Ten years ago, the term “impact investing” did not exist and the pursuit of “good” was mostly relegated to philanthropy. Today, investors who focus on more than immediate financial returns–and those who believe that balancing all sorts of impact (financial and otherwise) can yield long-term returns, again financial and otherwise–have entered the mainstream. In this post, we highlight the key developments that may make 2017 a pivotal year for impactful ventures and investments.
A Robust and Growing Market
According to a recent report by The Forum for Sustainable and Responsible Investment, the value of U.S. assets held by investors who consider environmental, social, and governance criteria (alongside financial returns) grew by 33% from 2014 to 2016 and now represents one-fifth of all investment under professional management. Opportunities for impact investment are now an unstated requirement for large wealth management firms. JP Morgan, Wells Fargo, Morgan Stanley, Black Rock, Goldman Sachs, Bain Capital, and TPG, among others being developed as of this writing, all offer investment vehicles geared towards this growing demand.
Venture capital interest in for-profit companies with social or environmental missions is also growing. According to a recent analysis from TechCrunch, impact VC funds raised $3 billion from 2001 to 2010. Since then, that number has grown to $10 billion.
Demographic Shifts Will Further Growth
Industry experts expect the acknowledged increase in the amount of wealth held by women and millennials to further the growth of sustainable investing. A survey by Morgan Stanley found that 40% of women are likely to consider the impact of their investment along with financial returns, compared to only 23% of men, while the millennial generation is more than twice as likely as the total investment population to invest in companies or funds that target specific environmental outcomes. As the percentage of wealth controlled by these two groups continues to rise, the amount of capital allocated to impactful investments will follow.
Crowdfunding and Impact Investing for the Masses
While impact investing (like investing and philanthropy in general) has historically been the playground of the wealthy, both because the wealthy have the resources to play with and because protective securities regulations have kept others off the field, 2016 changes in investor regulation sought to break down (or at least ease) one of those barriers to entry. However, as MoFo has written for Entrepreneur Magazine, the new crowdfunding rules (dubbed Regulation Crowdfunding by the SEC) may actually create problems for social enterprises as they begin to scale in size. So far, capital raises under Regulation Crowdfunding have been slow, but there is reason to be hopeful. On February 28th, acting SEC Chairman Michael Piwowar expressed concern that the final rules may be “too restrictive or too burdensome” and that the agency should consider using its authority or taking other action to further loosen the regulations. The takeaway here is that the crowdfunding movement is in its infancy and stakeholders on all angles are still working out the kinks, but any opportunity for individual participation at the micro-level may give would-be impact investors a voice in the market.
Impact Measurement and Reporting
A lot of energy is going into measuring and reporting impact lately. Large asset managers like Goldman Sachs are developing complex pricing mechanisms for stock of publicly traded, socially responsible companies. Impact assessment tools are honing in on techniques to identify and report impact such as PRISM, developed by IRIS, GIIN, and Intellecap. In addition, ClearlySo (which has been described as an investment banking firm that helps social enterprises raise capital from impact investors) recently launched a new assessment tool to allow for impact measurement in investments. Meanwhile, SASB continues to push ESG (environmental, social, and governance) reporting and sustainability accounting into the mainstream. Designed in order to address the need for more tangible and quantifiable investment information, the new services will make it easier for investors and social enterprises to track and report their impact. While robust and objective reporting is critical for any social enterprise with impact-focused investors, the entry of Laureate Education into the public market as a Delaware PBC (the first of those anticipated this year) makes fulsome measurement of impact metrics alongside financial metrics critical for required reporting. We all wait anxiously for the reaction of stockholders and other stakeholders both to Laureate’s first reporting cycles and to the SEC’s treatment of double-bottom-line reporting.
Potential Changes to Tax
Taking the temperature of the new Administration may be futile; nevertheless, we identify several possible changes to our tax code that could touch the philanthropic economy. For instance, Congress may vote to reduce income tax rates for the wealthy (decreasing the tax savings from charitable deductions) or repeal the estate tax (de-incentivizing charitable contributions). Some observers even expect changes to donor-advised funds, such as instituting foundation-type payout obligations. While it’s not likely that these (or other) changes would take effect in 2017, nonprofits could begin to feel the effects this year as would-be donors begin to plan for future change.
Government Will Play a Limited Role
With the federal government unlikely to increase its impact-related financing in 2017, one thing is certain: it will remain imperative that the private sector continue to innovate and develop financial and operational solutions to problems like poverty and climate change. According to Bloomberg, green-bond issuance reached $90 billion in 2016, exceeding expectations. As one article summarizes, cities “stand on the front lines of climate-related issues such as sea level rise, transportation, air pollution, and green energy, and increasingly they’re fighting for a better way forward.”