At the Center for Global Development, we have been investigating, through our work on Development Impact Bonds, impact investment, and private investment more generally, the best ways to leverage private sector involvement in development for the greatest impact. A new report released last week, Private Capital for Social Outcomes: Identifying Opportunities for Impact Investment in International Development, focused on one of those issues, impact investment: what it is and what needs to be done to bring it to scale in developing countries.
This new report is one of several reports prepared under the auspices of the international Social Impact Investment Taskforce, a group made up of G8 government and private sector representatives which was established under the UK’s presidency of the G8 last year. Nancy was a member of the Taskforce’s International Development Working Group chaired by former CGDer Sonal Shah (along with friends of CGD including OPIC President Elizabeth Littlefield, former DfID official Michael Anderson, and Toby Eccles, co-founder of Social Finance UK), and Rita was the report’s co-author with Sonal.
The overall report, Impact Investment: The Invisible Heart of Markets, summarizes the results of the entirety of the Taskforce’s work, the objective of which was to catalyze a market for impact investment worldwide. The Taskforce launched a series of reports to take a closer look at what governments, businesses, and the social sector can do, including a report from each G7 country and four thematic Working Group reports, including the one on international development. (For more on the Taskforce and the US-focused report, which was released back in June, go here).
The Social Impact Investment Taskforce’s Overall Report
The report Impact Investment: The Invisible Heart of Markets (read more about it in the Economist and Financial Times) calls for the unleashing of $1 trillion of new investments to tackle social problems. It draws a distinction between “responsible investment” and “impact investment”– the latter directly targets social and financial returns and requires the measurement of both. We were pleased to see the report giving a good bump to Development Impact Bonds, as one way to use development financing differently to tackle seemingly intractable problems and potentially even change how development is done. Ronald Cohen, chair of the international Taskforce, was instrumental in setting up the first Social Impact Bond in the UK and, like us, would like to see more experimentation with this kind of approach – a quintessential model of impact investment which directly aligns financial returns with social outcomes – in new contexts including in a range of developing countries.
An underlying premise of the Taskforce’s work, as Ronald Cohen discusses here, is that it is possible to do for organizations who want to “do good” what’s been done for business and private equity, by giving them access to capital markets and relaxing constraints for investors who want their investments to have a social impact as well as a financial return. These ideas are reflected in our work on the International Development Working Group, which was convened by the Taskforce to shed some light on what impact investment means for development –potentially one of the biggest opportunities for the growth of the market.
The International Development Report: Identifying Opportunities for Impact Investment in International Development
Some of the takeaways from the international development report are:
Impact investing is neither totally new nor the ‘same old business’ in the development industry. The report applauds the efforts of development finance institutions over the decades through their investments to boost growth, job creation, and economic development in poor countries, but it points out that not all investments which might have a development impact are “impact investments.” The two key parts of the definition of impact investing are intentionality of targeting both social impact and financial returns and the measurement of both. Development finance institutions like the US Overseas Private Investment Corporation (OPIC) and the Inter-American Development Bank are now starting to distinguish impact investments from other types of investments to make it easier to assess what the magnitude and outcomes of income investments have been. While, to date, impact investment is a relatively small piece of development funding and hard to assess overall, there are a flourishing number of examples of organizations who are doing it, including private and public, and many which have been doing it for some time. Acumen, Aavishkaar, Grassroots Business Fund, and the UK DFID Impact Fund are among many examples highlighted in the report.
Impact investing is complementary to other forms of development financing and potentially can help different sources of capital work together to a greater effect. The report highlights the ways in which the landscape for development financing has been changing, including much greater private flows relative to official flows. Official aid and philanthropy won´t be sufficient to address the scale and complexity of today’s global development challenges, and impact investing is one way to bring in more private capital that can benefit the public good, by putting “social impact” into investors´ decision-making frameworks. As international aid agencies look to new tools and forms of public-private partnerships to increase their effectiveness, supporting an ecosystem for impact investment is one way to align different sources of capital better and drive faster progress.
