80533 BRIEF Where Do Impact Investing and Microfinance Meet? “Impact investing” is a new investment category that has been getting a lot of play in the past few years. This Brief1 presents the results of CGAP research on impact investing and how it relates to the micro, small, and medium size (MSME) investment space. One key finding is that microfinance investments through microfinance investment vehicles (MIVs) and small and medium enterprise (SME) funds make up a significant share of investment activity covered by this term. Though the term “impact investing” was first coined products, or the markets or sectors in which they in 2007, the activity has existed under various names concentrate, but rather through the motivations for many decades. The sector has gained momentum behind their investment. Therefore, broadly speaking, both in developed and developing countries in impact investors fall into two categories:4 recent years. Today there are more than 300 impact investment funds.2 This universe of funds includes • “Impact first” investors who aim to maximize social those known as socially responsible investing vehicles and environmental impact and are prepared to (SRIs), MIVs, and bottom of the pyramid venture funds. accept below-market-rate returns They are run by specialized asset managers (e.g., • “Finance first” investors who seek investment responsAbility, Triodos, and Bamboo Finance) and vehicles that offer market rate or above mainstream financial institutions (e.g., J.P. Morgan, returns while secondarily generating social or UBS, and Deutsche Bank). A number of actors also environmental impact engage in “sector building” activities, including foundations such as Rockefeller, Omidyar Network, Compared to the entities financed by MIVs, impact and the Bill & Melinda Gates Foundation; networks investment goes to a much more diverse group of such as the Global Impact Investing Network (GIIN), possible investees. Aspen Network of Development Entrepreneurs (ANDE), and European Venture Philanthropy How much and where does it go? Association (EVPA); and universities such as Duke, Harvard, and Oxford. Over the past three years, J.P. Morgan and GIIN have conducted an annual survey on global impact What is impact investing? investing, capturing data from a sample of those funds with at least US$10 million in assets under According to GIIN,3 “impact investments are investments management (AuM). The latest survey released in made into companies, organizations, and funds January 2013 showed that US$8 billion had been with the intention to generate measurable social and committed by impact investors in 2012, increasing environmental impact alongside a financial return.” This from US$2.5 billion reported in 2010. While the definition differs from philanthropy—where no financial different reporting universes from year to year make returns are expected—and from socially responsible it difficult to report precise growth trends, 5 the investment—where negative impacts are avoided but significant increase in the number of respondents positive impacts are not necessarily required. (from 24 respondents in 2010, to 52 in 2011, and 99 in 2012) itself signals sector growth. Impact investors do not distinguish themselves from traditional investors by their funding vehicles, 1 CGAP conducted interviews with industry leaders (from GIIN, J.P. Morgan Social Finance, EVPA, Grassroots Business Fund, Bamboo Finance, Impact Investing Exchange Asia, ANDE, and responsAbility); analyzed data in the ImpactAsset 50, an annually updated list of the top 50 global impact investors, and the GIIN ImpactBase—a global directory of impact investment funds; and conducted a literature review. 2 This figure is derived from funds listed in ImpactAsset 50, GIIN ImpactBase, GIIRS, and other sector-related lists. 3 See http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html 4 For further background see Monitor Institute (2009). 5 The survey does not collect data on AuM. June 2013 2 Table 1. Impact investing sector allocations Sector AuM % of AuM Microfinance 6,400,000,000 72.1 SME finance 1,300,000,000 14.6 Agriculture    585,000,000 6.6 Housing    100,000,000 1.1 Education    17,000,000 0.2 Environment    216,000,000 2.4 Cross-sector    263,000,000 3.0 Total 8,881,000,000 100 The J.P. Morgan–GIIN reports cover both developed the livelihoods of smallholder farmers in East Africa. and developing markets. To assess the scale of impact The U.S. Agency for International Development investing focused on developing countries, CGAP (USAID) provided a 50 percent debt guarantee to analyzed the ImpactAsset 50 and GIIN ImpactBase J.P. Morgan’s investment, as well as a grant-funded databases and found that the top 50 impact investing technical assistance facility for the fund’s investees. funds active in developing countries have just over US$8.6 billion in AuM as of December 2011. Several specialized asset managers, such as responsAbility and Incofin, with track records in Table 1 summarizes the various sectors covered by microfinance, are also launching “fair-trade” funds the impact investing space in developing countries with a special focus on Latin America (coffee) and and their relative scale, using the following typology.6 Africa (cocoa), each estimated at around US$50 million. Other sectors with smaller exposures that Microfinance makes up close to three-fourths of total are attracting attention include education, water, and impact investing AuM (US$6.4 billion) focused on health. developing countries. SME finance follows, with a 14.6 percent (US$1.3 billion) share. Agriculture AuM The impact investing community is most active in are one-tenth of microfinance assets; other sectors sub-Saharan Africa (SSA).7 Investment firms such as are still more nascent. Interestingly, over 70 percent Invested Development, Grassroots Business Fund, of the sampled funds (based on AuM) are expecting Acumen Fund, and Village Capital, among others, near-to-market rate of returns. have recently set up offices in East Africa.8 “Finance- first” investments