RSS FeedBy M. Isi Eromosele
Impact investors offer a bridge between traditional philanthropy that can incubate innovation and mobilize attention on exciting solutions and the private sector capital markets that ultimately hold the wealth required to take these solutions to fruition.
There is not enough charitable capital to meet the scope of the world’s social and environmental challenges. Impact investing has the potential to be part of the answer. The ability of this new industry to deliver on its global potential is tremendous.
To achieve this feat, major industry leaders will need to work together to measure and articulate the industry’s past successes, build infrastructure to increase its efficiency and create products that respond to investors’ demand for transparency and liquidity.
Entrepreneurs and managers in multi-national corporations pioneered business models beyond microfinance to provide basic social services to poor people and address environmental problems. Impact investing is emerging as the investment counter-party to these businesses.
The Influence of Impact Investing
Despite, and sometimes because of, a proliferation of activity, the impact investing industry is poised at a crucial time. Impact investors have already made their mark in a few global sub-sectors, most notably US-low income housing, and, more recently, micro-finance and green energy projects. Yet, impact investing capital is not nearly to bear to bear at the required scale of the hundreds of billions of dollars needed.
The industry remains beset by inefficiencies and distortions that currently limit its impact even in areas where impact investing should be viable (such as healthcare delivery, slum upgrading, agriculture development and education). Analytical tools, capital markets and the legal system do not fully support impact investing.
In the above context, impact investing can be frustrating. But these frustrations are hardly unique. They are the archetypal challenges that confront pioneers in new industries and ventures. Fortunately, investors’ frustrations are also entrepreneurs’ opportunities. Global innovations and collaborations are now pointing to potential solutions to these barriers that will produce industry breakthroughs.
Impact investors need a broader understanding of the contours and structures of this new industry to enable them to work together. They need to know how big this industry is, who its participants are, who has capital, who has deals and how to connect them more efficiently.
The concept for a Global Impact Investing Network is gaining momentum globally, with hubs of activity coming together in various countries. The launch of the Aspen Network of Development Entrepreneurs also provides a promising platform for the substrata of investors interested in supporting small and growing businesses in emerging markets.
Discussions with wealth advisors and private client bankers indicate that the development of a credible, independent ratings agency to measure the social impact of investments will be crucial to unlocking this source of impact investing capital.
The launch of a process to develop a Global Impact Investment Ratings System and Impact Ratings and Investment Standards is particularly exciting. By mobilizing investors as well as activists, academics and entrepreneurs, this initiative has the potential to break through the historic logjam that has kept similar efforts fragmented.
Impact investors face high transaction costs in sourcing deals, conducting due diligence, closing and syndicating investments. Investment funds, investment bankers and market platforms have not yet achieved the scale and visibility to provide viable conduits for billions of dollars of latent impact investment capital. The intermediation challenge is, however, being met by innovators working across a spectrum of segments and business models.
Building a mature impact investing industry will also require brave self-examination by impact investors and the businesses and funds into which they invest.
The impact investment industry needs to be realistic about the kind of returns it will offer and investment products it will need to develop to become a viable proposition for the institutional investors, who control most of the world’s investable assets, but are bound by rules that limit their freedom to invest in unproven and sub-market products.
The industry also needs to become more confident and honest about explaining the need for subsidy in many areas, through lower return and higher risk tolerance.
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
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2012 Oseme Group
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