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From Margins to Mainstream: World Economic Forum Tackles Impact Investing

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From the folks who brought us Davos comes a new report that cautiously concludes that impact investing is ready to break out from its niche and capture the imagination — and the assets — of mainstream institutional investors.

The World Economic Forum used its access to senior decision-makers and portfolio managers of pension funds, insurance companies, private equity firms and mutual funds to get a reality-check on the hype that has surrounded impact investing. The exuberance reached a crescendo in June when British Prime Minister David Cameron made impact investing a key focus of the G8 meetings in the UK.

“Although the growth in impact investing has been driven largely by niche players, leading mainstream investors have now begun to allocate relatively small pools of capital to impact investments,” wrote the authors, who included consultants from Deloitte Touche Tohmatsu. In another section, they state, “Mainstream investors agree that impact investing has the potential to drive a distinct competitive advantage.”

The full report, “From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors,” will be released Thursday in New York. Impact IQ reviewed an abbreviated version of the document.

Impact investing will only take off, the report says, when it broadens beyond the family offices, high-net-work individuals and development-finance agencies that have participated to date. Those players together hold about 2.5 percent of global assets. Foundations and endowments represent another 2 percent. The real money is in pension funds (48 percent), insurance companies (39 percent) and sovereign wealth funds (nine percent).

Four out of five U.S. pension fund managers are familiar with impact investing, but only 9 percent feel it is a viable investment approach, the report found. Impact investors think differently, however: nearly 80 percent say they target market-rate returns.

To attract institutional capital, impact investing must overcome a number of challenges, including small average deal size, the fragmentation of the marketplace, the absence of a track record of exits among impact companies and impact’s fit within traditional asset allocation strategies and perceptions of “fiduciary duty.”

Balancing those constraints, however, may be even larger opportunities. For example, the huge generational transfer of wealth to and from baby boomers (estimated at $41 trillion over the next 40 years) signals major changes in the asset management industry. A Deloitte survey of Millennials about “the primary purpose of business” found the highest number (36 percent) stating “improve society,” even more than “generate profit” (35 percent).

“Trillions of dollars are expected to be inherited over the next 50 years by the next generation, a generation that believes business should play a crucial role in creating a better society,” said Chris Harvey, Deloitte’s managing director of global financial services.

In addition, institutional investors themselves cited the benefits of impact investing: “helped to engage and motivate investment teams,” “signal to shareholders an emphasis on long-term value creation,” and, most importantly, “drive higher investor commitments.”

“As a large wealth manager, we want to play a critical role in aggregating supply and demand and have invested heavily into impact investing by offering product and advisory solutions,” Jürg Zeltner, CEO of wealth management at UBS, said in a statement.

The abbreviated report notes one major risk in accelerating the supply of capital: “the potential for good capital to chase bad deals and potentially create a bubble.” The full report tackles that question with case studies and recommendations for impact funds, entrepreneurs, philanthropists, intermediaries and governments. Impact IQ will update this post with that additional information.

About the author: David Bank

3 comments

  1. David Bank says:

    Deloitte folks who worked on the WEF survey reflect on the lessons:

    >>”Large-scale asset owners are more than just curious about impact investing.”
    >>”Definitional issues related to the term impact investing and uncertainty related to the financial returns on impact investments, has created what some call an “identity crisis” within the space.”
    >>”To address this identity crisis, and to convert interest into investment, a more nuanced and segmented perspective is key.”

    Re the interest of large-scale asset owners, such as pension funds:
    “In the report, we describe the internal rate of return that impact investment fund managers are targeting , but much more work needs to be done to track what they are actually achieving (by asset class, geography, and sector). This tracking, reporting, and segmenting of returns data is a critical factor in bringing large-scale asset owners to the field. We are already beginning to see a more active focus among leading data providers and investment consultants, and our expectation is that greater insight and transparency of impact and financial returns will come.”

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