Announcing the SOCAP24 Agenda — Going Deeper: Catalyzing Systems Change!

How Do We Scale Impact Investing?

bunsundesigns January 5, 2016

The status quo of how capital is currently deployed can no longer support this changing world. Philanthropy and government aid are insufficient to solve the world’s most intractable social and environmental issues. There is mistrust of the capital markets, with their myopic focus on quarterly returns rather than longterm value creation.

Impact investing represents a paradigm shift, allocating capital for measurable social and environmental impact as well as financial returns. It focuses on maximizing stakeholder value rather than concentrating exclusively on shareholder value.

Impact investing in the US totals $6.5 trillion, a fraction of the $43 trillion of all US assets under management. The vast majority of impact assets are invested in the public markets through socially responsible investing (SRI) and environmental, social, and governance investing (ESG) strategies. Deep impact investing — investing in privately held impact ventures and funds — represents just $60 billion worldwide. Impact ventures focus on job creation, financial inclusion, sustainable agriculture, health, education, housing, energy, water, and sanitation.

What will it take to create greater growth in impact investing across asset classes? First, let’s look at the key players in the impact-investing landscape and take stock of current activity and hurdles, both real and perceived.


Investing in public companies and funds that screen out the so-called “sin stocks,” including tobacco, firearms, and alcohol


Investing in public companies and funds that strive to have beneficial environmental, social, and governance effects.


Investing in private companies and funds where impact is central to the business model and is both measured and reported.



Impact investors range from individual investors (retail or high net-worth) to institutional investors (foundations, pension funds, university endowments, etc.). High-net-worth investors have been leading the deep impact investing charge. Through angel investment groups such as Toniic and Investors’ Circle and peer networks like the 100% Impact Network and The ImPact, the deep impact investment movement has been growing. Increasingly, there are deep impact options for retail investors, including offerings from the Calvert Foundation, ImpactAssets, The Nature Conservancy, and RSF Social Finance.

Some progressive foundations — including the Ford Foundation, the MacArthur Foundation, and the F.B. Heron Foundation — have led the institutional movement in impact investing. University endowments are moving into the field too, motivated by increasing pressure from students and alumni to divest from fossil fuels and similar areas. Pension funds CalPERS and CalSTRS have been participating in values-based investing mainly, but not exclusively, through the public markets. However, the majority of institutional investors have been held back from impact investing by perceived financial tradeoffs and justifiable concerns about fiduciary duty.


Major financial intermediaries such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Merrill Lynch have launched impact-investing initiatives. These institutions are motivated by client demand and a projected $40 trillion wealth transfer to women and Millennials over the next 30 to 40 years, three-quarters of whom seek to invest with impact. There are also impact intermediaries like Big Path Capital and Enclude, which specialize in investing in pure plays (companies that focus on a particular product or activity instead of various interests).


As the industry matures, impact fund managers are starting to raise larger funds based on their financial and impact track records. For instance, DBL Investors closed a third, $400 million venture fund in June 2015. Incumbent asset managers like BlackRock and Bain Capital are launching public and private impact-investment products, respectively.


Public and private impact companies are driving demand for impact capital in varying ways. Public companies have observed that progressive ESG practices correlate with stronger financial performance, less stock volatility, decreased cost of capital, and less employee turnover. Investors are taking note of companies that are gaining such competitive advantages.

Private impact ventures raise both debt and equity capital in order to grow. But fundraising can often be challenging, as the supply and demand for capital are weakly connected at times. We hear from investors that the absorptive capacity for private capital is too small and that there are insufficient exit options from impact investments.


Finally, there are enabling functions such as government policy, corporate structures, and impact metrics, measurement, and reporting. Programs and policies such as community development finance institutions (CDFIs) and the Community Reinvestment Act (CRA) have catalyzed capital into private impact investments.

Benefit Corporations (a corporate legal structure that mandates fiduciaries to focus on stakeholder value) are legal in 31 states. B Lab has certified nearly 1,500 such companies worldwide. Impact metrics, measurement, and reporting mechanisms, including the Global Impact Investing Network’s IRIS catalog, the Global Impact Investing Ratings System (GIIRS), and the Sustainability Accounting Standards Board (SASB), are in an ongoing state of development, adoption, and proliferation.


