and investors to implement them.
Find out more at: www. The initiative creates practical tools and peer-learning communities that support investors in building their capabilities for managing impact, and integrating impact with financial data, analysis, frameworks, and processes. Impact Frontiers offers two tracks to investors: A cohort-based model in which Impact Frontiers guides investors through a process of designing and implementing their own approaches, with mutual support from peers and in ways that are aligned with existing standards and best practices Freely available online resources that any investor can use on their own Impact Frontiers also facilitates further consensus-building in areas of practice where standards and guidance do not yet exist, using practitioner experience to jump-start the conversations.
Impact Frontiers originated at Root Capital, migrated to the Impact Management Project in as a natural platform for industry collaboration, and is now continuing as an independent non-profit initiative of the Bridges group. For IFRS sustainability disclosure standards, visit www. Launched in June , the ICS aggregates information about sustainability-related disclosures of investments and brings them into a consistent digital reporting format.
Following the successful roll-out to over practitioners, the GIIN has now brought the ICS into its suite of impact management offerings, and is enabling the ICS to remain freely available.
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These efforts are informed by the GIIN Investors Council, a membership group comprised of leading impact investors committed to developing a coherent industry that facilitates more pri-vate capital investment in businesses addressing social and environmental problems around the world. By bringing together the large-scale family offices, institutional investors, pension funds, investment banks, wealth managers, private foundations and development finance institutions whose goals lie in the territory between philanthropy and the sole focus on profit-maximisation, and private foundations, the GIIN seeks to drive collectively towards the maturation of a sector that is currently inhibited by fragmentation.
During the last several years, Impact Investing has clearly emerged as one such solution: an innovation that can help more people tap into expanding markets while strengthening their resilience to 21st century risks. Government funding, international aid and philanthropic donations alone are insufficient to achieve the worlds development aspirations, especially against the backdrop of global recession. Private investment capital, therefore, will need to complement traditional resources or solve problems on a larger scale.
Fortunately, the emerging Impact Investing industry enables investors to direct their resources toward multiple bottom-line returns financial and social or environmental. This means doing good with the market, not only doing well in it. The Rockefeller Foundation recently launched a major initiative on Harnessing the Power of Impact Investing because we believe the industry could potentially become a powerful complement to our and others work.
Through this initiative, we organised an inspiring group of partners ranging from entrepreneurs starting Impact In-vestment banks and wealth management firms to leaders of major pension funds and investment banks to help accelerate this new industrys evolution.
A mature impact investing industry will enable more investors to address a wider range of social and environmental challenges more efficiently, making our job easier in turn. This new report, Investing for Impact: Case Studies Across Asset Classes, is particularly encouraging both for what it describes and for what it signals about how Impact Investing is evolving. It provides fresh evidence of the diversity of investment opportunities now available and, importantly, the range of investors this industry now counts among its ranks.
Together, this seminal scholarship lays groundwork for new and clearer understandings of the industry. The process by which this report materialised is also encouraging. The 50 Impact Investing pioneers who contributed their time and opened their books to the reports authors exemplify the collaborative commitment necessary for this new industry to reach its potential. The Global Impact Investing Network, whose founding members constitute many of the investors profiled in this document, will draw on this commitment and provide a platform for keeping these case examples live.
We are also grateful to the Parthenon Group and Bridges Ventures for their leadership and generosity in producing this study as a pro bono contribution to the field. I hope this publication makes plain exactly why my col-leagues and I are so excited about Impact Investings possibilities. We look forward to working with you to build an industry that generates many more promising case studies of high-Impact Investment.
What has become exceedingly clear to us here at Generation is that sustainability and long-term value creation are inextricably linked. We hope by our partici-pation in this study we can help demonstrate that Impact Investment makes sense even for mainstream investors.
We look forward to helping expand the community of Impact Investors, and we think now is the time for these activities to move from niche to mainstream. Today, the sustainability challenges the planet faces are extraordinary and completely unprecedented. Even beyond the bailouts and recent volatility, the challenges of the climate crisis, water scarcity, income dispar-ity, extreme poverty and disease must command our urgent attention.
Philanthropy alone cannot provide the full set of solutions needed to address these challenges. Now, more than ever, capital markets need to play a role in addressing global sustainability challenges. Whether you are a private individual, family office, investment bank, foundation endowment, or pension fund, this report should be helpful in providing a view across asset classes to highlight the variety of oppor-tunities and ways to invest for impact.
