In impact investing, the investing side of things typically earns more focus than the impact side, and in most cases, it is clear that returns still rule.
Impact-first investments run counter to this philosophy—they prioritize impact over financial returns. Also called “catalytic capital,” this category represented only 7.5% of the $47 billion in new impact investments made in 2019.
Yet as the industry grows and the valuation of returns expands, the tide may be turning toward a greater emphasis on impact. With it, more vehicles and expertise are available to investors seeking to place impact ahead of financial returns.
Impact First Investments Offer Catalytic Capital Where It Is Needed Most
Concentrating on impact rather than profit represents a middle ground between impact investing and outright philanthropic grants. Impact-first investors seek to contribute capital to enterprises or funds with a potential for significant impact (although raising suitable financing can present obstacles due to the risk of being unprofitable or requiring a long investment timeline). At the same time, investors expect to preserve their investment—not to give it away or seek a profit.
Such investments are crucial to helping low-cost capital reach the most impoverished and environmentally ravaged communities. For example, Ceniarth extended a $285,000 low-interest loan to India-based Kheyti. The organization helps subsistence farmers earn a reliable income with its “greenhouse-in-a-box,” which uses 90% less water but can grow seven times more food. Another pioneer is Global Partnerships, “an impact-first investment fund manager dedicated to expanding opportunity for people living in poverty” with $120.4 million in impact-first investment capital.
Impact-first investments also help validate market-shaping innovations, such as groundbreaking energy technologies. Breakthrough Energy Ventures invests in clean energy businesses such as H2Pro, which produces green hydrogen “by splitting water that is over 95% efficient, safe and cost-competitive with fossil-fuel hydrogen.” The MacArthur Foundation has meanwhile invested in the CrossBoundary Energy Access project to provide 100 million people in Africa with reliable access to energy.
Barriers Hinder Impact-First Investing
Impact first investing faces a number of psychological and organizational barriers to implementation. Not all investors are poised to focus primarily on impact, given that traditional impact investment funds with capital from multiple investors have a fiduciary obligation to make money. As a result, most impact-first investments will come from high-net-worth individuals and families that have established their own wealth-management advisory services.
Perhaps the biggest impediment to impact-first investing is the deeply embedded belief that one should grow wealth. Individual investors may struggle to overcome this psychological barrier; fund managers and professional advisors might have an even harder time doing so, given that financial performance is often a measure of both their competitive success and compensation.
The lack of effective impact measurement also poses an ongoing challenge for impact-first investing. Without globally shared and standardized benchmarks for an investment’s impact, advisors and fund managers have a greater challenge knowing if they have complied with their clients’ wishes.
2020 Illustrates the Need for Impact-First Investors
The past year and a half continues to weigh heavily on communities. Events such as the COVID-19 pandemic and the death of George Floyd have exacerbated health, social, racial, and economic issues. However, they have also highlighted the value of philanthropic and grant capital in organizing rapid emergency relief to communities in need.
The pandemic’s influence is wide-ranging—and widely uneven—across regions, sectors, and supply chains. As a result, impact investors have had to both get creative with and intensify their efforts to address long-standing disparities in society. A recent report from the Global Impact Investing Network (GIIN) noted the actions taken to tackle social disparities in the wake of COVID-19, including reviewing internal processes and reexamining investment choices.
For example, impact-first fund manager Global Partnerships responded to COVID-19 by carrying out new research into the correlation between poverty and race and ethnicity in the countries in which it invests. This research informed an expansion of its impact-first investment strategy to be more inclusive of marginalized people.
Overall, GIIN’s report offers the following insights into the priorities for and the potential of the impact investing market’s response to COVID-19:
- Certain social and environmental needs are growing in both severity and urgency. Impact investment can play a role in minimizing viral exposure and vulnerability, unemployment, and food insecurity among underserved demographics.
- Impact investors must address needs within their own portfolios, either by maintaining and supporting their current portfolio through nonfinancial support, raising further capital, or restructuring.
- Impact investors have capital available to support priority sectors where the need is greatest, such as financial services, food and agriculture, and healthcare.
- Emerging markets risk disproportionate capital shortages, yet many impact investors continue to focus their investments in these regions.
- Investors must be innovative and efficient to deploy capital effectively in the face of challenges constraining capital deployment including issues with due diligence, deal sourcing, and limited resources such as capital availability and staﬀ time.
Although impact-first investing has gained traction in recent years, the events that shaped 2020 have also accentuated where such capital is truly needed. Impact investing nonetheless represents only a small percentage of investment portfolios; financial returns remain the top performance indicator for investors. However, the hunt for an impact-first portfolio investment strategy now raises a number of possible avenues for capital to make a difference.