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CREATING IMPACT
The Promise of Impact Investing
IFC
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433 U.S.A.
ifc.org/ThoughtLeadership
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FPO APRIL 2019
About IFC
IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development
institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our
capital, expertise, and influence to create markets and opportunities in the toughest areas of the world. In fiscal year 2018, we
delivered more than $23 billion in long-term financing for developing countries, leveraging the power of the private sector to end
extreme poverty and boost shared prosperity. For more information, visit www.ifc.org.
© International Finance Corporation. First printing, April 2019. All rights reserved.
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views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and
Development (the World Bank) or the governments they represent.
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CREATING IMPACT
The Promise of Impact Investing
CONTENTS
vii FOREWORD
ix ACKNOWLEDGMENTS
xi EXECUTIVE SUMMARY
1 CHAPTER 1
TAKING STOCK: DEFINING IMPACT INVESTING AND SIZING THE MARKET
1 1.1 What Is Impact Investing?
1 | An Increasing Number of Investors Have Goals Beyond Maximizing Profits
2 | Impact Investments are Made With the Specific Intent to Contribute to the
Achievement of Measurable Social Objectives
10 | Value-aligned Investments May Have Intent, but Lack Contribution or Measurement
12 1.2 Why Impact Investing?
12 | Impact Investing Can Help Spur Progress Toward the SDGs
14 1.3 How Large is the Market Today?
14 | Measuring the Size of the Market is Subject to Several Complications
16 | Private Investment Funds with Intent for and Measurement of Impact: $71 Billion
19 | Shareholder Action Strategies and Green and Social Bonds May Oer Investors
Opportunities to Invest for Impact in Public Markets: $8,821 Billion
24 | Governments Are Also Impact Investors, Through the Outstanding Private Investment
Portfolios of Development Finance Institutions: $3,825 Billion
27 1.4 What is the Growth Potential?
30 | The Promise of Impact Investing to Contribute to Achieving the SDGs
31 CHAPTER 2
ADDRESSING THE CHALLENGES FACING THE IMPACT INVESTMENT INDUSTRY
31 2.1 Establishing that Impact Investments Can Offer Commercial Returns
31 | While Some Impact Investors Have Obtained Sub-Commercial Returns, Others Have
Earned Commercial Returns
33 | Financial Returns of Realized IFC Projects
35 | Shaping Market Perceptions: Sharing Data on Financial Returns
36 2.2 Bringing Transparency and Discipline to How Investments are Managed
to Achieve Impact
36 | Operating Principles for Impact Management
40 2.3 Building Clarity, Credibility, and Comparability in Impact Measurement
44 | Three Impact Measurement Frameworks
47 | Assessing the Most Appropriate Framework
48 | Case 1: LeapFrog Investments—FIIRM—a Target Framework
50 | Case 2. Partner’s Group (PG LIFE Fund)—a Rating Framework
52 | Case 3. TPG (RISE Fund)—a Monetization Framework
55 SPOTLIGHT IFC’s Anticipated Impact Measurement and Monitoring System
63 2.4 Addressing Regulatory Barriers Facing Investors
63 | Public Pension Funds and Sovereign Wealth Funds
67 | Insurance Companies
68 | Creating a Friendlier Regulatory Environment
69 CHAPTER 3
LOOKING AHEAD: SCALING IMPACT INVESTING
69 | From Youth to Maturity
70 | The Path to Scale: Opportunities, Credibility, and Evidence
72 | Scaling Together: Collaboration and Collective Action
73 | A Vision for the Future
FIGURES
EXECUTIVE SUMMARY
FIGURE 1 Private Investors Have Three Key Opportunities for Impact Investment, Which Span
Public and Private Markets ................................................................................................................................................................... xii
FIGURE 2 Governments, Through Development Finance Institutions, Are Major Impact Investors ....................xiii
CHAPTER 1
FIGURE 3 Recent History of Responsible Investment .................................................................................................................1
FIGURE 4 The Impact Thesis of Impact Investing ....................................................................................................................... 3
FIGURE 5 The Full Spectrum of Investment Options That Can Create Social Value ..................................................... 7
FIGURE 6 Private Investment Funds Raised by Asset Managers Since 2008 ..................................................................16
FIGURE 7 Impact Intent and Measurement Funds Disproportionately Focus on Emerging Markets ................... 17
FIGURE 8 Impact Intent and Measurement Funds are Focused on Infrastructure in Developed Markets .........18
FIGURE 9 Impact Intent and Measurement Funds Have Consistently Failed to Meet
Fundraising Expectations .......................................................................................................................................................................19
FIGURE 10 The Green Bond Market Has Grown Rapidly, With an Increasing Share of Issuance
Coming from Corporates ...................................................................................................................................................................... 22
FIGURE 11 IFC Concessional Financing by Income Level ........................................................................................................26
FIGURE 12 Impact Investors Purchase Professionally Managed Investment Products in Public
and Private Markets ................................................................................................................................................................................ 28
