Demystifying Impact Investing and Seeing its Potential
In recent years, there has been a growing wave of interest in “impact investing”—a term coined by the Rockefeller Foundation in 2007 to describe the act of investing to generate a social or environmental impact while earning a financial return.
The truth is that aligning money and mission has a decades-long track record, and early examples of economic activism traces back centuries. The resurgence of blended value investing gained a strong foothold following the financial crisis in 2008, which had many questioning their investment strategy and the role of private capital in addressing large-scale problems.
So, what is impact investing, and who are impact investors?
The accepted definition of impact investing is rooted in intentionality. Every investment you make generates an impact, but the test is whether that impact is aligned with your core values. Impact investors are not a different class of investors. They are simply people and organizations who support the notion of blended value—the idea that investing to pursue social and environmental goals does not need to be decoupled from profit-making.
We are seeing significant growth in community investment year-over-year. Assets in domestic Community Investing Institutions totaled more than $122 billion in 2016; a 2x increase over 2014 ($64 billion) and 6x increase since 2005 ($20 billion). Retail, accredited, and institutional investors are increasingly looking for opportunities to achieve double and triple bottom line returns, and CDFIs are poised to provide products that meet their risk/return/impact needs.
In an emerging market, impact investors are looking for points of entry.
The marketplace for modern-day impact investing continues to shift and shape itself in real time, making it difficult to say where the movement is headed with any great degree of certainty. What’s clear is that there is a demand for community investment products, and CDFIs present a solution for mainstream investors looking for actionable opportunities with easy executions.
Intermediaries are a tremendous asset to investors and financial advisors who lack the knowledge and expertise needed to find, underwrite, and manage direct investments. This is the CDFI value proposition within the emerging market of impact investing. We have been doing this work for more than three decades and have the benefit of boasting a successful track record, which is often absent in this nascent market.
Impact investors could play a key role in the future of CDFIs.
A CDFI’s scope, reach, and impact is largely influenced by the type of capital it can access. Many CDFIs look toward new sources of capital as we continue to confront everchanging legislative, regulatory, and funding priorities. Diversifying our sources of capital can help to ensure sustainability, and impact investors have the flexibility to provide loans with terms that are favorable to the work of CDFIs. However, our success in capturing this opportunity will rely upon our ability to create and market products that appeal to impact investors, and to advocate for public policies that leverage CDFIs to unlock private capital for public good.