Insights

Impact Investing - What it is and why it matters

While there are multiple definitions of the term, “impact investing” generally refers to an investment approach that intentionally seeks to create–and measure–both financial return and positive social impact. The impact can be social as well as environmental in nature.

While there are multiple definitions of the term, “impact investing” generally refers to an investment approach that intentionally seeks to create – and measure – both financial return and positive social impact. The impact can be social as well as environmental in nature.

 

Impact investing is increasingly recognised as an emergent investment field with potential for scale. The field has seen significant and accelerating activity over the past decade. Estimates of the size of the market, and its potential, range from US$650 billion to US$1 trillion by 2020. It is expected to generate between US$183 billion and US$667 billion of profit during the same period. (These statistics come from “From the Margins to the Mainstream”).

 

Despite this positive outlook, succeeding in this highly evolving and often uncharted field is fraught with challenges, including the early stage nature of the ecosystem; the small “deal size” or character of investable opportunities; the misalignment with existing asset allocation frameworks; and the complexity that quickly emerges when investors and companies are asked to manage for a “double or triple bottom line”. Meanwhile, social enterprises face similar challenges. They are asked to deliver impact and financial returns in a highly resource-constrained environment.

Adaptive strategies

Strategic advisory for investors, social enterprises, intermediaries and field-builders

Successful strategies clearly articulate the investor’s goals and priorities, account for ground realities of today’s impact enterprise landscape, and anticipate future growth and evolution within the ecosystem. Having worked with some of the leading players in the Impact Investing field, Deloitte member firms’ practitioners offer strategic advisory services designed to help clients establish winning strategic roadmaps and achieve financial and societal leadership in a rapidly evolving field.

Stories from the field

In 2011, a foundation hired Monitor Institute, now part of Deloitte, to support its strategic review process. As one of the leading intermediaries in the impact investing space, the foundation sought to develop a strategic vision that would allow it to deliver on its near-term strategic priorities while putting the right building blocks in place for achieving its vision for a just society. The team developed a strategic roadmap for the organization and helped its executive team identify ways to align its portfolio and operations to its strategic vision.

Innovative models

 

Financing mechanisms and structures, including social impact bonds 

Successful financing mechanisms match investors with different “risk-return-impact” appetites to impact investing opportunities. Steeped in practical insight into what it takes to launch innovative financial instruments, the Deloitte member firms help design and launch products that align with clients’ impact investment objectives. Innovative financing mechanisms include payment for success: products that incentivise innovation and allow governments to pay only if the initiative is successful. 

Stories from the field 

A UK organisation which delivers programs to provide at-risk young people with work, education, and training, wanted to develop a SIB  in the education sector in Glasgow. Deloitte UK conducted a feasibility study calculating the true economic cost of exclusion and truancy in England, Wales and Scotland. Deloitte UK’s ongoing work with the organisation to develop an education SIB is an example of the firm’s efforts to develop workable SIBs. The initiative with the organisation is only one of many SIB initiatives that Deloitte is supporting globally, across developed and emerging markets. 

 

Scaling social enterprises

 

Strategies to accelerate the growth of social and impact enterprises

Many different models exist to establish social enterprises that operate at scale. Models range from prizes, accelerator models, or fellowships for starting entrepreneurs, to support for commercially-focused enterprises looking to assume a double or trip bottom line. The Deloitte member firms worldwide have worked with social enterprises, intermediaries, and field builders alike to develop and implement scaling models that are most appropriate given the goals and unique context in which they operate. 

Stories from the field

Impact investors often note that the lack of a strong investment pipeline is a key challenge to building and scaling the industry. Too few social enterprises have the right systems and structures in place to be investable and fewer still that have achieved meaningful scale and thus can absorb larger amounts of capital successfully. Monitor Deloitte is working with a leading foundation to identify and examine innovative acceleration solutions to help impact enterprises achieve scale. Through acombination of primary and secondary research, we analysed the current state of the market and identified gaps. Through our role as an advisor on a grant-giving process, we are helping the foundation test various solutions to help enterprises overcome challenges with an aim to better understand and disseminate effective ideas to help social enterprises grow globally.

 

Measuring impact

 

Performance measurement, reporting and analytics support

Recognised performance measurement and reporting standards allow an organisation to report on its impact, return, and risk profile. If designed well, they also enable better management decision making and promote transparency and increased confidence in the information disclosed to the market. Leveraging deep experience with global financial and non-financial standards setters and ratings organisations, as well as with corporations seeking “impact transparency”, the Deloitte member firms support clients in implementing rigorous, yet practical impact evaluation and reporting practices. 

Stories from the field 

A key impediment to new capital flowing into the impact investing marketplace has been the lack of tools and metrics through which to assess, benchmark, and report impact. It has been difficult for investors to compare investment opportunities across markets, industries, and impact areas using comparable, transparent, and independently verified tools.  Deloitte is a pioneer funder of B Lab’s GIIRS and serves as the preferred provider for third-party desk and on-site reviews for companies and funds seeking a GIIRS rating. In addition, a Monitor Deloitte team helped develop a roadmap that would help a field-builder scale and “mainstream” its activities alongside a quickly evolving global impact investing market.

 

Market building

 

Strengthening the impact investing ecosystem, including “aligned action” services

Successful ecosystem efforts are often the result of multiple, parallel interventions where players from across sectors work together to facilitate, stimulate, and even enforce action. Learning from “aligned action” engagements across a host of issue areas and geographies, the Deloitte member firms can help individual clients and client consortia agree to and deliver on a common mandate and action agenda. Services range from strategy formulation, to meeting facilitation, research, and project management support. 

Stories from the field 

Given the highly evolving nature of the impact investing industry, there is a need to have a strong and supportive ecosystem. Other than research studies, the team has supported initiatives focused on enhancing transparency and reporting practices worldwide as well as a range of convenings focused on rallying practitioners around ways to enhance the impact investing ecosystem. Efforts include support related to: 

  • Enhancing Transparency and Reporting Practices: Deloitte’s experience in sustainability and leadership in advancing financial and non-financial reporting led to an invitation from a consortium of field-builders, to help build a “FASB and GAAP equivalent” for impact investing
  • Facilitating Dialogue and “Collective action”: Alongside a leading foundation, our team has supported a series of impact investing conferences and meetings to bring together leading players, identify challenges in the sector, and develop strategies to address them through collaboration.  Deloitte U.S. has also provided targeted support to bringing the US impact investing community and CDFIs closer together.

 

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