The Impact Investor. Clark Cathy

oh, and not to waste any of it on their overheads.

      Yet if business entrepreneurs had come to me at Apax with business plans that involved investing nothing on overheads, I would have shown them the door. The combination of unpredictable funding and lack of investment capital has prevented almost all charitable organizations from realizing their potential effectiveness and scale.

      Philanthropic foundations have a special role to play in driving innovation in nonprofit organizations, and are gradually rising to the challenge. Some foundations now seek to measure outcomes from their grant activities, by way of qualitative if not quantitative criteria. Some are beginning to see impact investment as a very focused complement to philanthropic grants. Some are using their endowments to attract investors, as the Rockefeller, Bloomberg, and Pritzker Foundations have done by taking first-loss positions ahead of third parties. Some charitable foundations are beginning to see themselves as the natural drivers of impact investment, especially the kind that carries the greatest financial risk and the potential for the highest social return. They think it natural to achieve their social objectives through some direct investment from their endowments.

      All investors will find this an informative and valuable book, a must-read for anyone serious about impact investing and sustainable business more broadly. For investors interested in improving people's lives, the book lays out a refreshingly detailed overview of the area. And Cathy, Jed, and Ben's predictions in their final chapter include many powerful ideas, including a number that chime with the work of the Taskforce: integrated reporting, the globalization of financial innovation, new concepts of fiduciary duty, and the importance of corporate and stakeholder alignment.

      Impact investing, more than anything, needs leadership. And this leadership does need to be cross sector, or, in the authors' terms, multilingual. We need it from investors in a position to pilot entrepreneurial ideas; from larger, commercial institutions whose participation is helpful to scaling the sector; from philanthropists and foundations, who can take risks to catalyze impacts; and from policymakers, who can help create a multisector playing field more conducive to improving lives.

      In truth, there are no more excuses for any of us not to act. Social outcomes can be measured. Governments are open to the best ideas on how to move forward. Investors are participating as the right products become available. The rise of impact investing requires only that we coordinate our efforts and, with careful urgency, bring the “invisible heart” of markets to help those whom the “invisible hand” has left behind.

Sir Ronald CohenChair Social Impact Investment Taskforce Established by the G8

      Preface

      Picture…

      …making an investment recommended by the local broker managing your retirement savings and then pulling up an app on your phone that shows the affordable housing development in your community that the investment is helping finance.

      …seeing a news article on the need for more employment opportunities offering sustainable wages, benefits, and professional training for the people of your region and then reviewing the investment report from a local fund quantifying the precise number of jobs it had supported with your capital.

      …collaborating with your start-up team to launch the business you've been planning for the past few years – and knowing there are investors on the other side of the term sheet as interested in the social relevance and intentional impact of your venture as they are in its financial health.

      Over recent years, the world has been witness to an accelerated process of economic evolution coming simultaneously from the fringe and the mainstream. It is a fusion of previously disparate areas of expertise and a vision emerging out of traditional finance, community and economic development, environmental finance, and social entrepreneurship. Following two years of in-depth research, case-studying the experience and track records of twelve of the leading impact investment funds operating in markets around the world, The Impact Investor offers a window through which to view this larger transformation.

      The work of the twelve funds has been significant. Among other things, they

      • Created and sustained more than 1.3 million jobs in underserved markets

      • Provided more than seventeen million people with access to finance previously beyond their reach

      • Managed portfolios of impact investment with more than 40 percent of their investments going into women-led firms and 60 percent of their funds invested in businesses operated by individuals from racial and ethnic groups historically excluded from mainstream financial markets

      • Have raised and invested in excess of $1.3 billion in impact capital

      The funds represent but a snapshot of larger trends under way around the world – trends we believe have the potential to transform business and finance as we know them today. Although in some ways the managers of these funds are simply taking traditional business practices and applying them to new markets, they bring a profound new investment perspective that integrates economic opportunity within a social and environmental context. This investment perspective is a new analytic mind from which all financial professionals may learn. As you will see explored in the pages to come, these investors operate with what we call a “multilingual” skillset – with the capacity to speak profit and purpose, financial return and social impact.

      If you take nothing else away from The Impact Investor, consider this:

      There is a new way of investing that is in the process of deep evolution and no longer sits on the edge of mainstream economics and capital markets.

      These managers do not think in terms of “do well and then do good” or “financial-social trade-offs.” Rather, they think in an integrated way that intuitively seeks to capture the full nature of value through their investment strategies, seeking financial return with impact. They do not see impact as the unique domain of traditional channels of the public and nonprofit sectors. These actors and the funds they bring to market extend the work of previous investment pioneers and represent a potentially powerful force integrating numerous worlds into a single, sustainable whole.

      These new approaches to investing are not being forced on markets, but are drawn into them at the same time as they are emerging out of them. The world is changing as we confront the shortcomings of an “either-or” understanding of capital – either you make money or you give it away – in favor of an integrated investment practice that rejects the short-term approach to managing long-term goals, with no consideration of off-balance-sheet factors such as worker health or the availability of water or the environmental sustainability of a company's supply chain. Some of the change under way in our world is about simple self-preservation (if you're a beverage company operating in emerging markets and are not taking water issues into account, perhaps you will be in a different line of work five years from now!); other parts come from those intentionally seeking to use investment capital to drive positive social and environmental impacts.

      This book is just the latest stepping-stone in a growing body of research across the fields of social entrepreneurship, blended value, community development finance, microfinance, workforce development, impact assessment, sustainability, corporate responsibility, and socially responsible investing. In the past five years, more has been written about the purpose, scope, and activity of these fields than ever before, with increasing speed and regularity, from more diverse and global voices.1

      What we add to the nearly daily drumbeat of new blogs and reports is a deeper empirical look at what is being done and accomplished by funds that have established a tangible track record, in order to understand this emerging field with fresh eyes and to more confidently predict what will come next.

      What this track record of research points toward is the reality that impact investing is moving from anecdote to analysis, from the whipsaw opinion of hopeful pundits to perspectives informed by sharp experience and insights grounded in practice. Our research is drawn from the concrete experiences of twelve funds precisely because that level of in-depth analysis is what is now required to move

1

For a brief but concise overview of the trends in impact investing, see the Case Foundation's “Short Guide to Impact Investing,” at http://casefoundation.org/impact-investing/short-guide.