We hope you will join us on the path to create a more sustainable form of capitalism. Investors in Impact Investment Funds include high-net-worth individuals, institutional investors, corporations or foundations, who invest in a wide range of asset classes. Governments and charities do not have sufficient capital nor the complete skills set required to solve the worlds pressing challenges.
At the same time, the recent economic crisis has shaken established orthodoxies about the risk and return profiles of traditional investments. The Impact Investment sector is emerg-ing as a partial answer to the twin challenges that these two realities present: Impact Investment unlocks substantial capital to build a more sustainable and equitable global economy while allowing for diversification across geographies and asset classes.
A plethora of investments is emerging across multiple asset classes that provide investors with market-rate investments, or for more altruistic investors, substan-tial social impact, while still generating positive financial returns. The old binary systemthe widely-held belief that for-profit investment could only maximise financial return and social purpose could only be pursued through charityis breaking down.
Who is this report for? This report is intended for the investment community and aims to help inves-tors understand this emerging industry. Many investors have begun to explore Impact Investments by investing in microfinance in developing countries or com-munity development projects in the US. However, there is still a perception that Impact Investment always entails a sub-market financial return, which this report demonstrates is far from the case.
Fortunately, the emerging contributed their time and opened their books to the Impact Investing industry enables investors to direct their reports authors exemplify the collaborative commitment resources toward multiple bottom-line returns financial necessary for this new industry to reach its potential. This means doing good with The Global Impact Investing Network, whose founding the market, not only doing well in it.
We are initiative on Harnessing the Power of Impact Investing also grateful to the Parthenon Group and Bridges Ventures because we believe the industry could potentially become for their leadership and generosity in producing this study a powerful complement to our and others work.
Through this initiative, we organised an inspiring group of partners ranging from entrepreneurs starting Impact In- I hope this publication makes plain exactly why my col- vestment banks and wealth management firms to leaders leagues and I are so excited about Impact Investings of major pension funds and investment banks to help possibilities.
We look forward to working with you to build accelerate this new industrys evolution. A mature impact an industry that generates many more promising case investing industry will enable more investors to address a studies of high-Impact Investment.
Investors in Impact Investment Funds include high-net-worth individuals, institutional investors, corporations or foundations, who invest in a wide range of asset classes. Governments and charities do not have sufficient capital nor the complete skill set required to solve the worlds pressing challenges.
At the same time, the recent economic crisis has shaken established orthodoxies about the risk and return profiles of traditional investments. The Impact Investment sector is emerg- ing as a partial answer to the twin challenges that these two realities present: Impact Investment unlocks substantial capital to build a more sustainable and equitable global economy while allowing for diversification across geographies and asset classes. A plethora of investments is emerging across multiple asset classes that provide investors with market-rate investments, or for more altruistic investors, substan- tial social impact, while still generating positive financial returns.
The old binary systemthe widely-held belief that for-profit investment could only maximise financial return while social purpose could only be pursued through charityis breaking down. Who is this report for? This report is intended for the investment community and aims to help inves- tors understand this emerging industry. Many investors have begun to explore Impact Investments by investing in microfinance in developing countries or com- munity development projects in the US.
However, there is still a perception that Impact Investment always entails a sub-market financial return, which this report demonstrates is far from the case. For example, Lyme Timber, a forestry fund based in Hanover, New Hampshire, has been able to utilise conservation con- tracts, partnerships with the Nature Conservatory, and deep industry experience to invest in sustainable forestry projects throughout the US.
These projects help conserve local forests, while delivering market to above-market returns to their investors. Meanwhile, the industry is developing globally and the financial products avail- able for investors are diversifying. Investments range from tropical rainforest preservation in South America, to finance for charities in the UK, to low-income housing development in New York City, to infectious disease prevention in Africa.
This structure illustrates readily the diversity of products that are being developed, where they re- side within a traditional asset allocation framework and the types of opportunities that are available to date. From these cases the report draws a series of findings [pg. This report, in conjunction with a new monograph by Rockefeller Philanthropy Advisors, Solutions for Impact Investors: From Strategy to Implemen- tation, demonstrates how impact investing can be integrated across asset classes and equips in- vestors with the tools to frame their investment decisions from strategy to implementation and evaluation.
The growth potential of impact investment Compared to more traditional investments in established asset classes, Impact Investment is only now emerging from infancy. Some initiatives have achieved substantial scale but many others remain small.