FIGURE 13 Only 8 Percent of Assets Trade in Private Markets Oering Less Liquidity ...............................................29
CHAPTER 2
FIGURE 14 The Public Market Equivalent (PME) of Realized IFC Investment Projects ................................................ 35
FIGURE 15 The Number of Publicly Traded Funds with “Impact” in Their Name Has Grown Substantially ........36
FIGURE 16 Operating Principles for Impact Management ....................................................................................................39
FIGURE 17 The Core Dimensions of an Impact Measurement Framework and Their Interlinkages ......................41
FIGURE 18 FIIRM Indicators and Consumer Insights ...............................................................................................................49
FIGURE 19 Partners Group—PG LIFE’s Fund Development Impact Framework ............................................................51
FIGURE 20 PG Life Fund Development Impact Framework Application ..........................................................................51
FIGURE 21 TPG (RISE Fund)—Impact Monetization Formula ..............................................................................................53
FIGURE 22 End-to-End Support System for Impact Assessment .......................................................................................56
FIGURE 23 The AIMM Two Dimensions: Project Outcomes and Market Creation ......................................................57
FIGURE 24 AIMM Sector Frameworks ..........................................................................................................................................58
FIGURE 25 AIMM Ratings Structure ...............................................................................................................................................58
FIGURE 26 AIMM Score Distribution .............................................................................................................................................59
FIGURE 27 AIMM’s Underlying Evidence-based Approach ....................................................................................................59
FIGURE 28 Attitudes of Asset Owners Toward Responsible Investing, 2017–18 ...........................................................64
FIGURE 29 Asset Owners’ Responsible Investing Strategies, 2017–18 ..............................................................................65
FIGURE 30 Global Catastrophe-related Insured Losses from 1970 to 2018 ..................................................................... 67
TABLE S
TABLE 1 Investors and Types of Assets, and Whether They Have the Three Distinctive
Attributes of Impact Investment ........................................................................................................................................................15
TABLE 2 Private Household and Institutional Investor Appetite for Impact Investment is
$5.1 Trillion in Private Markets; $21.4 Trillion in Public Markets ...............................................................................................29
TABLE 3 Comparison of the Operating Principles for Impact Management with Related Initiatives ................... 37
TABLE 4 Impact Target Archetype ..................................................................................................................................................45
TABLE 5 Impact Rating Archetype ..................................................................................................................................................46
TABLE 6 Impact Monetization Archetype ....................................................................................................................................46
TABLE 7 Compatibility within the Impact Measurement Framework Archetypes ....................................................... 47
TABLE 8 Framework Archetypes Summary ................................................................................................................................. 54
BOXES
BOX 1 Women Entrepreneurs in Vietnam .......................................................................................................................................4
BOX 2 Colombia—Bringing Jobs, Opportunities, and Growth .................................................................................................6
BOX 3 Social Impact Bonds ..................................................................................................................................................................12
BOX 4 The Role of Investment Principles in the Growth of the Green Bond Market ...........................................22–23
BOX 5 Women Entrepreneurs Debt Fund ..................................................................................................................................... 25
BOX 6 Blended Concessional Finance ............................................................................................................................................26
BOX 7 The Equator Principles ............................................................................................................................................................38
BOX 8 The Multiple Dimensions of Impact—the Shared Fundamentals ..........................................................................43
BOX 9 AIMM Private Equity Funds Sector Framework ...................................................................................................60–61
vii
FOREWORD
Across the world, the appetite for impact investing is growing. Investors are eager to show that they are broadly
a force for good—that profit isn’t their only objective. A recent survey of asset managers conducted by the Global
Impact Investing Network found that 86 percent of respondents said they ventured into impact investing because of
client demand.