A number of challenges are keeping the impact investing market from realizing its potential. In order for this to be a functioning market that will reach more people with the products and services that they need, a number of challenges need to be addressed. Chief among these are (a) lack of common definitions and standardized metrics; there are ongoing efforts to improve these dimensions, but it has generally been unclear what qualifies as an impact investment and how these assessments can be evaluated and compared; (b) an asymmetry between demand for investment and supply; although there is a growing interest in this type of investment, early stage businesses and social ventures in developing countries are too often not able to attract funding because they are perceived to be too high-risk; and (c) lack of a market infrastructure or “ecosystem”; greater involvement at the policy level, more training at the local level, and tools for sharing lessons and experiences are needed for this market to reach its potential.
The Working Group makes four recommendations meant to catalyze this market and maximize its potential impact in developing countries. The recommendations are geared towards G7 governments and DFIs but governments of developing countries and business and social sector leaders will be necessary partners:
Create a new Impact Finance Facility. To get capital where it is most needed and stimulate a market will require some risky investments in social enterprises in developing countries, particularly at the early stage. A new facility would operate as a ‘fund of funds’, investing in funds that are able to make investments that are smaller and perceived to be riskier than the kinds of investments DFIs typically make. DFIs could contribute to the start-up of the Facility, to help stimulate a pipeline of impact investment deals. The initial proposal in the report is for a $500 million facility including DFI and private contributions. The proposed Facility would likely need private grant capital to get off the ground, including to support a technical assistance arm that would match investments with business support services that investee companies need, and a platform for sharing lessons and best practices.
Create a Development Impact Bond (DIB) Outcomes Fund. DIBs are just one tool for impact investment and a small part of this overall market, but as we said before, a quintessential model: investors fund social interventions - giving providers more space to innovate and adapt their approaches - and governments and development agencies pay them back only for successful results. The model directly links financial returns to social outcomes - but we don't yet have a clear sense of how it will work. To facilitate experimentation with and learning from this new model, the Working Group encourages development agencies, perhaps in partnership with foundations, to contribute to an Outcomes Fund that would make resources available to pay for the results of successful DIB-financed programs. This ready pool of capital would reduce the transaction costs of individual projects and stimulate the development of transactions.
Improve metrics and increase transparency. In the International Development Working Group, we left a lot of the discussion under this topic to the Taskforce’s Impact Measurement Working Group but we did spend some time in the report highlighting the importance of clear definitions and comparable, accessible data to the development of this market. In particular, the report emphasizes the need for transparency by the DFIs on the intentionality and results of their investments, and the need for all players in the market to use international guidelines and common definitions for impact measurement as they are developed.
Provide additional resources for “ecosystem-building”. Throughout the course of the discussions, Working Group members emphasized that developing a market will require more than a flow of transactions. There is a need for resources that will be dedicated to supporting the broader environment for impact investing. This includes direct support to local governments and local intermediaries to build their capacity to advance the market; resources to develop improved metrics; support for research on new business models, exit strategies, or evaluations of new tools and funds; the development of mechanisms for sharing knowledge and best practices; and finally policy considerations - including for example ensuring that DFIs have the incentives and tools that they need to support this market (the US National Advisory Report discuss tools that OPIC needs to better support this market, as one example).
The new and growing market for impact investment recognizes that governments are cash-constrained and aims to attract more private capital to social issues – but governments will have an important role in creating an enabling framework. For development, this includes a role for DFIs and development agencies in finding new ways to support riskier, potentially high-impact investments and increasing efforts to build a wider ecosystem across developing countries with tools and mechanisms for sharing information and learning.
The Social Impact Investment Taskforce and its International Development Working Group are clear that this work does not end with the publication of a report or series of reports. Now comes the hard work of educating policy makers and their partners in the business and social sectors and trying to get the recommendations implemented.