However, apart from growing in its own right, the sector has fostered a high level of innovation which can potentially serve as a catalyst to influence how mainstream investments are made. The positive momentum of the Impact Investment sector continues, despite the recent turmoil in global capital markets. While the basic investment infra- structure needs to be developed, Impact Investment is becoming a stable and sustainable alternative for institutional investors and high net worth individuals.
As the infrastructure builds further and more funds across asset classes achieve market-rate performance, the Impact Investment sector stands poised to be- come a powerful vehicle both to address significant social and environmental issues and to chart a new course for the financial services industry to reclaim its stature as an engine of social and economic upliftment. Impact First Investors, who seek to optimise social or environmental returns with a financial floor.
Layered Structures Sometimes Financial First and Impact First investors collaborate in what we term as layered structures also termed Yin-Yang investments2. These layered struc- tures are created when the two types of investors work together, combining capital from Impact First and Financial First motivations, blending different types of capital with different requirements and motivations.
In these deals, Im- pact First investors accept a sub-market risk-adjusted rate of return enabling other tranches of the investment to become attractive to Financial First investors. This symbiotic relationship allows Financial First investors to achieve market rate returns and Impact First investors to leverage their investment capital thus achieving signifi- cantly more social impact than they would if investing on their own.
It is important to note that these structures are not limited to Financial First and Impact First inves- tors, but can include philanthropic organisations pairing grant money with Financial or Impact First investors to generate high levels of impact.
This segmentation of Impact Investors, as adapted from the Monitor Institute Re- port, is summarised in the figure on page 7. Financial impact investment sector? Fi- vestment Arm, have internal allocations for the nally, some investors are bound by fiduciary percentage of their total assets to be placed in duties either set out in their mission statement Financial First investments versus Impact First or governed by their legal status and are re- investments.
Investors who have the flexibility stricted to only Financial First Investments. Without the same level limiting their ability to play in Impact First invest- of fiduciary duty as many other types of inves- ments. Although generally confined to Financial tors, these investors can invest across different First investments, these investors have a multi- asset classes. The Impact Investment space tude of options available to them for achieving allows these investors to pick multiple strate- market-rate return Impact Investments.
From gies for their investments. They, like pension direct investments through to investments in funds, can look to maximise returns through a numerous funds, pension fund managers have diversified Financial First platform. Or they can the ability to put together a diversified portfo- choose a particular social or environmental mis- lio of Impact Investments. Given their Impact Investments across asset classes from flexibility, family offices were instrumental in cash to debt to private equity that comply with pioneering the early commercial investment ve- fiduciary responsibility regulations.
Layered hicles in microfinance and are proving similarly structures also give these investors further influential in seeding the rapidly growing field of opportunities to meet their fiduciary responsi- Impact Investment funds. High net worth individuals and family offices typically have greater flexibility in their investment mandates.
Pension funds and other institutional investors are normally bound by strong fiduciary duties, limiting their ability to play in Impact First investments. According to John Goldstein of They can invest their endowment in Financial Imprint Capital, The flexibility to invest across First investments sometimes known as Mis- asset classes, impact areas, and return profiles sion-Related Investment then use a portion possessed by some high net worth investors is of their grant allocations or assets to invest both a blessing and a curse.
This ability to play in Impact First Investments often referred across the whole spectrum can be paralysing, to as Social Investment and sometimes as leaving some thinking Where do I start? Find- Programme-Related Investment from their ing clear anchors and entry points is essential. Like high net worth individ- ate operational learning experiment in Mission uals and family offices, foundations can often Driven Investing.
They saw investments as achieve strong returns, while creating impact an additional tool to drive impact and used not just broadly, but in specific target missions the funds to test various investment vehicles that relate to the foundations own mission. RSF Social Finance decided to offer its clients portfolios consisting exclu- sively of market rate mission managers such as Beartooth Capital, a real estate investor restor- ing and protecting ecologically important land.
Each strategy fits the individual goals als, foundations often have of the investors but demonstrates a defined, the latitude to take a more thoughtful approach and entry point. The current economic crisis has shaken established orthodoxies about the risk and return of mainstream investments. At the same time, there has been rising interest among the investment commu- nity towards social and environmental responsibility in investment, as illustrated by the growing importance of initiatives such as the UN Principles for Responsible Investment.
As Rockefeller Founda- tion President Judith Rodin notes in her introductory letter, charitable donations do not provide enough capital to solve our pressing social and environmental challenges at scale. With the global economy hobbled, mobilising all capital efficiently will be crucial if we are not to lose ground in creating a more sustainable and equitable world.