Demographic shifts are driving some of this demand. In North America alone, at least $30 trillion in wealth will
be transferred over the next three decades from Baby Boomers to Generation X and millennials, according to
Accenture. Younger investors increasingly favor socially and environmentally motivated investment strategies—
and they’re willing to invest larger amounts in them. In a recent survey, Barclays found that the social and
environmental causes most important to investors are those embedded in the Sustainable Development Goals—
health, education, and water and sanitation. In short, a potentially transformative alignment has begun to occur
between key global development objectives and the immediate needs of private investors.
This is a historic opportunity that must not be squandered. As much as $269 trillion—the financial assets held by
institutions and households across the world—is potentially available for investment. If just 10 percent of this were
channeled toward investments focused on improving social and environmental outcomes, it would go a long way
toward providing the funding necessary to achieve the SDGs including facilitating a shift to a low-carbon future.
That is why the IFC, the largest global development bank focused on the private sector in emerging markets,
undertook the analysis that is contained in this report. It constitutes the most comprehensive assessment so far of
the potential global market for impact investing. It also offers practical suggestions that will help harmonize and
grow the market in support of the promise of impact investment, which is to have impact at greater scale in support
of global development.
The market holds great potential. We estimate that investor appetite for impact investing is as high as $26 trillion—
$21 trillion in publicly traded stocks and bonds, and $5 trillion in private markets involving private equity, non-
sovereign private debt, and venture capital. Turning this appetite into actual investments will depend on the
creation of investment opportunities and investment vehicles that enable investors to pursue impact and financial
returns in ways that are sustainable.
How far has the market come in providing those opportunities? The lack of clear boundaries between impact
investing and other forms of sustainable and value-aligned investing makes it difficult to say for sure. This report
explores various categories of investors and assets that have potential to offer these opportunities. We know that
private impact funds currently total around $71 billion. Larger amounts are invested by development finance
institutions (including over $700 billion by those following harmonized measurement metrics) and in green and
social bonds (over $400 billion outstanding). In addition, a share of the $8 trillion dedicated to activist investing in
public markets may be managed for impact.
This lack of clear boundaries and the thus far limited role of privately managed funds is not unusual for a
market under development. What’s important going forward is that investors should be able to clearly identify
opportunities to invest for impact, and that those opportunities can expand over time to enable larger amounts of
capital to be put to work. We offer proposals in this report to enable this to happen.
We know, moreover, that it’s possible to mobilize like-minded investors to collaborate in ways that can change the
landscape of investing. We did so in 2003 when we helped international banks establish the Equator Principles,
which have become the most tested and applied global benchmark for sustainable project finance in emerging
viii
markets. We also worked to develop guidelines and procedures for the green bond market as a member of the
Green Bond Principles Executive Committee. The principles were established five years ago to promote market
discipline and transparency. Since then annual issuance of green bonds has grown from around $10 billion in 2013
to $183 billion in 2018 according to SEB.
Soon after the publication of this report, IFC and a wide cross-section of other institutions will become the first
signatories to the Operating Principles for Impact Management—a market standard that we think could achieve
the same discipline and transparency for impact investing that the Equator Principles did for project finance.
Just as the Green Bond Principles helped avoid “greenwashing”—or deceptive environmental claims—the
Operating Principles for Impact Management will help avoid “impact washing” and strengthen the development
of this new market.
For six decades, IFC has been at the forefront of impact investing in emerging markets. Over the years, others
joined us in the search for impact and returns. With the establishment of the Operating Principles for Impact
Management—and the detailed market assessment contained in this report—we hope to work with a much broader
universe of private investors and development finance institutions to mobilize the trillions of dollars in financing
necessary to achieve the SDGs.
Philippe Le Houérou
IFC CEO
ix
ACKNOWLEDGMENTS
This report was prepared by a team led by Giuseppe Iarossi (Program Manager, CEDTL), under the supervision
of Neil Gregory (Chief Thought Leadership Officer, CEDTL) and the overall guidance of Hans Peter Lankes (Vice
President, CEDVP).
