Eight Trends Driving the Social Impact Investment Boom
The impact investing sector is the fastest growing alternative investment market today. Yet it still remains a mystery to many of the leading advisors and accountants in the investment industry.
The growth is stunning. In just the next year, the impact investor sector is expected to double to $500 billion in assets under management. What’s more remarkable is that amount is roughly double the $228 billion in 2018, and that was roughly double the $114 billion in 2017. The field of impact investing is one of the fastest growing areas in the investment scene.
Impact investing, unlike traditional investing, measures not only your (monetary) return on investment (ROI), but also the positive impact on society, with the social impact often taking priority over the financial return. I often tell my impact clients that they may be able to get a 10 to 15% (monetary) return, and the additional 20% they might expect in a risky venture capital deal will come in stories of positive societal change.
And this may give you some further insight into what is driving this growth.
Based on our Nonprofit & Social Sector practice and my conversations with clients and involvement in such ventures over the last decade, I would suggest there are eight trends to watch.
1. Millennials are inheriting their family’s income.
This generational shift of an estimated $30 trillion dollars is the largest in the history of the world. Many of these inheritors are not interested in their parents’ style of philanthropy or, for that matter, their parents’ means of making money. These optimists want to measure impact and return. Recently, one of America’s larger philanthropic families spoke with our team to help them through a challenge. The inheritor insisted that the entire foundation transition to impact investments. That meant that hundreds of millions of dollars would need to be moved into the social impact movement. The family needed help on both strategy and accounting. So it is not unusual to see fund managers, many very prominent and with the big investment houses, starting up impact funds. This is simply because their clients are demanding it. Marcum’s Nonprofit and Social Sector Group, anticipated this trend when we began to incubate, house, and support the first college-centric social impact program back in 2010, which today is known as Social Impact 360. Additionally, a group known as Nexus, with over 5,000 members from 70 countries, works to unite the next generation of philanthropists, impact investors and social entrepreneurs to bring about some of the most promising global solutions of their generation.
2. Return Rates are improving.
Early on, most impact investors I worked with had a philanthropic mindset. They were surprised when they saw a return and often would offer to simply put it back into the social venture. But lately we are seeing returns moving up from 8% to as high as 18%. As returns improve, hesitant money managers feel more comfortable recommending consideration of investment opportunities in the space. My philanthropic side hopes that, for many serious investors, their initiation to impact investing becomes the gateway to true philanthropy.
3. New issues are emerging.
An example would be climate change, which less than a decade ago was not nearly in the forefront of our social debates. If we understand that it is not just simply economic need that can drive markets but that social needs can and do as well, issues such as climate change can be and are being addressed through impact investing. And solutions can result in profits. In fact, GINN-Global Impact Investing Network reported that 72% of those surveyed were focused on climate change. Our team regularly attends the “Breakthrough Institute” funded in part by the Pritzker family, with an entire focus on energy and climate change strategies.
4. Opportunity Zones passed in the Tax Cuts & Jobs Act of 2017 allow for capital gains to be avoided if funds are put into designated zones.
This alone could help to double social impact investing yet again by 2020. By some estimates, including commentary at Marcum’s recent Opportunity Zone symposium in Washington, more than $1 billion will flow into Opportunity Zones this year, with more expected to follow. And the smart investor will be aware that, for such investment to truly be effective, there must be a productive engagement between the investor and those who live in the communities in which they will invest. And, what we know at Marcum as advisors to impact investors, is that timely and transparent access to data about these investments is a primary key to success.
5. Ease of engagement is another reason that this field is taking off.
It is no longer just for the super–wealthy, or an alternative to a charitable contribution. Crowdfunding and changes in the law create an easier on-ramp for all investors. Years ago, Raffa launched a Social Capital Advisory to bridge the gap between investors, social ventures and policy leaders, as we anticipated the growing need for those seeking to break into this sector. This group has seen great expansion within Marcum.
6. Better metrics is another incentive to participate and a huge opportunity for anyone in the finance or accounting field who sees beyond the bottom line.
Investors want to measure progress and need similar auditing efforts. And now that it is a matter of measuring profits and purpose, having such skill is paramount. B Lab certification is one method for business of all sizes to establish metrics that consider the impact of their decisions on their workers, customers, suppliers, community and the environment. B Lab certification (or B Corp certification) is issued to for-profit companies by B Lab, a global nonprofit organization. To qualify, companies are scored on “social and environmental performance” and must pledge to integrate B Lab standards into their governing documents. There are currently over 2,900 certified B Corporations across 150 industries in 64 countries. Raffa was one of the first CPA firms in the world to be B-Certified. Marcum, like so many other smart businesses, is moving towards it. Our Non Profit & Social Sector practice can help other companies and firms achieve this goal and earn certification.
7. Global interest is also on the rise.
We are currently working with a few of the largest USAID country programs investing hundreds of millions of dollars in for-profit social businesses. For instance, in India, there is a new law requiring for-profit businesses that meet certain profitability thresholds to give 2% of their EBITDA in support of social advancement. We help these corporations not just to comply with the law but to benefit from it by connecting them with impactful organizations that are advancing civil society. The goal is to allow these companies to see the positive effects on society, while the returns on their investments can include cause marketing and employee engagement for their businesses, and yes, a monetary return on their investment. Our social impact team just spent a week in Nicaragua to help craft the largest fund for that country in support of childhood education. Our friends in the Asian Venture Philanthropy Network located in Singapore have for years been a leading ecosystem builder that increases the flow of capital into the social sector in Asia and beyond.
8. Pension Funds are now being scrutinized over the use of their investments.
Once this happens, and it will, hundreds of billions of new dollars will move toward social impact investing. This is why investor groups like Bain, KKR, U.S. Trust and others are rushing to create social capital advisories.
Social impact investing has the potential to transform traditional capitalism into a greater win for more people. Our political climate is breaking under the stress of income inequality and the elite-working class divide. I believe the more we can get behind impact investing, we just may be able to solve the world’s greatest social challenges while still finding a way to earn a financial return.
Something to think about and to discuss with some of the leaders in this movement at MARCUM.