Elizabeth Littlefield

Impact Investing: Roots & Branches

Foreign aid has grown to become a $200 billion global enterprise,1 and aid fund- ing from traditional donor nations alone has increased more than 63 percent in the past decade.2 In many sectors, the investment has paid off. At a time when the world population is climbing inexorably beyond 7 milliard, we are now on track to actually reduce the number of people living in extreme poverty by more than half, depuis 1.3 billion to fewer than 600 million, in the decade from 2005 à 2015.3 Entre-temps, long-sought progress is being made on basic needs such as access to safe water, sanitation, and nutrition, as well as on issues such as maternal mortali- ty reduction, primary school completion, and gender parity in education.4 The magnitude of this generation’s advances against some of humanity’s most perva- sive and debilitating problems is unprecedented. That said, new and stubbornly persistent social and environmental problems continue to require investments that far exceed the coffers of governments and other donors. Just one of the challenges facing the developing world—adapting to climate change—is estimated to require an additional $70 billion to $100 billion per year.5 Fortunately, cependant, such problems are not beyond the scale of global financial market resources. Commercial businesses and investors have the capaci- ty to help address the needs of developing nations, and ever more private investors and entrepreneurs are seeing opportunities in doing so. ENTER IMPACT INVESTING There is growing optimism about business as a force for good in the developing world. A new momentum is building along with this around a breed of private investor that aims to solve social and environmental problems while making a financial return—impact investors. These investors have abandoned the long-held Elizabeth Littlefield was appointed by President Obama as OPIC’s tenth President and CEO. Depuis 2000 jusqu'à 2010, MS. Littlefield was Director of Private and Finance Sector at the World Bank and Chief Executive Officer of the Consultative Group to Assist the Poor (CGAP), a multi-donor organization housed at the World Bank. Prior to joining CGAP, MS. Littlefield was JP Morgan’s Managing Director in charge of cap- ital markets and financing in emerging Europe, Middle East, and Africa. MS. Littlefield has served on the Board and Executive Committee of Women’s World Banking, the Mastercard Foundation, and Calvert Foundation, and was the founder of the Emerging Markets Charity in the UK. © 2011 Elizabeth Littlefield innovations / volume 6, number 3 19 Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/6/3/19/704686/inov_a_00078.pdf by guest on 07 Septembre 2023 Elizabeth Littlefield belief that their philanthropy draws from one of their pockets while their financial revenue lines another. These objectives can be blended rather than separated, and both values and commercial discipline can apply across the whole of their invest- ments. To their minds, this is where the borderless world of capital meets the bor- derless world of conscience. Depuis des décennies, both public and private investors have sought in different ways to harness the power of private enterprise for the greater good, or at least to steer it away from making matters worse. Take the socially responsible investor move- ment. The market capitalization of corporations targeted each year by socially minded investors who engage with those companies as share- holder activists and advocates measures in the trillions. Other socially responsible investors, who only invest in funds that screen out undesirable industries such as tobacco, gambling, or liquor, are now estimated to account for as much as $3 tril-
lion.6 Best-in-class investors set
an even higher bar for social per-
formance, but command fewer
assets.

Instead of a policy of
excluding undesirable
investments or an engagement
as shareholders to improve
investee companies, impact
investors seek those rare
investments whose very
business model is geared
toward having a positive
impact on a social or
environmental need.

Today’s impact investors are
fundamentally different. Plutôt
of a policy of excluding undesir-
able investments or an engage-
ment as shareholders to improve
impact
companies,
investee
investors seek those rare invest-
ments whose very business model is geared toward having a positive impact on a
social or environmental need. They aim from the outset—frequently before an
enterprise is created—to hardwire positive social and environmental returns along
with sufficient financial returns into their investments. They hope to draw on the
efficiency, versatility, market discipline, and powerful incentives of the private sec-
tor in order to address public needs.