The core team comprised Paul Brest (Stanford University), Ellen Carey Maginnis (Consultant), Girum Dagnachew
Abate (Consultant), Diane Carol Damskey (Adviser, CEDTL), Mario di Filippo (Consultant), Prajakta Diwan
(Research Assistant, CEDTL), Djeneba Doumbia (Economist, CEDTL), Telmen Erdenebileg (Research Assistant,
CEDTL), Jack Glen (Consultant), Henry Gonzalez (Associate Fellow, Oxford University), Mengxi Jin (Research
Assistant, CEDTL), Scott E. Kalb (CEO, KLTI Advisors), Liane Lohde (Adviser to the VP, CEDVP), Kevin Matthees
(Research Assistant, CEDTL), Martin Melecky (Lead Economist, GFCDS), Camilo Mondragon-Velez (Principal
Research Economist, CSEIM), Chinemelu Okafor (Research Assistant, CEDTL), Christian Rahbek Rosenholm
(Results Measurements Specialist, CSECR), Tristan Reed (Economist, CEDTL), Tetsutaro Shindo (Financial Sector
Specialist, GFCLT), Fiona Elizabeth Stewart (Lead Financial Sector Specialist, GFCLT), Ariane Tamara Volk
(Research Analyst, CEDTL), Giovanni Tanzillo (Consultant), and Alexandr Trubetskoy (University of Chicago).
The report benefitted from a stimulating discussion of its key findings during a workshop on Impact Investing
held at the International Finance Corporation headquarters in Washington D.C. on Dec. 10, 2018. Along with
the contributors to this workshop, the team is grateful for comments, suggestions, and contributions from: Selena
Baxa (Principal Operations Officer, CAMCE), Shawn Cole (Harvard Business School), Catherine Clarke (Duke
Fuqua School of Business), James Emery (Senior Manager, CSEDR), Issa Faye (Director, CSEDR), Greg Fischer (Y
Analytics), Oliver Hart (Harvard University), Chris Jurgens (Omidyar), Elizabeth Lewis (Senior Communications
Officer, CAMCE), Morten Lykke Lauridsen (Principal Economist, CEDTL), Adair Morse (Haas School of
Business, University of California, Berkeley), Gordon I. Myers (Chief Counsel, CLES3), Jane Nelson (Harvard
Kennedy School), Thomas Rehermann (Senior Economist, CEDTL), Vincent Palmade (Lead Economist, GFCSS),
Philip Schellekens (Senior Economic Advisor to the CEO, IFCEO), Hannah Schiff (Nuveen), Qiuyun Shang
(Research Assistant, Responsible Asset Allocator Initiative), Josef Vaessen (Independent Evaluation Group, World
Bank), David Wilton (Zheng Partners LLC), Rong Zhang (Senior Policy Officer, CEGSB) and other International
Finance Corporation and World Bank staff.
Special thanks are extended to the official peer reviewers of the report, Robert Cull (Lead Economist, DECFP),
Asli Demirgüç-Kunt (Director, DECRG), Alfonso Garcia Mora (Director, GFCD5), Indermit Gill (Professor,
Duke University), Michael U. Klein (Professor, the Frankfurt School), and Laura Tyson (Haas School of Business,
University of California, Berkeley).
The report was edited by David Lawrence (Consultant) and Matthew Kenneth Benjamin (Consultant), with
cover design by Alison Heasley (Creative Circle) and interior design and composition by Rikki Campbell Ogden
(Consultant). Nadine Ghannam (Senior Communications Officer, CIEPC), Thomas Kerr (Manager, CGOPC), Irina
Likhachova (Senior Communications Officer, CERPC), Jay Pulizzi (Senior Communications Officer, CERPC), Joseph
Rebello (Senior Communications Officer, CERPC) and Robert Wright (Senior Communications Officer, CERPC)
supported the production and dissemination of the report.
We thank Vinitha Jayalal (Finance Assistant, CBAED), Ahlame Moustakbal (Special Assistant, IFCEO), Sreekala
Ramanathan (Budget Officer, CBAED), Alicia Roaquin (Executive Assistant, CEDVP), and Weilan Xiao (Executive
Assistant, CEDVP) for administrative and resource management support.
