Impact Investment. Allman Keith А.

impact has been generated is what will define entities in impact investing. This is why the brunt of this book and the electronic files accompanying it focus on the investment process and social impact measurement. There are many publications available that have striking images of rural villagers using innovative technologies and compelling stories of impact-oriented companies, but these are largely motivational and show basic causality. It's the day-to-day tasks of impact investors – which involve accounting, corporate finance, valuation, statistical measurement, and social metric analysis – that are the most difficult, but the most important.

      Although I left impact investing as a full-time endeavor because of some of these issues, I remain committed through select investments in solar and energy efficiency that my current position allows for and pro-bono work with impact investing entities. I anticipate a full-time return at some point. In the interim, I can offer this book that tries to address proper investment execution and social impact measurement. As with any of my books, I stand behind the learning process and offer my email directly if you have questions: [email protected].

      Keith A. Allman

      New York 2014

      I have had the privilege of walking the narrow streets of Mumbai slums and speaking with micro-entrepreneur women whose endurance and creativity merit recognition and respect. I have also heard businesspeople in luxurious offices in Geneva argue that it is not possible to build an ethical gold supply chain. Impact investing builds a bridge between apparently disconnected realities. Impact investing is the promise of channeling private capital to solve intractable social problems while delivering impact, inclusion, and sustainability.

      But, is impact investing delivering on its promise? Keith Allman's kind invitation to be a contributing author of this book sparked a desire to share the lessons learned by Bamboo Finance on the importance of adding rigor and accountability in defining, measuring, and assessing impact. Even if we are only at the beginning of the learning journey, we follow from due diligence to exit a responsible investment process aimed at delivering impact.

      The impact promise begs for more accountability. Too much money has been deployed with little analysis on effectiveness. Impact investing marries the rigor of the industry of investing with the (nascent) rigor of impact measurement. If impact investing wishes to deserve its name, it needs to be evidence-based investing. Building evidence on what works and what doesn't requires a collective effort. The broader the participation is, the richer the learning will be. The voices of customers at the base of the pyramid, on whose behalf we too often speak, are central to our learning. Also, the entrepreneurs, investors, and academia need to join the conversation. This book seeks to contribute to that learning. I am grateful for the opportunity and excited to read your reactions. [email protected]

      Ximena Escobar de Nogales

      Geneva 2014

      A NOTE ABOUT THE WEBSITE

      Readers will find professional-level investment material on this book's website: www.wiley.com/go/impactinvestment. See the appendix for more details.

      Acknowledgments

      While impact investing demands a large body of financial knowledge, it would simply be traditional investing without the social impact analysis. I'm thankful that Ximena joined this project to provide her expertise in social impact and be the counterweight that allows this book to cover the full spectrum of challenges and solutions for impact investment.

      Also, while I identify the inception of my work in impact investing many years ago through Relief International, it was my work with Bamboo Finance that accelerated my understanding of direct investments and industry-wide issues. I'm thankful for all of the collaboration, discussion, and engagement with Jean-Philippe de Schrevel, Christian Schattenmann, Eric Berkowitz, Keely Stevenson, Natalia Mouhape, Florian Ulmer, Ana Maria Aristizabal, Marlene Mueller, Elvira Espejo, Anu Valli, and Geetali Kumar.

      Finally, it's been three years since I've worked with the team at John Wiley and Sons and I still can't thank them enough for the opportunity to publish on their platform and work with their talented staff. In particular, Bill Falloon has worked with me throughout the years and is a great sounding board for ideas and bringing a concept to reality. I'm also very thankful of the work Meg Freeborn, Helen Cho, Maria Sunny, and the rest of the Wiley team completed.

      Keith A. Allman

      New York 2014

      Many people have contributed to the learnings and insights on impact management shared in this book. I am particularly grateful to the individuals whom this industry seeks to serve. In a quest to better understand their needs, we often intrude in their lives. They generously allow us in, even when our “studies” do not always result in gains for them. Thanks also to our investee companies who help us seek evidence of what products and distribution models deliver the expected impact.

      Much of my learnings on impact investing come from over four years at Bamboo Finance, and I am most grateful to Jean Philippe de Schrevel, whose tenacious belief in the power of private capital to solve intractable social problems inspires many of us in this industry. I am also thankful to my colleagues at Bamboo Finance and in particular to Sarah Djari, Ana Maria Aristizabal, and Anu Valli for many hours of engaged discussions on identifying, measuring and expanding impact, and to Tracy Barba, for helping us articulate our achievements and challenges.

      I have also benefited from the insights of industry-wide social performance and impact management initiatives, specifically the Global Impact Investing Rating System (GIIRs), the Social Performance Task Force (SPTF), and the European Venture Philanthropy Association (EVPA). Many thanks to Neha Kumar, Olivia Muiru, Flory Wilson, Emmanuelle Javoy, Kelly McCarthy, Laura Foose and Lisa Hehenberger. On a more personal note, I would like to thank my daughter Camille for ongoing stimulation.

      My greatest gratitude is to Keith Allman for having invited me to contribute to this book.

      Ximena Escobar de Nogales

      Geneva 2014

Chapter 1

      Introduction to Impact Investing

      It is an extremely tempting proposition: Invest money in a business whose product or service offers financial return and at the same time generates positive social impact. All parties seem to win, with an investor making a return and society benefiting. A charity could direct money into an organization that accomplishes the same social mission as one it grants to, but instead is able to receive back and reinvest the granted funds. What could hinder such a paradigm?

      This idealistic form of capitalism has surged in the last few years. As of 2014, over USD12.7 billion has been committed to impact investing, representing a growth of 19 percent from the prior year.1 Numerous investors are active ranging from lone high net worth individuals to a multitude of private equity funds. Even larger-scale financial institutions and investment firms have dedicated funds and resources to impact investing. Ancillary services have emerged to support these investors and further develop the industry including secondary market platforms, capital advisers who specialize in impact investments, and services to validate and rate social performance.

      With such fervor, why does it still seem like the impact investing market is constrained? The simple answer is that it is not easy to both create a profitable business that has a significant social impact and also scale that business so that it generates commercial returns for investors and continues to progress its social mission. It comes as no shock, then, that for a number of years in a row, J.P. Morgan's impact investing survey cites “a shortage of high quality investment opportunities with track records” and a “lack of appropriate capital across the risk/return spectrum” as primary hindrances to the growth of impact investing.2

      Part of the issue is that impact investing appeals to our senses and consciences through innovative solutions to pressing social problems. This thought should not be misinterpreted though, as many of the entities and businesses an investor encounters when reviewing social enterprises legitimately intend to or are actively creating significant positive social value. The

2

Ibid., 6.