PUBLIC AND PRIVATE PIONEERS OF IMPACT INVESTING

Impact investors have development goals in their DNA, just like mission-driven
public-sector organizations. Donc, loosely defined, this “impact first” model is not a
new phenomenon. Community development finance institutions were created in
the United States early in the 1900s. Credit unions and housing investment trusts
soon followed. And public-sector institutions that finance the private sector have

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Impact Investing: Roots & Branches

been an established tool of the foreign aid community for decades. These develop-
ment finance institutions such as the CDC Group of the United Kingdom,
International Finance Corporation of the World Bank, DEG of Germany, FMO of
the Dutch government, and the Overseas Private Investment Corporation of the
U.S. were created, in effect, to serve as impact investors for underdeveloped
nations.

In their early years, DFIs were regarded as peripheral players, smaller in staff
and lending capacity than their kin who financed governments. As emerging mar-
kets have grown and attracted more private capital, cependant, DFIs have grown with
eux. Using a combination of loans, equity, and risk-management instruments,
DFIs have played an outsized role in helping create private-sector jobs and mobi-
lizing finance for high-risk, low-income markets. 7 OPIC, par exemple, has support-
ed nearly $200 billion worth of investments in developing countries, generating an estimated 830,000 jobs in those countries. The IFC’s outstanding portfolio has grown to roughly $50 milliard.

The DFI model is largely what impact investors now seek to emulate: co-
financing and risk management for profitable emerging market investments;
sophisticated management of corporate, country, and currency risks; job creation
and tax revenue for less-developed host nations; spillovers such as technology
transfer, improved corporate governance, and market diversification; and measur-
able contributions to vital sectors such as energy, eau, health care, agriculture,
and housing. De plus, DFIs have been financially self-reliant. Over its 40-year
histoire, OPIC has generated enough income to return profits to the U.S. Treasury
every year.

The ways in which impact investments contribute to development are virtual-
ly limitless. Consider the diversity of just a handful of OPIC investment projects in
recent years:
• Buchanan Renewables Fuel Inc. is a Liberian company that converts old rubber
trees into biomass that will help replace coal as a fuel source in European ener-
gy plants.

• Habitat for Humanity’s subsidiary, MicroBuild I, provides microfinance loans
to help thousands of low-income families throughout the developing nations
build or improve their homes.

• Afghan Growth Finance makes loans and equipment leases to SMEs focusing
on agribusiness, light manufacturing, energy, information technology, con-
struction, and consumer goods and services.

• Husk Power Systems of India builds facilities to convert rice husk waste into

electricity.

The other development finance institutions, like the IFC and those in

European countries, have similar stories to tell.

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Elizabeth Littlefield

PUBLIC AND PRIVATE CAPITAL INVESTING TOGETHER FOR IMPACT

Aujourd'hui, these DFIs are engaging with the new breed of private capital-based impact
investors who have the potential to extend the reach of financing far beyond what
governments alone could hope to supply.

Among these funders are foundations such as the Calvert Foundation,
Rockefeller Foundation, and The Omidyar Network; retirement funds such as
TIAA-CREF; “layered” entities that blend philanthropic funds and investment
financing, such as Acumen Fund; sector-specific funds such as the clean energy
investor E+Co. There are also angel investors, ultra-high net worth individuals,
and families.

The thousands of social enterprises that have already benefited from other
investment and returned profits to their investors include microfinance providers
like Equity Bank, Water Health International, and Grameen Phone, which cover
virtually every market sector and developmental issue.

There are business school programs and affinity networks dedicated to build-
ing infrastructure for the asset class, such as the Aspen Network of Development
Entrepreneurs and the Global Impact Investing Network.

The result has been an outpouring of innovation and groundbreaking initia-
tives ranging from mobile phone banking to advance market commitments for
vaccines to projects that monetize the benefits of biodiversity.

