Ten years ago, the founders of what would become LeapFrog Investments took off across Europe, just “five guys in a Volvo” trying to sell the crazy idea of a private equity fund determined to change the world. Today, LeapFrog manages $1 billion in assets and its institutional investors include Christian Super, TIAA and Zurich, among many others. Its companies reach 111 million people in Africa and Asia – the vast majority of whom are low income – with essential financial and health services. The firm invests primarily in high-growth, purpose-driven companies offering microfinance, insurance, pensions, savings and healthcare services. These businesses, such as AllLife, a South African company that was the first to offer affordable life insurance to people living with HIV, are having a transformative social impact.
I tell this story because despite a decade of growth and increasing awareness, some institutional investors still don’t fully understand the practice of impact investing – investments in positive solutions to environmental and social problems as well as financial returns. And it’s important to address this, because if we are going to tackle big problems like poverty, hunger, climate degradation and social inequality, it is necessary to have capital of a scale that matches the scale of these global issues.
A lack of information about impact investing is just one of the barriers that keeps institutional investors on the sidelines, along with continued misconceptions about risk and returns, and the fact that the market’s relative youth means there aren’t yet vast numbers of asset managers with long-term track records. But the market is maturing quickly, and, while barriers remain, impact investing can provide a competitive advantage for those choosing to get involved sooner rather than later.
Even as we are seeing increasing interest from institutional investors, and those active in the market are expanding their portfolios, questions are still being asked about the financial performance of impact investments. However, a recent report provides comprehensive analysis of existing research on financial performance, and confirms that market rates of return are achievable for those who seek them.
It has been exciting to see growing coverage of impact investing in the mainstream and specialist media, which is helping increasing numbers of investors to understand what impact investing is (and isn’t), and the commercial as well as societal opportunities it can offer.
However, impact investing can sometimes be a victim of its own success: heart-warming coverage about impact on individuals and communities may give a false impression that investments are always about small-scale, early stage investments in emerging markets. Institutional investors we have spoken to have told us that, because of the large scale of investments they typically make, it has seemed harder to find the right investment opportunities that fit their strategic objectives. It is clear that even more information is needed about how other large-scale investors have successfully built portfolios, including how they made the case for impact investing internally, how they have structured their teams, and what has led to their successes. Happily, this may be starting to change, as institutional investors like Aegon, a multinational life insurance pensions and asset management company headquartered in the Netherlands, and Australian superannuation fund Christian Super begin to share their experience.
Of course, there is no denying that the impact investing market remains young, and not all of the exciting opportunities in impact investing reach the scale institutional investors typically seek. But a growing number of asset managers are offering impact funds in areas that will be familiar to large-scale investors, such as affordable housing, microfinance and other financial services, and infrastructure projects, in both developing and developed worlds, and across all asset classes. As the market ages it is becoming easier to find managers with track records as impact investors. Moreover, there are many well-known managers with long histories in the mainstream market entering the space, which bodes well for institutional engagement.
In the future, I believe investment capital that exists only to make more capital will be a thing of the past. We already see signs of a growing movement of large-scale investors – leaders such as Aegon, AXA, Prudential, and others – who realise the power of their capital to drive social and environmental progress.
I urge those who are not already investing with impact to begin conversations internally with their teams and/or board about how they can invest in a more sustainable world while also achieving financial objectives. Also, we hope that institutional investors will express their interest in impact investing to asset managers and investment consultants, and explore how they might be able to help identify funds that provide the right fit for their organisations’ investment strategies.
Too often, investors get bogged down with concerns about the barriers to impact investing. They may see the reasons they can’t get involved, instead of looking for the reasons they can and should. Really, impact investing is about opportunities, including, for large-scale investors, opportunities to invest in progress for vast populations and contribute to a more sustainable planet. If you’re investing for the long term, and beginning to spot signs around you that things need to change, then consider impact investing and how you can be part of this paradigm shift in the capital markets that will help to safeguard your portfolio, and our planet.
The GIIN Investor Forum, co-hosted with PEI Media, takes place in Paris this October. Click here for more information.