x
AIMM Anticipated Impact Measurement and
Monitoring System
AUM assets under management
BC benefit corporation
BCR benefit cost ratio
BIA B Impact Assessment
BIS Bank for International Settlements
BOP base of the pyramid
CSRC China Securities Regulatory Commission
CDVC community development venture capital
DFI development finance institution
DOTS Development Outcome Tracking System
EBRD European Bank for Reconstruction
and Development
ECGI European Corporate Governance Institute
EEA European Economic Area
EM emerging market
EMPEA Emerging Market Private Equity Association
EPFI Equator Principles financial institution
ERR economic rate of return
ES environmental and social
ESG environmental, social, and governance
EU European Union
GAAP Generally Accepted Accounting Principles
GIIN Global Impact Investing Network
GIIRS Global Impact Investing Rating System
GPIF Government Pension Investment Fund
(Japan)
GRI Global Reporting Initiative
GSG Global Steering Group
HBL Habib Bank Limited
HIPSO Harmonized Indicators for Private Sector
Operations
HKEX Hong Kong Stock Exchange (located in Hong
Kong SAR, China)
IFC International Finance Corporation
IFI international financial institution
IFRS International Financial Reporting Standards
IMM impact money multiple
IMP Impact Management Project
IORP II Institutions for Occupational Retirement
Provision Directive
IPA Innovations for Poverty Action
IPO initial public oering
ABBREVIATIONS AND ACRONYMS
IRIS Impact Reporting and Investment Standards
IRR internal rate of return
J-PAL Abdul Latif Jameel Poverty Action Lab
KFW Kreditanstalt für Wiederauau (German
Development Bank)
KPI key performance indicator
LP limited partner
MCPP Managed Co-Lending Portfolio Program
MDB multilateral development bank
MFI microfinance institution
NGO non-governmental organization
OECD Organisation for Economic Co-operation
and Development
OECD-DAC Organisation for Economic Co-operation
and Development–Development
Assistance Committee
OJK Financial Services Authority of Indonesia
ON Omidyar Network
OPIC Overseas Private Investment Corporation
PEPP Pan-European personal pension product
PPF/SWF public pension funds and sovereign
wealth funds
PME public market equivalent
PPM private placement memorandum
PRI Principles for Responsible Investing
REM rapid evidence mapping
ROI return on investment
SASB Sustainable Accounting Standards Board
SCR solvency capital requirement
SDGs Sustainable Development Goals
SEB Skandinaviska Enskilda Banken
SEBI Securities and Exchange Board of India
SEC Securities and Exchange Commission
SGX Singapore Stock Exchange
SIP statement of investment policy
SME small and medium enterprise
SRI socially responsible investing
SROI social return on investment
TOC Theory of Change
UNCTAD United National Conference on Trade
and Development
VC venture capital
WEF World Economic Forum
Note: All dollar amounts are U.S. dollars unless otherwise indicated
xi
This report takes stock of the market for impact investing and examines the conditions
that would allow the market to grow and realize its potential. Historically, there have
always been investors who cared about more than just financial returns. Governments
and philanthropists, for example, have set up investment vehicles with mandates to
promote social and environmental goals. Over the last decade, impact investing has
gained prominence as an approach to investment that aims to achieve both financial
returns and social or environmental goals.1 This has created a dynamic but somewhat
disorganized market of diverse participants, standards, and concepts. Although still small,
the market is attracting considerable interest, and it has the potential to increase in scale,
and thereby contribute to the achievement of the Sustainable Development Goals (SDGs)
and the Paris climate goals.
What is Impact Investing?
The emergence of impact investing, alongside related
concepts such as sustainable and responsible investing,
has led to some confusion about its precise place within
the broader investment market. In this report, we
seek to provide clarity to the market by articulating
a definition commonly used within the investment
industry, and by drawing a distinction between
value-aligned investing and impact investing. Value
alignment occurs, for example, when investors buy
stocks in companies that sell products that improve
the environment. In contrast, as well as achieving a
financial return, impact investments are made with
specific intent to make a measurable contribution to the
achievement of social and environmental goals.
This report defines impact investments as investments
made in companies or organizations with the intent to
contribute measurable positive social or environmental
impact, alongside a financial return.2
A key feature of this definition is that impact
investments are not defined by their membership
in an asset class with common risk and return
characteristics, but rather by the approach of the
investor. In principle, investments may be made into
the full range of public and private assets, as long
as by doing so the investor contributes to achieving
impact. Specifically, the definition encompasses three
observable attributes of impact investors that can
distinguish them from other investors.
• Intent. The investor articulates an intent to achieve
a social or environmental goal by identifying
outcomes that will be pursued through the
investment, and specifying who will benefit from
these outcomes.
• Contribution. The investor follows a credible
narrative, or thesis, which describes how the
investment contributes to achievement of the
intended goal—that is, how the actions of the
impact investor will help achieve the goal. In this
case, contribution is considered at the level of the
impact investor, and can take financial or non-
financial forms.