But impact investing is still small in comparison to other forms of social
activist investing and foreign aid. Figures are notoriously difficult to obtain, mais
some researchers such as the Monitor Institute place impact investing assets in the
range of $50 billion.8 J. P.. Morgan recently argued that impact investing already qualifies as a distinct asset class and estimated that the scale of impact investing capital among poor populations in five sectors—housing, rural water delivery, maternal health, primary education, and financial services—will range from $400
billion to $1 trillion over the next 10 années. Of equal importance: the profits gen- erated by these sectors could range from $183 billion to $667 billion.9 One aspect of this activity has been lacking, cependant: scale. With a handful of exceptions, enterprises in the impact investing sector have often been too small and location dependent to draw capital from large investors and provide suitable exits for investors. One recent study estimated that there were only about 200 impact investments that were viable vehicles for the developing world as a whole.10 “Scaling-up” has become the mantra of the day. WHO’S IN? WHO’S OUT? MEASURING PERFORMANCE As the new wave of impact investors attempts to create a distinctive asset class, one question continues to crop up: who qualifies? One finds a number of competing definitions of an impact investment. Financial performance benchmarks vary. Some definitions call for positive environmental or social impact accompanied by 22 nouveautés / Impact Investing Downloaded from http://direct.mit.edu/itgg/article-pdf/6/3/19/704686/inov_a_00078.pdf by guest on 07 Septembre 2023 Impact Investing: Roots & Branches a very small financial rate of return or simply a return of capital. Others call for environmental or social impact plus a competitive rate of return. Developmental standards also vary and are far more complex—as complex as poverty itself. While there seems to be unanimity that a firm’s intent must be “impact first” rather than profit maximization, guidelines for operations and methods of measuring impact still vary considerably. With numerous segments of the investment and development communities engaged in the debate, there is unlikely to be consensus soon. One can fairly ask whether consensus is necessary. À ce jour, there is little evi- dence that a lack of universal guidelines has been a deal-killer for impact investors. Witness the microfinance sector, where a consensus on best practices and measure- ment of both financial and developmental performance has emerged over time and is still evolving. Inclusivity, rather than exclu- sivity, served the movement well in its early phases. In a complex global economy, private firms have innumerable valid ways to make positive economic, environmental, or social contributions. In a complex global economy, private firms have innumerable valid ways to make positive economic, environmental, or social contributions. A firm can do so through its production factors (organic farming, off- grid renewable energy), des produits (par exemple., antimalarial bed nets, low-income hous- ing), or its target market (par exemple., post conflict populations, disenfranchised women). The signal question is whether impact investors can craft consistent, quantifi- capable, and comparable measures of developmental outcomes per dollar invested across projects—a “price-to-impact” ratio, similar to a price-to-earnings ratio— and ensure that those outcomes are transparent and subject to verification. Should this prove possible, mainstream investors now on the sidelines will have a critical missing element in their decision-making equation: the means to analyze the trade-offs between development outcomes and financial rates of return that CEOs and boards of social enterprises inevitably make. Big capital will trust hard evi- dence more than pre-approval punch lists and post disbursement anecdotal reports. Par exemple, suppose an investment’s intent, normes, des produits, target pop- ulation, and financial sustainability match all checklists but still fall short of hoped-for returns? The Abdul Latif Jameel Poverty Action Lab of MIT recently conducted a randomized trial (increasingly regarded as the gold standard in impact analysis) to examine the effect of charging small fees for preventive health care products—for example, insecticidal bed nets, water disinfectants—across ten projects in four developing countries. The researchers found that even very small prices for such products led to huge drops in consumer uptake and that charging innovations / volume 6, number 3 23 Téléchargé depuis http://direct.mit.edu/itgg/article-pdf/6/3/19/704686/inov_a_00078.pdf by guest on 07 Septembre 2023 Elizabeth Littlefield a fee for the products had no bearing on whether consumers actually used them.11 This type of price-to-impact finding need not doom every private enterprise that seeks to deliver health-care products. Toujours, such findings should inform the deci- sions of future investors and investees alike. The impact investing community has a plethora of new entrants and experi- ments. Its next phase requires rigorous evaluation, transparency, and platforms for sharing comparable information. As the managerial capacity and adroitness of impact investors and their investee companies improves, brighter lines to deter- mine “who’s in and who’s out” will emerge. INGREDIENTS OF GROWTH Impact investing holds enormous promise for addressing the problems of the developing world. Cependant, a sturdy, large asset class of such investments will need more than a steady tide of creative entrants, a few hundred small, break-even incumbents, and a handful of larger “lighthouse” ventures that best market per- formance. It will need a generation of managers with enough sophistication to negotiate both local development issues and investment climate risks, such as political instability, corruption, and red tape. It will need margins to cover man- agement fees, overhead for impact monitoring, reinvestment for growth, and then some. It will need enterprises with enough scaleability to warrant attention from institutional investors. It will need liquidity beyond mere industry sales and man- agement buyouts. It will need broad-based indices that enable market analysts to make reliable estimates of long-term rates of returns, assess volatility, and find cor- relations with market and economic variables. The history of the global financial markets has proven that none of these hur- dles is insurmountable. In the decades since their founding, DFIs in the emerging markets learned their lessons the hard way and devised solutions for investors when none were at hand. Through trial and error they succeeded, and helped oth- ers succeed, sometimes spectacularly so. From a vast desert of equity opportunities a generation ago, the stock market capitalization of emerging markets has grown to $14 trillion, and it may be as much as $80 trillion by 2030.12 Impact investment
in the developing world, where both needs and market opportunities will be great-
est, can and should be a vital part of that trend. It is no longer a hypothetical asset
class; it is well on its way. Finalement, that will mean millions of lives bettered and
potentially millions of lives saved.

