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Cracking the Code of Impact Investing

The creation of “impact classes” as a classification system has the potential to address a number of stubborn barriers in impact investing.

I recently read a fantastic article called Cracking the Code of Impact Investing, this is an excerpt of some of the best bits with a link to the full story at the bottom. 

As compelling as the concept of impact investing has become, many investors still remain stymied in their efforts to put capital to work addressing social and environmental challenges.

Some barriers are obvious, like the shortage of investable products. Despite numerous studies showing increasing client demand, and the addition of the likes of BlackRockBain CapitalState Street Global Advisors, and UBS, fewer than one-third of the world’s largest 50 investment managers are active in impact investing.

Other barriers are less obvious, like the ongoing difficulty for investors to navigate impact investing easily and efficiently. Navigation barriers result from deficient market scaffolding, including the lack of agreed-upon product categories and underdeveloped performance benchmarks. As a result, the extra effort required to move from interest to action in impact investing can sap investor enthusiasm and confidence. The ramifications are significant:

  • Slow entry. New investors are struggling to enter the market. Barclays recently reported that, while more than half its clients are interested in impact investing, just 9 percent had actively engaged for lack of “knowledge, guidelines, or frameworks.”
  • Inefficient market matching. Investors and investment managers pay a real price for the inefficient, bespoke efforts required to identify aligned counterparties who have similar objectives.
  • Inappropriate impact expectations. The risk grows that investors will walk away if impact performance expectations are unmet in the absence of frames that more clearly establish appropriate objectives.
  • Market gaps. The current market provides too little visibility into where capital might be most needed, leading to a lack of appropriate investment across the risk/return spectrum (the challenge identified by practitioners as most limiting to the growth of impact investing).

Next Steps

While the impact class concept needs further refinement, diverse stakeholders agree the design process is worthwhile. We have engaged an expert advisory group for this effort, including pension fund managers, investment managers, foundations, family offices, wealth advisors, investment banks, and academics. Following a convening of 40 global participants held at Blackrock’s offices in New York in February 2016, we surveyed the group and found that, of 27 respondents, 80 percent wanted a “broadly accepted framework for categorizing the many ways in which funds/intermediaries create impact through investment.”

About three-quarters also agreed impact classes would help in the sorting process needed to make individual investments and portfolio allocations, and that impact classes would help advisors and their clients arrive at impact objectives. We also see others adding fuel to the idea of portfolio maps or grids that are very similar to this idea.

It’s important to note impact classes are not about creating yet another complicated framework in impact investing. While we need to build impact classes on robust foundations, the end result ought to be surprisingly basic. As a result, market entry should become easier, matchmaking more efficient, objectives more transparent, and capital more available for multiple purposes. Indeed, as one participant at the February meeting remarked, classification in impact investing is inevitable. The question is whether practitioners want to shape the effort or prefer to have the categories imposed from outside.

We hope that others will join the conversation at a site we’ve just launched to help engage the larger community in reviewing the ideas in our working paper. We think it’s time to address the thorniest challenges in impact investing by creating common classifications of the impact that investors are trying to create.

If you are interested in putting your investment capital to work and make a difference, get in touch with Impact Investment Funds' Chief Investment Officer here

You can read the full article published in the Stanford Social Innovation review here by Cathy Clark & Ben Thornley. 

There is also an earlier story from 2014 here by Jason Saul.