• Measurement. The investor has a system
of measurement in place linking intent and
contribution to the improvement in social and
environmental outcomes delivered by the enterprise
into which the investment has been made. The
measurement system enables the investor to assess
EXECUTIVE SUMMARY
1 The term was coined, according to the Rockefeller Foundation, at a conference held by the organization in 2007.
See: https://www.rockefellerfoundation.org/our-work/initiatives/innovative-nance/.
2 Here investments refer to debt or equity, as well as the provision of guarantees or risk insurance, which facilitate the provision of debt by a third party.
xii
EXECUTIVE SUMMARY
the level of expected impact, ex ante, in order to
continuously monitor progress and take corrective
actions when appropriate, and then finally to
evaluate the achievement of impact, ex post.
Why Does it Matter?
The potential to make a difference to global
development challenges such as poverty, inclusion,
and climate change is why the global development
community is supporting the growth of impact
investing. Indeed, by making a difference, impact
investment has the potential to mobilize additional
resources, and potentially generate additional
momentum toward achieving the 2030 Agenda for
Sustainable Development. While not all impact
investments will have an equal impact, continued
development of the industry improves the prospects for
achieving the SDGs.
Taking Stock of the Market
This report takes stock of the size and segments of the
market as of 2018 and estimates its growth potential
through an analysis of the revealed preferences of
investors. While it is clear that this approach to
investing has become more widespread in recent
years, the lack of clarity about which investment
strategies and assets should be considered to be impact
investment makes the total size of the market difficult
to establish. Instead, we identify some classes of
investors whose mandates align with the definition
of impact investing. We also identify some classes
of investments that lend themselves to achieving
measurable impact and therefore may be utilized by
investors with the intent for impact.
We begin with opportunities for impact investment
available to private households and institutions. In
private markets—which include markets for private
FIGURE 1 Private Investors Have Three Key Opportunities for Impact Investment, Which Span Public
and Private Markets
*Total fundraising from 2008–18 by private investment funds with verifiable intent for, and measurement of, impact. These funds operate only in
private markets: private debt and equity, real estate, infrastructure, and natural resources such as timber. Their fundraising is equivalent to AUM
under the assumption that it takes 10 years to return capital to investors.
**Value for year-end 2015.
***Value of all green and social bonds outstanding as of year-end 2018. This includes sovereign issuance.
Source: Preqin, EMPEA, ImpactBase, ImpactAsset50, Symbiotics, IRIS, B-Analytics, Gresb, HIPSO, 2016–17 DFI mobilization reports, and
DFI annual reports. GSIA. PwC. ICMA. Bloomberg. Thompson Reuters.
Note: There may be double counting between these two groups, to the extent that DFIs are limited partners in, or guarantors of, private
investment funds
BILLION
AUM
,
BILLION
AUM
BILLION
VALUE
OUTSTANDING
PRIVATE MARKETS
Private Investment
Fund Managers*
Corporate Engagement
and Shareholder Action**
Green and
Social Bonds***
PUBLIC MARKETS
xiii
CREATING IMPACT The Promise of Impact Investing
equity and debt, real estate, infrastructure and natural
assets—we identify about $71 billion of assets managed
by private investment fund managers with verifiable
intent to contribute to measurable impact alongside
financial return (Figure 1). Impact investors are heavily
focused on infrastructure, with 62 percent of their
assets in developed markets devoted to the asset class.
In emerging markets however, impact funds invest far
less—just 9 percent of assets—in infrastructure as an
asset class.
Public markets, however, are where the overwhelming
share of financial assets—in particular those of
households—are held. In public markets, we identify
two classes of investments through which one may
potentially contribute to measurable impact: corporate
engagement and shareholder action investment
strategies ($8.4 trillion), which operate primarily in
public equities, and green and social bonds ($456
billion), which are increasingly offered to the public.
However, today we do not have a basis to identify how
much investment in these assets is motivated by intent
to contribute to measurable impact.
Beyond households and private institutions, many
development finance institutions (DFIs), which are
owned by governments, have mandates that could
be interpreted as intended to contribute to social and
environmental impact. Some also measure their impact
in ways similar to private investors. This suggest
a convergence of investment practice between two
classes of investors previously considered to be very
different—private investors and development finance
institutions. Taking a more holistic view of the types of
investors and assets that may deliver impact expands
the potential size of the market.
