SOCIAL IMPACT INVESTING

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1 SOCIAL IMPACT INVESTING Luke Fletcher Bates Wells and Braithwaite Type: Legal guide Published: August 2012 Last Updated: August 2012 Keywords: Impact investing; responsible business; finance;

2 This document provides general information and comments on the subject matter covered and is not a comprehensive treatment of the subject. It is not intended to provide legal advice. With respect to the subject matter, viewers should not rely on this information, but seek specific legal advice before taking any legal action Any opinions expressed in this document are those of the author and do not necessarily reflect the position and/or opinions of A4ID Advocates for International Development 2012

3 Social Impact Investing What is social impact investing? Social impact investing is investment for a social as well as a financial return. It is different to the giving of grants or donations, which do not involve any expectation of a financial return. It is also different to ordinary socially responsible investing, which usually involves screening out investments with a bad social impact, such as tobacco, arms and pornography, as opposed to finding and making investments which create a positive social impact, such as clean technology, education and sustainable agriculture. The word social in social impact is shorthand for social or environmental. In social impact investing, the evaluation of social performance is an integrated component of the investment process, as well as evaluation of financial performance. Other terms which are used to describe the same approach to pursuing positive social impact through investment include impact investing, which is the term of choice in the US, and social investing which is the term of choice in the UK. What kinds of investors get involved in social impact investing? The social impact investing movement has been led by NGOs, development agencies, high net worth individuals and other philanthropically minded investors. However, increasingly, new categories of investors, including mainstream banks and financial institutions and multilateral agencies are becoming involved. A distinction is often made between finance-first investors and social-first investors. Finance-first investors are investors for whom financial returns are primary and social impact is secondary. Mainstream financial institutions engaging in social impact investment are likely to come into this category. Social-first investors put social impact before profit and tend to include NGOs and development agencies. What kind of social impact is created? The kinds of social impact generated are enormously varied.

4 Social impact investing can take place in a range of different sectors, from microfinance, renewable energy and sustainable agriculture to affordable housing. The social impact may be creating employment for ex-offenders, disabled people or people who are likely to find it difficult to find employment, by investing in firms that deliberately seek to create employment for people who come into these categories. Alternatively, it could be investing in a business that purchase from developing world producers at a premium, such as a fair trade business. It might be investing in social enterprises seeking to provide education, health, finance or other basic services to people at the bottom of the pyramid who would otherwise not be able to access the services they need to live a comfortable life. Investee social enterprises may be based anywhere in the world but will probably tend to be local businesses, such as worker co-operatives or small businesses with a social mission. Social investors tend to be bigger and might include major international NGOs, such as Oxfam or Christian Aid, or specialist social impact investment funds. How big is social impact investment? Estimates of the potential size of the social impact investing market vary enormously. A report entitled Impact Investments: An Emerging Asset Class published by the investment bank JP Morgan in 2010 estimates significant market opportunity for social impact investment. The report analysed selected segments of five sectors serving the population at the base of the economic pyramid : urban affordable housing; rural access to clean water; maternal health; primary education; and microfinance. It identified a potential profit opportunity between $183 and $667 billion and a potential investment opportunity between $400 billion and $1 trillion in the next decade for just these segments of the social impact investing market. The deal sizes for individual social impact investment deals varies enormously from multi-billion fundraisings for the Global Alliance for Vaccines and Immunisation to minority investments in SMEs at the level of only a few thousand pounds. What are the opportunities social impact investing brings? Social impact investing brings with it the opportunity to bring investment discipline to development interventions. Investors want to see capital returned and so do due diligence, ask difficult questions, seek good management and exercise

5 judgement about what management teams and operational models are likely to succeed and become replicable and scalable over time. Social impact investing also provides socially oriented capital to match and facilitate the growth of social enterprise. Social impact capital is often more patient or sympathetic, in allowing repayment holidays or initial grace periods for start-ups for example, and is willing to take more risks than traditional capital in the hope or expectation of social impact. It is therefore able to address some of the market failures that prevent the financing of developing world small and medium sized enterprises. Early indications are that typical rates of return for investors are likely to be modest and in the order of single digit figures, often between 5-10%. What are the challenges faced by social impact investing? Social impact investing faces a number of significant challenges. It is a new approach to investing and to development and does not fit easily into existing categories. As a result, there are low levels of awareness and understanding of social impact investing. It is an approach to investing that for some investors is seen as an extension of philanthropy, whilst for other investors is simply seen as a different form of investing. As a result, it often falls between regulation of philanthropy and regulation of financial services generally. There is a need to develop enabling policy and regulatory frameworks on a country-by-country basis. This will take many years. One of the major challenges faced by social impact investing is the need to measure social impact. There is no standard approach to measuring social impact and a range of methodologies are being developed. Examples include social return on investment, which is a relatively intensive principles-based social accounting methodology, and more simple methods involving feedback from beneficiaries. Another challenge is the relatively illiquid nature of most social impact investments, which tend at the moment to be investments in unlisted entities. This means that secondary markets are unavailable and exiting investments can be difficult. Social impact investing depends on the generation of revenue to repay investments. Where the beneficiary class is too poor to pay, it may not be possible for investee enterprises to generate enough revenue to be able to raise social impact investments. There is therefore a limit to the degree to which social impact investment can reach and help the very poorest in developing world contexts.

6 Can you give any examples? Kiva ( is a website which allows retail investors to engage in social impact investing by enabling users to lend monies, via partner microfinance institutions, to aspiring developing world entrepreneurs. Loans are repaid into the users Kiva account and can be loaned out again to the next market trader or farmer in need of start-up or growth capital. Since its founding in 2005, Kiva has provided $318million of microloans to nearly 800,000 lenders with a repayment rate of 98.93%. Acumen Fund ( is a US based non-profit venture capital fund which has helped to pioneer social impact investment. The mission of Acumen Fund is to create a world beyond poverty by investing in social enterprises, emerging leaders and breakthrough ideas. It aims to provide people with access to the critical goods and services they need, including affordable health, water, housing, energy, agricultural inputs and services by taking social enterprise approaches to poverty. The Small Enterprise Impact Investment Fund is a joint initiative between Oxfam and asset management group Symbiotics. The fund, which claims to be the first of its kind, will target small and medium enterprises in developing countries, offering investors measurable social impacts and financial returns, with relatively low risk.