Big Investors, Small Investors, All Investors
by Marta Maretich
A handful of visionary investors, social thought leaders, philanthropic organizations and foundations gave impact investing its start. These were typical early adopters, open to new ideas and confident enough to take the risks necessary to find out if they worked.
Now impact investing is beginning to prove its worth. Its reach is extending to include smaller investors on the one hand and large, mainstream investors on the other. Recent work by The World Economic Forum Investors Industries and ImpactAssets gives a sense of this dual trend.
Small is beautiful
Impact investing has a natural appeal for small and grass-roots investors, but until now there have been few ways for them to put their money into the market. The popularity of crowdfunding platforms like Mosaic and Crowdfunder give a sense of the potential in this investor group and more organizations are looking for ways to tap in.
Recently launched by ImpactAssets, the Seed Ventures Platform helps unlock the potential of smaller donors. As President Tim Freundlich explained in his presentation at SOCAP 13, ImpactAssets set out to “crack code on seed-stage investing into social enterprise, especially investing into for-profits.” They wanted to lower the cost of due diligence and other deal costs which meant impact investing funds had to be big (around the $20 million mark) and do large volumes of deals to be viable.
Their answer was to create a a platform within ImpactAsset’s donor-advised fund (DAF), the Giving Fund, to aggregate smaller amounts of capital. A DAF is a philanthropic vehicle that offers many of the advantages of a private foundation without the expensive set-up fees or administration. Initial donations are tax-deductible and can start as low as $5000.
Democratizing early-stage impact investing
The Giving Fund is at the heart of the Seed Ventures Platform, a new investment option that gives both investors and donors access to seed-stage businesses needing capital. The Seed Ventures Platform offers a “dim sum menu” of select social investments backed by trusted accelerators such as Village Capital and Hub Ventures.
Freundlich: “Folks will be able to log into their online platform; and see a menu of 20, 30, 40 ventures; all early-stage, handpicked (by accelerators) and able to use tiny investments from the accounts aggregated by this fund.” Investors are able to create a personalized portfolio that aligns with their mission and financial goals. The portal allows to allocate grants, too, and to track both investments and grants online.
ImpactAssets is now testing the Seed Ventures Platform with larger donors, but if it works, the model could open up seed-stage impact investing to everyone with a social conscience and money to invest. The model is designed to be replicable: ImpactAssets has plans to share the software with other organizations. Freundlich envisions a future where tiny investments of as little as $25, managed through a smartphone app, could create huge impact in areas like agriculture, cleantech and renewables.
On the large side
While there’s evidence that small investors are eager to get involved in impact investing, the same can’t be said for large ones.
Despite its success in recent years, impact investing accounts for only a thin slice of the global asset cake. The majority of impact investors are still among the development finance institutions, family offices and high-net-worth individuals that were its early advocates. Altogether, these groups own only 2.5% of global assets. Compare this to the percentage of assets held by mainstream investors; sovereign wealth funds: 9%, insurance companies: 39%, pension funds: 48%; and it becomes clear why impact investing needs to reach out to big institutional investors.
So far the impact investing movement has hardly touched the mainstream, according to the recent report by the World Economic Forum (WEF), From the Margins to the Mainstream. Client demand for sustainable and responsible investing (which are different but related approaches) suggests impact investing could be popular among mainstream investors. Yet with some exceptions like Credit Suisse and Deutsche Bank, few of the big players are taking up the challenge.
The WEF’s survey of US-based pension funds gives a snapshot of the reasons why: Confusion about what impact investing is and does; skepticism about its viability and problems related to the immaturity of the impact marketplace are among the obstacles for the biggest investors.
Obviously a lot more needs to be done to convince these mainstream institutional investors to put their money behind impact investing. The WEF report makes number of recommendations for impact investment funds, foundations and philanthropists, intermediaries, governments and the impact enterprises themselves. It also offers a useful checklist for institutional investors who want to get started with impact investing. Download the full report.
Working both sides
The WEF report provides valuable first step toward involving the mainstream in impact investing. Engaging small investors may prove easier in the short term. They have more flexibility, more autonomy and can take risks that most institutional investors would shy away from. But given the threats of climate change, food shortages, population growth and environmental degradation, it seems urgent that all investors become impact investors right now.
[Image credit: alphaspirit 123rf]