The impact-investing movement is growing across asset classes, even though there are a number of barriers to scaling. Innovation in the public and private capital markets is essential to meaningfully increasing the flow of impact capital. Until increased flow is achieved, impact investing will just nibble around the edges of true growth. The great news is that the impact-investing ecosystem is connected — for each change made by one set of actors, there is a compounding effect across the entire stage. Such change is afoot.


Large financial institutions have started their impact-investing initiatives mainly by placing ESG funds on their platforms. This is strong progress, but in order for these organizations to facilitate deep impact investing, they will need to accommodate smaller private debt and equity funds that have traditionally lacked access to mainstream platforms. Financial firms must evolve their criteria in order to accommodate smaller-sized impact funds while not compromising due diligence.


While deep impact exposure can be achieved through investments in private debt and equity funds, many investors seek to place capital with individual impact ventures. The challenges there, however, are deal sourcing, due diligence, and transaction costs, making it labor-intensive and expensive to construct deep impact portfolios. The development of impact-deal platforms and groups that syndicate investment in individual deals and funds could make the creation of deep impact portfolios more efficient.


In order for impact fund managers and product developers to scale impact investing, innovation is essential, including the development of funds and products designed to be distributed through wealth advisor platforms and solving for how to cost-effectively layer investment, government, and foundation capital into creative structures that work for all stakeholders.


Recent studies by the University of Oxford, Morgan Stanley, Cambridge Associates, and the Global Impact Investing Network concluded that impact investments in the public markets and in venture capital can perform as well as, and in many instances better than, their traditional cohorts. The truth is that there is a spectrum of financial returns in impact investing, but as these studies indicate, market rate returns may be achieved.


Private companies’ lack of readiness is a current barrier to capital flows. The Center for the Advancement of Social Entrepreneurship at Duke University has developed one potential solution in “Smart Impact Capital”: a set of online modules that will help impact-entrepreneurs prepare to absorb capital. To get to scale, we also need more innovative and flexible layering of capital. More foundations should offer both grants and investment capital to help emerging-market entrepreneurs bridge the so-called “Pioneer Gap,” thereby helping to reduce risk and scale impact ventures.


Exit innovations beyond acquisition are needed. Creative exit strategies in early practice and development include facilitating revenue rights, buyout/buyback rights, demand dividends, and working with business-development companies.


Clear, uniform, and transparent impact metrics, measurements, and usage of industry standards (including those mentioned above) will help drive greater interest and demand from investors. Further development is needed in impact verification and auditing, which has a strong start with GIIRS.


Recent policy changes may catalyze significant capital entering impact investments from institutional and retail investors. Internal Revenue Service and Department of Labor guidelines allow foundations and pension funds regulated by the Employee Retirement Income Security Act (ERISA) to take impact factors into account when making investments, without jeopardizing their fiduciary duty.

In October 2015, the Securities and Exchange Commission passed rules to implement Title III of the JOBS Act, which allows equity crowdfunding from unaccredited investors. These landmark policies are game-changers for impact investing.

In the words of F.B. Heron Foundation President Clara Miller, “All investing is impact investing.” The impact may be positive or negative, but how we invest matters deeply. We must align our investment portfolios with our values. Innovation and education throughout the impact-investing landscape must occur in order to scale the field and create the change we seek.

Disclaimer: Investments cited in this article are neither endorsements nor investment recommendations. This article is intended only to provide information and analysis about the range and types of impact investments in the marketplace. Please seek the advice of a wealth advisor before making any investment.


 The total amount of US assets under management


 The total amount of US assets committed to impact investing


 The total amount of US assets committed to deep impact investing


Fran Seegull is chief investment officer at ImpactAssets, a nonprofit investment firm seeking to increase the flow of capital to impact investing. She oversees impact product development for the firm and heads investment management for The Giving Fund, an impact investing donor-advised fund. Seegull is adjunct professor of entrepreneurship at the Lloyd Greif Center for Entrepreneurial Studies at the University of Southern California’s Marshall School of Business. Connect on Twitter with@franseegull.

Impact Investing / Stakeholder Capitalism
Join the SOCAP Newsletter!