Flourishing New Models of in this report have debunked the notion that Impact Investment socially or environmentally beneficial projects Creativity in the Impact Investment sector has always require charity. From its genesis in community investment and low-income housing development, clean- Creativity in the Impact In- tech and microfinance, Impact Investment is vestment sector has led to now helping to provide the scale-up finance strong increases in invest- that enables slum schools in India to expand, ment activity.
Impact Investors are also Impact Investment is becoming a becoming more innovative in designing invest- Global Movement ment structures that are drawing institutional Impact Investment examples are springing capital to new asset classes. The case studies up across the globe and are flourishing both 10 Investing for Impact: Case Studies Across Asset Classes 13 in the developed and the developing worlds.
The per- developing new homes for the poor as Ignia ception that Impact Investment necessitates is doing in Mexico. As new models are flour- accepting sub-market rate returns is eroding. Layered structures are also helping to in sustainable banks like Triodos, a bank which drive money into new areas.
For example, provides financing exclusively to companies IFFIm bonds are currently tapping the reserves and projects that have a social or environmen- of the wealthier Western world to provide tal impact and delivers market rate returns immunisation for the 70 poorest countries to its depositors.
Many funds today are rais- globally. It is mov- vestor types as larger institutional investors ing far beyond the quoted asset class in which are attracted by the diversification, returns, Socially Responsible Investment SRI has its and social impact generated from these in- roots. Whether through sustainable forestry vestments. There are investments across all Many impact-oriented funds cited their begin- asset classes that provide investors with nu- nings as Impact First funds.
Traditionally, their merous options to trade off among risk, return investor base was made up of foundations and and level of impact. As these funds were As these Impact Investments become more able to prove that they could also generate widespread, when faced with a choice be- 3 International Association of Microfinance Investors 11 14 market rate returns, institutional money started ability or relative impact in an attempt to give to flow in and these funds eventually migrated investors tools to compare and contrast their to the Financial First segment.
These developments in building a sustainable ecosystem for Impact As more impact oriented funds demonstrate Investments are driving the confidence many market rate returns made from high-impact institutional investors are starting to gain in the platforms, more institutional funds will look sector. This will attract more funds to be raised, increasing the social impact that can be achieved.
By pioneering invest- ment in new fund managers and investment areas, investors with a risk appetite can help to accelerate this trajectory and seed the next generation of Impact Investment funds that can be accessible to Financial First investors.
As more impact oriented funds demonstrate market rate returns made from high- impact platforms, more institutional funds will look to invest in this sector. Impact Investment is Helping Answer Challenges and Change the Market Clarity is Emerging By creating mechanisms through which inves- The Impact Investment sector is gaining clar- tors can both make money and address social ity.
Numerous success stories have allowed lutions. Impact Investments often leverage the sector to break down the stereotypes many grants, sometimes in mezzanine financing ar- mainstream investors had on Impact Invest- rangements that create a large multiplier effect ments. However, as the examples in this report show, Impact In- Through using the Asset Allocation Framework vestors are not limited to partnering with grant presented in this paper, investors can more makers: from tropical rainforest preservation, to easily navigate around the plethora of options low-income housing development in New York available.
Alongside research like this, devel- City, to infectious disease prevention in Africa, opments are being made in the infrastructure Impact Investors are also making market-rate of the sector. Initiatives set forth by the Rock- returns on investments that fit seamlessly into efeller Foundation and B Labs are looking to their portfolios.
However, as opportunities grow in ronmental challenges, Impact scale and number, will the same returns ex- Investment offers the po- ist? Will impact be compromised as the sector grows? The answers to these questions will tential to expand the pool of prove critical to the future of the sector. The early pioneer investors are helping ca- talyse the sector by showing how profitable investment portfolios can be compounded with impact.
Early investors have also helped inspire replication in other areas of impact. Having seen the success IFFIm was able to achieve through its bond offering, the Prince of Wales is currently proposing a similar structure for rainforest bonds to halt the deforestation of the worlds endangered rainforests. Impact Investment is Emerging from Infancy New capital is employed across the asset allocation spectrum.
These investment vehicles are examples of how expansion into new asset classes is helping to broaden the reach of Impact Invest- ment, while allowing investors to diversify across multiple asset classes. The tors must have been able to satisfy framework is thus organised along two key di- themselves that a risk-adjusted market- mensions: investor motivation Financial First rate return is being targeted; otherwise vs.
Impact First and asset class as per tradi- it is deemed Impact First. The cases out- investments.
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