Impact Investment: The Movement Is Growing

A new report, “Private Capital, Public Good” released this week by the US National Advisory Board on Impact Investing offers some insights on how to get impact investing to reach its full potential. The report was launched at a White House roundtable, alongside commitments from 23 investment firms and foundations to collectively make over $1.5 billion available for new impact investments — investments that seek to make a measurable social impact while earning financial returns.  A key message behind this new report and these new financial commitments is that the combination of private-sector funding and drive for success, with the right policies and government support, can channel new capital and talent to solve tough social problems more effectively than government, the business sector, or philanthropy could do alone. 

What is the US National Advisory Board?

The National Advisory Board (or NAB) is one of several advisory boards and thematic groups that were launched at the G-8 Social Impact Investment Forum in the UK in June 2013 to support the work of the high-level international Social Impact Investment Taskforce, which is tasked with catalyzing the worldwide market for impact investment. US NAB members (listed here) are representatives from investment firms, social enterprises, and foundations who convened to outline a framework for actions US policymakers can take to support this market.  As Sir Ronald Cohen, the chair of the Taskforce who has helped to drive the social investment market in the UK, wrote following the group’s kickoff meeting last fall, the Taskforce aims to produce concrete recommendations that will “galvanize the market's ability to fund non-profits, social enterprises and mission-driven businesses that deliver financial value and also tackle pressing problems – effectively extending to social entrepreneurs the benefits of innovation and access to capital that business entrepreneurs can get through venture capital and private equity today (see this speech by Sir Ronald for more on the motivation behind this movement).  

Why does this matter for international development?

After all, isn’t development already about making investments for a social impact?

A 2010 CGD report documented that a growing number of impact investment vehicles have been demonstrating results for development in sectors — including health, water and sanitation and rural development — that traditional FDI doesn’t reach. As the report title shows, these investments are about “More than Money,” leveraging both private-sector funding and expertise to find solutions to development challenges and help effective social enterprises reach scale.  Take just one example of the kind of business impact investors invest in, highlighted in the US NAB report: d.light, a for-profit social enterprise that provides solar power products to people who don’t have access to reliable electricity, received a $1 million grant from USAID’s Development Innovation Ventures in its early days. After eight years of growing successfully, establishing an extensive distribution system, and positively impacting millions of lives, the company took on a financing round of $11 million from impact investors including Omidyar Network and Acumen Fund to reach even more people with clean, safe solar lanterns. 

But it still holds true that there isn’t much data available to assess what the development impact of this type of investing has been, largely because the market suffers from fragmentation and lack of infrastructure. These are problems that the Social Impact Investment Taskforce is aiming to help fix, by coordinating efforts at the national level, which could help impact investment meet the needs of more people in developing countries.      

How can impact investment work better for international development?

The US NAB report includes several recommendations that could lead to gains for development:

1.Loosen constraints on the US Overseas Private Investment Corporation (OPIC): A lot of impact investment is done by development finance institutions like OPIC, but it’s hard for OPIC to establish relationships with enterprises that can have a long-term social impact when it must be reauthorized on an annual basis, is restricted from making early stage equity investments, and can only support projects that benefit US citizens or businesses. The US NAB recommends that Congress relax these restrictions on OPIC so that it can advance its core development objectives. My colleagues Ben Leo, Todd Moss, and Beth Schwanke have more to say on how OPIC could more strategically and efficiently promote private sector development if some outdated rules were changed.

2.Similarly, remove restrictions on USAID’s Development Credit Authority: DCA uses partial loan guarantees to attract private capital to underserved businesses in the development world. The report recommends relaxing existing limits on DCA’s level of risk exposure and total face value of loans guaranteed.

3.Streamline access to development finance:  The NAB would like to see the US Government act on a recent recommendation by the Global Development Council to create a development finance bank that would combine programs currently spread across numerous agencies including OPIC, USAID, MCC, the State Department, and the US Trade and Development Agency with the goal of catalyzing private-sector investment in development. A new bank would provide a “one-stop storefront” that more efficiently responds to enterprises who could benefit from new financing options to help them grow. 

4.Experiment with Development Impact Bonds:  Great to see this in the report! In many ways DIBs are a model tool for impact investment:  private investors provide working capital, and are remunerated by the public sector (in many cases donor agencies) only if measurable results have been achieved. The model requires that financial returns are aligned with a measurable social impact. The NAB recommends that “US donor agencies lead a proposed G-7 initiative committing each member country to piloting DIBs focused on social and environmental objectives,” and suggests that governments pool capital to create a $100 million DIB Outcomes Fund, an idea we also endorsed in the CGD–Social Finance DIB Working Group report. 

Last week I attended the fifth meeting of the Social Impact Investment Taskforce, where it was clear from discussions with about 200 representatives of the private investment and public policy worlds that impact investment is a movement that is happening, has been happening in both the domestic and international context for some time, and has a great deal of potential to do more to solve social challenges and spur development. But reaching this potential will require more coordination, better methods of measuring social returns, and more clear communication about why this growing movement matters.

The US NAB report is the first of a series of reports to be released which bring sector experts together to recommend policy actions to address these challenges. Reports from other G-8 country NABs and four crosscutting working groups, including one focused on international development, are forthcoming, and the Social Impact Investment Taskforce will release a report of its conclusions on September 15.