May 18, 2012 12:31 am
By Sarah Murray
Solar energy in Tanzania
In launching its SocialAlpha-Prometheus fund, Zurich-based AlphaMundi is looking for more than financial returns. The fund, which is raising capital for its first close, will also measure how successfully its portfolio is delivering on its social aim of financing small enterprises that provide renewable energy to rural off-grid communities in Latin America and sub-Saharan Africa.
Such funds are attracting growing investor attention. Yet “impact investments”, as they are known, remain a tiny proportion of the global investment industry. What is needed before this emerging alternative-asset class can attract mainstream investors, argue its proponents, is a new ecosystem of legislation, tax laws, ratings providers, analysts and intermediaries.
Enthusiasm is there. An Ipsos Mori report in 2011 found 65 per cent of investors with more than £100,000 in investable assets wanted to achieve social impact from their investments as well as financial returns. And last December, when JPMorgan polled 52 impact investors, it found they planned to invest almost $4bn over the next 12 months.
When it comes to the foundation endowment managers, pension fund managers and private banks that drive the investment market, however, few are yet offering impact investment products to their clients.
“There’s real money flowing,” says Margot Brandenburg, an associate director at the Rockefeller Foundation working on initiatives that include impact investing. “But there’s much more uneven progress in unlocking institutional capital, with real and perceived barriers, depending on countries and regulatory and policy frameworks.”
One of these barriers is a dearth of professional expertise. And market expansion will depend on the emergence of a cohort of fund managers able to analyse investments based on more than purely financial factors. “Building human capital is a critical need and exists at multiple levels – entrepreneurs, fund managers, investors and service providers,” says Brandenburg.
Another impediment to the flow of institutional funds into impact investments is lack of supply. “There’s a finite number of social enterprises in the world, so the investment opportunities have so far been relatively small,” says Gavin Power, deputy director of the United Nations Global Compact, the UN’s business sustainability initiative.
Another challenge lies in the size of the investments. “There’s plenty of product out there today, but it’s mostly small,” says Andrew Kassoy, co-founder of B Lab, a US-based non-profit organisation which aims to harness the power of business to solve social and environmental problems. “If you’re a big pension fund or private bank looking to provide product for your client base, funds of $5m-$10m aren’t that useful.”
In the US, legislation is helping to expand the portion of the economy made up by socially driven businesses. In seven US states, new incorporation legislation has created an alternative commercial entity – the benefit corporation. Critically, the legislation gives leaders of benefit corporations legal protection to pursue social and environmental goals as well as profit.
Not only does benefit corporation legislation allow certified companies to put social and environmental goals on an equal footing with profit targets, but it also confers on them a mark of credibility.
“Everybody is concerned about greenwashing of one sort or another,” says David Wood, director of the Initiative for Responsible Investment at Harvard University. “So structures that signal credible social impact, such as benefit corporations, are important to develop.”
Allied to this is a need for robust measurement – not only of financial returns but also of the social and environmental impact of investments. To give investors a clearer indication of these returns, B Lab, supported by the Rockefeller Foundation, has developed the Global Impact Investing Rating System and is in the process of rating the first funds in the system.
This is something new. For while efforts have been made to take into account social and environmental factors in investments, ESG (environmental, social and governance) ratings tend to focus on the risk to financial return from non-financial factors rather than on positive social return. “That’s not to say risk management isn’t important,” argues Kassoy. “But investors who care about social impact aren’t getting answers from that analysis.”
Meanwhile, some regulatory hurdles need to be dismantled or adapted to allow large investors to participate in impact investing. In the US, the Employee Retirement Income Security Act (Erisa) is one example. While Erisa does not prohibit managers taking into account other factors, it requires pension plan fiduciaries to maximise the financial return of their investments.
“Erisa has some very strict laws about what pension funds can invest in. For the ESG and impact investing community, those are quite limiting,” says Kassoy. “So there are some big policy issues that need to be addressed if you want that kind of capital invested with a social impact lens.”
Power agrees. He sees governments as critical in creating incentives and policy signals, whether through tax codes or lowering regulatory hurdles. “There’s a huge opportunity for governments to take an interest in this and stimulate its development,” he says.