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Thursday, September 10, 2009

Social Capital Markets 09: Forecasting a Marketplace

By Jake Samuelson

What is the future of the impact investing marketplace? Where will the social capital market be in 2010? Those with the unenviable task of taking on this questions in the Wednesday morning plenary at SOCAP09 where Charly Kleissner from the KL Felicitas Foundation, Dan Crisafulli from the Skoll Foundation, and Amit Bouri from the Global Impact Investing Network (GIIN). SoCap convener Kevin Jones moderated.

Matthew Bishop wrote in the Economist before the conference that SOCAP08, "proved long on optimism but rather short on coherence." Our 9am futurists were skeptically optimistic, but argued that growth and maturity for this field could only come through dedicated collaboration. This message reinforced what Willy Foote of Root Capital said the night before that we "need to be pathologically cooperative with would-be competitors." Thankfully each panelist has collaboration written in their job descriptions and are all in positions to help drive coherence and scale to the field.

Kleissner started with a sobering note about the strained carrying capacity of our planet. With our population growing, the reality of scarce resources opens up opportunity for actors to maximize return at the expense of sustainability - a tough trend to counter. He followed with the acknowledgement that impact investing is still a rounding error in the current capital market and "CSR in the U.S. is merely a marketing band-aid." Further, the fiscal crisis has wounded all portfolios and as Kleissner noted, "the people are on the sidelines last year are still on the sidelines - and they are more scared."

At the same time leaders in the space are "stepping on the gas" and increasing involvement. KL Felicitas' portfolio as one example has 45% of investments in impact investments today and is targeting 100%. By making their portfolio strategy and results open to all, Kleissner is both inspiring and enabling others to develop or increase their mission and program related investments. Kleissner predicted a tipping point for impact investing in 2015 reaching a 5-15% of the total capital markets (a bold claim seemingly out of line with his other predictions, but I'd love if he proves correct).

Amit Bouri built on these comments while being clear that "while he was not trying not to paint too rosy a picture, there was clear momentum we can build on as a field" There was evidence the impact investing field was going in both depth and breadth. Players like responsAbility and Gray Ghost Fund continued to raise capital and post returns even in the depth of the downturn. Mainstream players like TIAA-Cref, Prudential, JPMorgan Chase and others are increasing their impact investment activity. There has been a greater level of public-private partnerships and many more deals referred to in the Monitor Institute report of 2008 as "Yin-Yang deals."

One great example of such a deal is how AGRA and other partners made a $10 million loan guarantee fund, allowing Standard Bank to make $100 million available for lending over three years to African small-hold farmers. While impact investing is still an underleveraged niche, coordination and sophistication is growing.There's a long way to go.

With proliferation of funds, Bouri warned "we'll see increased scrutiny and demand for data on impact investments." As Brian Trelstad of Acumen Fund noted that day, "Right now our investors care that we care about metrics, they don't care as much about the metrics themselves. And that will change." To solve this problem and ultimately drive more capital to impact investments, the GIIN (of which I am an employee as a disclaimer) and its partners including B Lab, Acumen Fund, PricewatershouseCoopers, Deloitte, The Rockefeller Foundation and others have been developing standards for measuring and communicating the social impact of investment known as The Impact Reporting and Investment Standards (IRIS).

These standards will be key to improving the effectiveness of impact investments through performance measurement, while allowing for benchmarking on social metrics in addition to financial returns. Bouri added that field-building projects such as IRIS will only succeed with the support and adoption from leaders of the field. Just as the growth of the venture capital industry took committed investment from leaders and academics to grow and scale, the impact investing community will need similar commitments.

Dan Crisafulli, perhaps the least rosy of all, reminded us to "keep in mind the tough realities." Our current problems are getting worse (e.g., climate change, global conflict) and we won't return to the wealth generation of the past. Crisafulli preached that the promise of social impact is not to make us feel better or give us a fuzzy feeling from doing good, it is to scale social impact with major amounts of capital to reverse trends on major global problems. While he was preaching to the choir on this day, Crisafulli's articulation was a reminder of the messages we need to bring outside of the confines of an insider conference.

So how can we get to a brighter future Crisafulli asked? "Social capital" will not be sufficient  - we'll need to mobilize dramatically more support from the government and private sector. On the private side, we need more highly scalable business models beyond microfinance drive investment capital at the scale that is needed. As far as business models and transparency, Cristafulli stated "businesses either need to be paid for their social impact or someone else needs to be paying for it." If the latter, the social subsidy needs to be made clear and not hidden. Further transparency and lower transaction costs can also create a more efficient "conveyer model" from seed to growth capital to later stages of investment capital that doesn't exist today. On the government side, the bigger value will be from policy rather than funding (the size of the Social Innovation Fund on Day 1 was a stark reminder of this fact).

All panelists agreed that growth of this industry is not in any way inevitable - it instead will depend on the willing commitment from leading actors to build industry infrastructure and build a unified voice to lobby for specific policy/regulatory change. Just as important, we'll need to share best practices, business models, deal, and metrics.

Greater transparency will not only drive search and transaction costs down for the current players, but also help attract new players. Kleissner stated how it "amazed him that his rich friends didn't fire their advisors and seek out new models" when they lost 40% of their money with current advisors. Unfortunately, the endowment effect and status-quo bias and other realities of human nature are hard to shake - they give out Nobel Prizes for studying how people make decisions that appear inconsistent with standard economic rationality. (Note: See behavioral economist Dan Ariely's TED Talk for an entertaining explaination).

While we can't change human nature, we can work together to achieve and then showcase the promise of impact investing to those still on the sidelines. While the crisis has shaken the confidence in established investment approaches, we need a louder and more unified voice to change the minds that matter.

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