By Marta Maretich, Chief Editor @mmmaretich
If you were asked to guess which sector attracted the biggest proportion of impact investment, which would you say it was?
Looking at the websites of major impact intermediaries and financial institutions you might guess the answer was agriculture, clean energy, water, or healthcare. But you’d be wrong.
Finance still makes up the biggest single slice of the impact investing pie. According to the recent survey by GIIN and JP Morgan, 42% of all impact investing assets under management in their sample were finance, with microfinance and financial services each accounting for 21% of the total. This compares to just 8% for agriculture, 11% for energy, 6% for healthcare and just 3% for water. This means that a significant proportion of impact investments are actually made into finance institutions, and not directly to companies or individuals.
This answer may surprise you; it may even disappoint you; but it shouldn’t.
The social investing movement has its origins in banking, with well-meaning pioneers trying to find ways to use the tools they understood; financial tools; to better the lot of their fellow men and women. Providing finance, whether in the form of small loans or more sophisticated services like consumer credit or banking, was the possibly earliest form of social investing and it still makes sense to many responsible investors who choose to put their capital into finance businesses.
Popular with investors
As the GIIN/JP Morgan survey indicates, there are also practical reasons finance is attractive to impact investors. Microfinance, according to their information, appeals to “closer-to-market” investors while financial services attracts “competitive return” investors. Although the research sample isn’t large, the findings indicate a reality: As one of the longest-established sectors of social investing, finance now has a track record. With experienced service providers like the Grameen Bank, Triodos and PAX World returning stable profits over a number of years (17 years in the case of veteran Grameen), finance has made a place for itself as a mainstay of impact investment portfolios that may also include riskier and low-return investments.
Financial provision has also proven a flexible tool the face of a changing world, especially in an era where the practice of economics is seen as an important lever for social change. Recent years have seen an explosion of innovative ways to “do“ finance using models designed to reach underserved markets, especially ones in developing economies. Today, alternative finance intermediaries, including banks and insurers, are proliferating across the social investing sector and impact investors are following that expansion.
This trend reflects a deeper development in the social investing space. Once a controversial idea, now the notion that financial services are a necessary part of human life; or even, as Nobel Laureate Muhammed Yunus states, a “human right”; is widespread. Social finance in all its forms is one of the most familiar aspects of the social investing movement in the eyes of the public, for whom many of its more arcane forms, like catalytic capital and public-private partnership deals, are too complex to grasp and hold little human interest.
But which types of financial services are popular in the impact investing sector? And how is the relationship between impact investors and financial service providers set to change in the future?
To find out, see part two of this series: A Guide to the Different Forms of Impact-backed Finance and part three: The Future of Investable Social Finance.
Find impact deals in financial services.
Interested in keeping up with the latest news in impact investing? Sign up for our monthly newsletter.
Image: Copyright: bartderijk / 123RF Stock Photo