Opening the Market for Impact Investments: The Need for Adapted Portfolio Tools

Abstract

Social and environmental impact investing as an activity as well as a concept has grown in recognition on a truly global scale. Yet, apart from anecdotal success stories of some specialized forms such as social-impact bonds, little is known about the field and the complex interplay between agents, instruments and regulations. Neither the rationales of the various participants in the field, nor the evaluation criteria for some of its instruments have been scrutinized in-depth so far. Especially the important constructs of risk and returns from a financial as well as a social impact perspective have so far been used in differing fashions, thus rendering the applied logic constructs incompatible to each other. Compatibility, however, is a pre-requisite for the inclusion of impact investments into the portfolios of traditional institutional investors. Much can be gained from this, not only would a huge inflow of capital improve the social and environmental sector, but early evidence shows that the overall performance of mixed portfolios might profit because the experienced low correlation of impact investments to traditional markets reduces portfolio risk and increases sustainability. In addition, more and more investors demand ESG (environmental, social and governance) criteria to be considered when it comes to building portfolios because of the great opportunities provided.

The social impact investment race: toward an interpretative framework

“…Some of them focus on real-word examples to study the functioning of specific financial instruments (Warner, 2013;Joy and Shields, 2013;Sinclair, Roy Huckfield and Donaldson, 2013;Jackson, 2013;Nicholls & Tomkinson, 2015a;Stoezs, 2014;Arena, Bengo, Calderini and Chiodo, 2016), barriers to SII (Nicholls, 2010;Glanzel and Scheuerle, 2016;Mendell and Barbosa, 2013;Schwartz, Jones and Nicholls, 2015;Ormiston, Charlton, Donald and Seymour, 2015) and public policies for SII (Andion, Becker and Victor, 2012;Wells, 2012;Wood, Thornley and Grace, 2013;Addis, 2015;Spear, Paton and Nicholls, 2015;Hazenberg et al, 2014). Other authors offer a mathematical modelling (Brandstetter and Lehner, 2015;Nicholls and Tomkinson, 2015b;Nicholls and Patton, 2015;Chowdhry, Davies and Waters, 2015). Few of them propose a theoretical conceptualization of the SII phenomenon (Nicholls,5 2010; Bell and Haugh, 2015;Ormiston et al, 2015;Lyons and Kickul, 2013;Hebb, 2013;Mulgan, 2015;Oleksiak et al, 2015;Geobey, Westley and Weber, 2012;Moore, Westley and Nicholls, 2012;Young, 2015).…”

The Role of Government, Nonprofit, and Private Facilitation of the Impact Investing Marketplace

“…Facilitation and mediation of impact investments runs the risk of resulting in loss of social benefit if the mediation is too weak or too strong, pro forma, or does not move assets toward market readiness. Some work is currently underway to explore this loss of social benefit which is sometimes termed "social risk" (Brandstetter & Lehner, 2015;Lehner, 2016;Moore, Westley, & Nicholls, 2012). An under researched area is the optimization of facilitation of impact investments.…”

“…Forecasts of potential market size are dependent upon the successful implementation of standardized and meaningful metrics for measuring social impact. However there are a multitude of challenges to creating uniform metrics (Antadze & Westley, 2012;Barman, 2016, p. 206), much less ones that meet the demand for commensurability with standard market products (Barman, 2016;Brandstetter & Lehner, 2015;Harji & Jackson, 2012), and much can be learned from the work of innovative nonprofits and charities that have responded to the increasing demand for performance analytics by both individual and institutional funders (Brest & Born, 2013).…”

Private sector impact investment in water purification infrastructure in South Africa: a qualitative analysis of opportunities and barriers

“…One of the main hindrances to growing the impact-investment market is the limited number of investment-ready deals into which investors can place significant amounts of capital (Ormiston et al, 2015;Burand, 2014;Freireich and Fulton, 2009). As such, there is a shortage of high-quality investment opportunities with well-established track records (Clarkin and Cangioni, 2016;Brandstetter and Lehner, 2015;Saltuk, 2015;Burand, 2014). The lack of well-documented success stories has also resulted in a perception among investors that impact investing cannot provide market-related, risk-adjusted financial returns (Barby and Pederson, 2014;Saltuk, 2015).…”