FIGURE 2 Governments, Through Development Finance Institutions, Are Major Impact Investors
*Values for 2017. DFIs include 12 multilateral development banks (MDBs) and 13 bilateral DFIs, all of which are signatories to a memorandum
of understanding regarding the Harmonized Indicators for Private Sector Operations (HIPSO). The committed portfolio includes: non-treasury
investment portfolios of loans, equity investments, and debt securities to non-sovereign entities ($455 billion); an estimate of the stock of third-
party investment that has been directly mobilized by DFIs over five years ($255 billion); and gross exposure to guarantees to non-sovereign
entities ($32 billion). In general, DFIs only expect to pay claims on a small fraction of their gross exposure to guarantees or risk insurance. For
MIGA, gross guarantee exposure does not include guarantees against the non-honoring of financial obligations by sovereigns, sub-sovereigns, or
state-owned enterprises. Within this pool, the largest institution by far is the European Investment Bank (EIB), which has approximately $515
billion in outstanding portfolio, or 69 percent of the total, split between $322 billion in non-sovereign portfolio investments, $183 billion in
estimated direct mobilization; and $10 billion in off balance sheet contingent liabilities and guarantees.
**Includes 12 multilateral development banks and 69 national development banks with charters or mission statements describing intent to
contribute to social or environmental impact alongside financial return. Given limited data on the share of portfolio allocated to treasury,
sovereign and non-sovereign operations, the outstanding portfolio of these institutions is estimated at 50 percent of total assets.
Source: HIPSO, 2016–17 DFI mobilization reports, and DFI annual reports.
BILLION
OUTSTANDING
PORTFOLIO
BILLION
OUTSTANDING
PORTFOLIO
25 HIPSO Signatories* 81 Development Banks**
DEVELOPMENT FINANCE INSTITUTIONS’ PRIVATE SECTOR OPERATIONS
,
xiv
EXECUTIVE SUMMARY
For instance, 25 DFIs have signed a memorandum of
understanding regarding common impact metrics—the
Harmonized Indicators for Private Sector Operations
(HIPSO). This group of financial institutions manages
about $742 billion of investments (Figure 2). This
includes investments for their own accounts, the
direct mobilization of funds from co-investors,
and guarantees or risk insurance. These investors’
contribution to positive social and environmental
impact is readily identifiable, given the mandates of
these funds and institutions, their role in providing
additional capital to firms, and their typically direct,
and often long-term, relationship with investees that
allows them to exert influence over management or
transfer knowledge.
In addition to these institutions, there are many other
government-owned national and regional development
banks with mandates to achieve a range of policy,
social, and environmental goals. We identify 81 such
institutions, with outstanding portfolios of $3,083
billion (Figure 2). Much of this involves sovereign
lending to governments, but to the extent that some
of these assets are invested in firms and organizations
with the intent to contribute to measured social and
environmental impact, they could be considered as
impact investments.
Based on our assessment of the current preferences of
investors to take criteria other than financial return
into account in their investment process, investor
appetite for impact investment could, today, be as much
as $5 trillion in private markets—private debt and
equity, real assets, infrastructure, and natural assets—
and as much as $21 trillion in public markets. These
estimates do not include the activities of DFIs. Taken
together these could make a substantial contribution to
the SDGs and the Paris climate targets. However, this
depends upon the ability of the investment industry
to generate enough investment opportunities and
investment vehicles that can gain investor confidence in
pursuing impact and commercial financial returns in a
disciplined way.
Bottlenecks to Growth: Challenges
Facing Impact Investing
Despite large investor appetite, the market is far from
reaching its potential as several bottlenecks constrain
its development. Specifically, four key challenges
prevent impact investment from realizing its promise.
First, continued uncertainty about whether impact
investors can earn commercial financial returns in
line with non-impact investors limits the appetite
for impact investment. Impact investing first gained
prominence among philanthropists and other
investors willing to accept “sub-commercial returns.”
Today, impact investors’ expectations vary, but the
largest group of investors—especially the potential
growth market—seeks commercial financial returns.
A common belief that impact investment pays only
sub-commercial returns continues to discourage these
potential investors.
There is, however, increasingly solid evidence that
impact investors can achieve commercial financial
returns at scale, and in a variety of settings. For
instance, on average, IFC’s realized equity investments
have delivered returns in line or better than the MSCI
Emerging Market Index in vintage years from 1988
to 2016. Debt returns have been competitive with JP
Morgan Corporate Emerging Market Bond Index.
Together this performance has allowed IFC to achieve
financial sustainability over a long period of time.