1. Kemal Dervis and Homi Kharas, and Noam Unger, Aiding Development: Assistance Reform for the

21st Century. Washington, D.C.: Global Economy and Development at Brookings, 2010.

2. See “Net ODA Disbursements, Total DAC Countries,” at

http://webnet.oecd.org/dcdgraphs/ODAhistory/.

3. Laurence Chandy and Geoffrey Gertz, Poverty in Numbers: The Changing State of Global Poverty
depuis 2005 à 2015, Policy Brief 2011-01. Washington, D.C.: Global Economy and Development at
Brookings, Janvier 2011.

4. Global Monitoring Report 2010: The MDGs after the Crisis. Washington, D.C.: The International

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Impact Investing: Roots & Branches

Bank for Reconstruction and Development/The World Bank, 2010.

5. The Cost to Developing Countries of Adapting to Climate Change: New Methods and Estimates.

Washington, D.C.: The World Bank Group, 2010.

6. Report on Socially Responsible Investing Trends in the United States, 2010. Washington, D.C.: Social

Investment Forum Foundation, 2010.

7. An IFC investment officer, Antoine van Agtmael—not a private-sector investor—actually coined
the term “emerging markets” in the late 1970s to encourage equity investors to consider opportu-
nities in poor nations in a better light. His parlance replaced the pejorative term “Third World,»
and within a few years he led a successful effort to create the first global fund for securities from
the developing world.

8. The Monitor Institute at http://www.fa-mag.com/component/content/article/14-

features/5617.html?Itemid=133.

9. Impact Investments: An Emerging Asset Class. New York: J.. P.. Morgan Chase & Co, the Rockefeller

Fondation, and Global Impact Investing Network, Inc., Novembre 29, 2010.

10. John Simon and Julia Barmeier, More Than Money: Impact Investing for Development.

Washington, D.C.: Center for Global Development, 2010.

11. The Price Is Wrong. Cambridge, Massachusetts: J-Pal Bulletin, Avril 2011.
12. Timothy Moe, Caesar Maasry, and Richard Tang, Goldman Sachs Economic Paper No: 204. Nouveau
York: Goldman Sachs Global Economics, Commodities, and Strategy Research at
https://360.gs.com, Septembre 8, 2010.

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