Investing for Impact: What's in Your Portfolio?

Market Context & Definitions

• Impact investing is being defined by the G8 Task Force (supported by 7 governments, EU, and private/public sectors) as a field to scale from small projects to a major economic driver.
• A seminal 2010 JP Morgan report predicted $1 trillion in assets under management by an impact label, sparking years of debate regarding terminology and whether it constitutes a distinct asset class.
• The G8 Task Force aims to produce a report in September detailing necessary government policy reforms, corporate law changes, and ecosystem mapping for impact investing in national contexts.

Panelist Backgrounds & Motivations

• Jean Case: Transitioned from public service and AOL (democratizing information) to the Case Foundation; views impact investing as "new ways to solve old problems" by engaging entrepreneurs as "missing seats" in the rowing team of social change.
• Michael Schlein: Former Citi executive and government official; founded Accion, a microfinance leader serving 2.5 billion people in poverty; emphasizes that philanthropy alone is insufficient to solve poverty and requires capital markets with market-rate returns.
• Tracy (Social Finance): Focuses on Social Impact Bonds (SIBs) or "Pay for Success" models; argues these tools invert the 2008 crisis dynamic by having private investors absorb risk while public sectors only pay for achieved social outcomes.
• John Hempston (LGT Venture Philanthropy): Brings a private equity background to impact investing; highlights Asia as a key growth region due to the convergence of massive wealth accumulation and deep social need.

Key Financial Instruments & Deals

• Social Impact Bonds (SIBs):
  • A pilot in New York State (announced late 2013) raised $13.5 million from 45 investors (including Larry Summers) to fund reintegration services for 2,000 ex-convicts.
  • Structure: If recidivism is reduced by 8%, New York State repays investors principal plus up to 12% annual return; if targets are missed, investors lose capital.
  • Potential market: Criminal justice spending alone in the US is $70 billion annually; SIBs aim to monetize future government savings from preventative programs like asthma management and elderly care.
• Microfinance:
  • Axion has supported 63 microfinance institutions in 32 countries serving millions; well-managed institutions generate 20–30% return on equity.
  • Lessons from the SKS Finance crisis in India included over-lending and poor regulation; the industry now self-regulates through the Microfinance CEO Working Group focusing on consumer protection.
  • Realized returns: The Accion Investment Fund achieved a 15.6% annual return over a decade in difficult markets like Nigeria and Ecuador.
• Specific Portfolio Examples:
  • Brain Trust Fund: A Case Foundation initiative for brain cancer research that made a successful exit with a for-profit, for-profit fund structure.
  • Husk Power Systems (India): Seeded by LGT and others to provide electricity from rice husks; scaled to power 50,000 homes in rural Bihar, modeling high-teen percentage returns.
  • M-Kopa (Kenya): A $20 million round closed recently for pay-as-you-go solar home systems, utilizing a tiered capital structure with philanthropic guarantees (Gates Foundation) and commercial banks.

Market Trends & Challenges

• Labeling Debate: Some pioneers (e.g., Carlyle) avoid the term "impact investing" when raising capital to prevent perceptions of below-market returns; they frame deals as "sub-Saharan focused" to attract traditional risk capital.
• Institutional Traction: Goldman Sachs launched an impact fund; Carlyle closed a $700 million sub-Saharan fund; JP Morgan predicted $1 trillion in impact assets.
• Regulatory Shifts: India introduced a compulsory 2% CSR (Corporate Social Responsibility) rule, forcing corporations to direct capital toward social sectors; Hong Kong allocated $500 million (approx. $70M) and Seoul $100 million to support social entrepreneurship.
• Technology & Innovation:
  • Mobile Money: Accion highlights Tiaxa (Chile/Global) using prepaid mobile data and big data (70 data points per user) to offer "nano-loans" with 97% repayment rates.
  • Crowdfunding: Technology platforms are enabling democratized investment; one platform alone facilitated over $1 billion in micro-donations, with total platforms reaching $1.5 billion.

Forward-Looking Statements & Predictions

• Growth Trajectory: Tracy projects $300–$500 million in US Social Impact Bond deals within the next 18 months, building on over $100 million currently active globally.
• Asset Class Evolution: Jean Case and Tracy agree the sector is in "very early days" but anticipate a "tipping point" similar to the venture capital trajectory of the past.
• Future Returns: Michael Schlein predicts returns in financial inclusion will likely continue to rise due to digital innovation; he disputes the notion that impact investing requires a trade-off on returns for social good.
• Accessibility: Jean Case notes that while 401(k) inclusion is distant due to risk profiles, instruments like Calvert Notes and vaccination bonds are already reaching retail investors.

Critical Discourse & Criticisms

• Risk vs. Philanthropy: Critics like Warren Buffett and Marc Andreessen have characterized impact investing as risky or "not a good house, not a good boat"; counter-arguments emphasize the "brunch" concept (better than the alternatives of 100% capital loss or no impact).
• Measurement & Transparency: The consensus is that the field requires standardized metrics and certification to resolve investor confusion and validate the "impact" in "impact investing."
• Inequality Context: The panel links the rise of impact investing to historic levels of income inequality, suggesting that harnessing capital markets for shared growth is essential for long-term economic stability.

Call to Action & Resources

• Case Foundation: Released a crowdsourced "Short Guide to Impact Investing" for public feedback at casefoundation.org.
• G8 Task Force: The final report on national ecosystem mapping and policy reform is scheduled for release in September.
• Investor Education: Jean Case urges philanthropists to move beyond 100% capital loss grants and utilize Principal-Protected Instruments (PRIs) or market-rate returns to scale social solutions.