in the region are made primarily While MSME-related investments represent the by private equity and venture capital funds, while vast majority of impact investing exposure thus “impact-first” investors, such as development finance far, this is likely to change soon with the observed institutions, private foundations, and specialized asset trend to launch funds and facilities focused on the managers, provide the main funding for early growth- agribusiness and fair-trade sectors. For example, in stage companies. September 2011, four members of GIIN’s Investors’ Council (J.P. Morgan and the Bill & Melinda Gates, Who’s funding this? Gatsby Charitable, and Rockefeller Foundations) closed a US$25 million impact investment into the Funding for impact investing comes from a variety African Agricultural Capital Fund, managed by Pearl of sources. Public investors and donors are the main Capital Partners, which primarily invests in small and sources, while about one-third of the assets are raised medium-sized agricultural enterprises to improve from institutional investors and private individuals. 6 For more information see O’Donohoe et al. (2010). 7 Microfinance investments in SSA grew by 12 percent annually on average to reach close to US$2.7 billion, while SSA’s MIV portfolio has been the fastest growing (CGAP 2012 Funder Survey and Symbiotics 2012 MIV Survey). 8 For additional information on Africa, see Glisovic and Mesfin (2012). 3 Donors and public investors, who see impact investing industry by learning from these experiences. Donor as an opportunity to leverage private investment support to develop standardized financial and social into solving development goals (particularly as aid performance metrics for impact investments can budgets are under pressure), are the main actors enhance transparency and allow benchmarking on supporting high-risk investments and early-stage fund performance. businesses. Examples include USAID’s development innovation ventures, the World Bank’s development A second concern for the impact investing industry marketplace, and the Inter-American Development is whether the social impact expectations created Bank Multi-lateral Investment Fund’s Opportunity for by the growing excitement around impact investing the Majority Initiative. can be met. Some newer entrants to the market may overestimate the current market potential and Improvements in impact investing infrastructure anticipate unrealistic development returns. Lessons could enable more “brokering” between funds and from microfinance, which faced a similar challenge of social enterprises. For example, the Nexus for Impact inflated expectations, might be relevant. Alignment Investing in South Africa, the South Africa Social of the message about the impact investing sector’s Investment Exchange, and the Impact Investment financial and social returns with the actual evidence Exchange Asia (IIX) platforms seek to match investor (ideally against standardized metrics) may help allow capital with impact ventures. Key supporters of the industry to mature at a realistic and sustainable the development of social capital markets include pace. the Rockefeller Foundation and some regional development banks, such as the Asian Development The final challenge concerns capacity. MIVs were Bank. created after many years of direct investment in and capacity building of microfinance institutions (MFIs). Only once a robust number of MFIs were in place Outlook and challenges did the microfinance investment community emerge. Impact investing seems to be missing this important Interest in impact investing has grown in the past phase of “pipeline creation” with donors and three years, resulting in increased assets and investors jumping directly into the investment vehicle improved sector infrastructure. However, several phase. Donors may need to help build a pipeline important challenges need attention. of “investment ready” firms to narrow the gap between investors’ appetite and absorption capacity. First, information on the financial and social Incubators are one vehicle to help nurture investment- performance of impact investments is either scarce ready social enterprises. Additional funding and or unavailable. While the Global Impact Investing support is needed to support the capacity-building Rating System (GIIRS) and Impact Reporting and infrastructure for the nonmicrofinance segments of Investment Standards have focused on standardizing the impact investing sector. impact measurement, there are still widely divergent practices in whether and how impact investors References systematically track social impact. Establishing standard performance metrics and making this CGAP. 2010. “Microfinance Investment Vehicles information publically available through platforms Disclosure Guidelines.” Consensus Guidelines. such as the Microfinance Information Exchange (www. Washington, D.C.: CGAP. mixmarket.org) were instrumental in advancing the microfinance industry, allowing financial and social Glisovic, Jasmina, and Senayit Mesfin. 2012. benchmarking across regions and institutions. Efforts “Microfinance Investments in Sub-Saharan Africa.” such as the “Microfinance Investment Vehicles Brief. Washington, D.C.: CGAP, June. Disclosure Guidelines” (CGAP 2010) to codify standard indicators and ratios strengthened reporting Monitor Institute. 2009. “Investing for Social and by microfinance investment managers. Donors Environmental Impact: A Design for Catalyzing an can speed the evolution of the impact investment Emerging Industry.” San Francisco: Monitor Deloitte. June 2013 All CGAP publications O’Donohoe, Nick, Christina Leijonhufvud, Yasemin are available on the CGAP Web site at Saltuk, Antony Bugg-Levine, and Margo Brandenburg. www.cgap.org. 2010. “Impact Investments: An Emerging Asset Class.” Washington, D.C.: J.P. Morgan Chase & CGAP Co., The Rockefeller Foundation, and Global Impact 1818 H Street, NW MSN P3-300 Investing Network, Inc. Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org © CGAP, 2013 AUTHORS: Mayada El-Zoghbi and Henry Gonzalez