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Microfinance loans to spur female entrepreneurship is an example of a concessionary impact investment

Can impact investing, which aims to provide a tangible social benefit as well as a financial return, move into the mainstream?

Large asset managers have placed bets this year that it will: US investment bank Goldman Sachs acquired Imprint Capital, a specialist consultancy; BlackRock, the world’s largest fund house, headhunted Deborah Winshel, head of the Robin Hood Foundation, an anti-poverty charity, to run an impact division; and Bain Capital, the private equity giant, has begun raising funds for impact investing.

A number of trends are coming together. A new generation of savers believe investment can be used for good or for ill, and would like it to be the former. Young entrepreneurs often have a social mission as well as a profit motive, and more companies are set up explicitly to pursue a “double bottom line”. Non-profits are experimenting with sustainable financing models that are opening up investment opportunities such as social impact bonds.

But have no illusions. Only $60bn can be identified specifically as impact investment to date, eight years after the term was coined. There are large tasks ahead if impact is to be a meaningful part of the investment landscape rather than a passing buzzword.

Some of that scepticism was on display at the FT Live Investment Management Summit (IMS) where I led a roundtable on the subject with Ms Winshel and Abigail Noble, who runs TheImpact.org, a project funded by billionaires who are interested in promoting impact investment.

Financial advisers who attend IMS are the gatekeepers of wealthy families’ fortunes. Millennial scions may be agitating for investments that do good in the world, but financial advisers see their primary role as minimising risk and maximising returns. If impact investing cracks the adviser audience, it will have hit the mainstream.

So what were the advisers in the room thinking? Here is a sample: “I cannot tell what is an impact investment and what is not.” “I cannot be sure what impact my investment is really having.” “I fear impact investments are not made with the same financial rigour as other investments.” And, “even when I was persuaded of the idea, I could not find enough opportunities that would have an impact on my client’s chosen problem”. We are at the more-questions-than-answers stage of this nascent investment area.

Part of the problem is defining terms. Impact investments can be either “market rate” or “concessionary”. The former are investments that generate equivalent (or better) returns than others in the same asset class. A stake in a company that tackles recidivism by employing former prisoners is probably going to generate the same return as any other company in the same industry.

The latter are expected to generate a lower return. Below market-rate microfinance loans to spur female entrepreneurship and empower women in developing countries would be an example of a concessionary impact investment. My own view is that two different terms would be better, perhaps “concessionary investing” or “leveraged giving” for the latter, leaving impact investing for market-rate investments.

That aside, the real problem is measurement. By definition, an impact investment has a quantified societal return. Yet who does the quantifying, and of what? Different investors will be motivated to achieve different impacts, whether it be in education, health or equality at home or abroad, but even within quite narrow areas (eg, promoting girls’ education in sub-Saharan Africa) different ventures can target different outcomes (time spent in school or educational attainment through remote learning). We are not just comparing apples and oranges, but the whole fruit salad.

Index providers such as MSCI, governance consultants such as Sustainalytics, agencies such as the World Bank and start-ups such as B Labs are among those trying to build impact score sheets and certification systems.

Asset managers can also do it in-house. A new BlackRock Impact US Equity fund promises its portfolio of publicly traded companies will have “positive aggregate societal impact outcomes” as scored by BlackRock on “green innovation, corporate citizenship, high-impact disease research, ethics controversies and litigation”.

By targeting an aggregate score, the BlackRock fund is free to sweep in quite large companies, such as pharmaceuticals whose products are saving lives. That expands the universe of investment opportunities, overcoming a hurdle to mainstream adoption, but it is a far cry from funding sanitation projects in the developing world.

Infrastructure, such as transportation links that can promote trade or clean-energy plants that can cut a country’s carbon emissions, may be a happy area where investing can be done at scale and with high impact.

At our roundtable, Ms Winshel made the case for modesty of ambition at this early stage in the development of impact investing. “The worst thing we can do is promise too much and then fail to deliver,” she said.

Financial advisers will be asking sceptical questions every step of the way, a bulwark against over-enthusiasm.

Stephen Foley is the FT’s US investment correspondent

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