Second, a lack of clarity about how investments are
managed to achieve impact gives rise to concerns about
“impact washing,” which deters potential investors and
threatens the credibility of the industry. The industry
lacks common standards covering what it means to
manage an investment portfolio for impact. In line with
the definition used in this report, standards should
include an investment strategy that clearly links intent
to asset selection, asset selection based on a credible
impact thesis, and an impact measurement system
that ensures accountability by establishing targets,
monitoring performance, and reporting results for
impact in the same way that investment managers do
for financial performance.
xv
CREATING IMPACT The Promise of Impact Investing
Third, limited comparability of measured impact across
projects and investment managers poses a challenge to
investors who are trying to allocate capital to impact
investments. Unlike financial return, the assessment
of impact has not yet evolved to the point at which
common approaches, metrics, and conventions have
become widely accepted. Impact measurement does
not yet have its equivalent of Generally Accepted
Accounting Principles (GAAP).
However, several promising approaches are emerging
that allow comparability across investments within an
investment pipeline. Three measurement frameworks
are presented in the report, in addition to the
Anticipated Impact Measurement and Monitoring
(AIMM) approach developed by IFC. Having choice
is important, as different approaches may work for
different types of investors. However, convergence
of these systems’ common elements, metrics, and
approaches will build trust in the market and help
investors to identify asset managers that pursue impact
in a disciplined way.
Finally, regulatory frameworks often do not support
investment managers who seek to create impact
alongside financial returns. Fiduciary duty is frequently
interpreted too narrowly as only concerned with
maximizing financial returns. Although beneficiaries
may care about more than financial returns, asset
managers are often discouraged from pursuing
additional objectives in their investment strategies.
While fiduciary duty has an important rationale—to
protect asset owners from reckless or underperforming
fiduciaries—a one-dimensional interpretation
constrains pension funds and other institutional
investors from pursuing impact objectives when their
beneficiaries would like them to do so. Likewise, many
fiduciaries are unaware that they could take non-
financial considerations—like impact—into account
when making investment decisions, and this too
discourages impact investing.
Looking Ahead: The Future of
Impact Investing
To support the growth of the industry, this report
identifies key solutions that can help tackle the
identified bottlenecks.
First, a new set of operating principles for impact
management represents an important step in bringing
clarity and discipline to managing investments for
impact. Developed by IFC in concert with other DFIs,
asset managers, and asset allocators, the principles
establish a shared understanding of the key elements
of the process through which an investor integrates
impact considerations with financial considerations
at each stage of the investment process, and with
independent verification. As more and more impact
investors commit to following the principles in their
operations, this will bring greater transparency to
how investment funds are managed, build trust in
the market, and help investors to identify the funds,
institutions, and asset managers that pursue impact in
a disciplined way.
Second, the adoption of uniform standards for
measurement frameworks and tools will bring greater
transparency and comparability to the performance of
impact investments. The growth of impact investing
places greater demands on companies to measure and
report on their impact, and to consider the potential
positive and negative impacts of their investment
decisions. Initiatives to strengthen impact reporting
by firms such as the Global Reporting Initiative will
help provide investors with the information they need
to assess impact. And uniform standards will enable
the industry to better compare the effectiveness of
impact strategies. As the amount of money managed
for impact increases, companies that can provide this
information will have an advantage in raising capital.
There is a shared agenda now to build the evidence
base for demonstrating the social and environmental
impacts of investments.
xvi
EXECUTIVE SUMMARY
Third, to unlock larger pools of capital, regulators
should reduce the barriers faced by institutional
investors that are interested in impact. The main
regulatory and legal changes needed pertain to 1)
investment policy, and 2) rules related to disclosure
and reporting. Reforms should aim to allow asset
owners to pursue additional goals beyond financial
returns if they prefer to do so, while still protecting
fiduciary duty. They should allow fiduciaries to
include impact considerations in their fiduciary,
reporting, and disclosure mandates.
For impact investing to achieve its potential, the full
range of participants need to work together to create a
well-functioning market in which investors can deploy
their capital. This report points to a powerful potential
synergy between development finance institutions
and private impact investors in creating this market.
In low- and middle-income countries, private-sector
focused DFIs can play an important role, especially
by supporting upstream policy reform and project
development that creates investment opportunities for
private investors sourcing investment opportunities,
and creating co-investment platforms to mobilize
impact investments. Leveraging over 60 years’
experience as an impact investor, IFC will contribute its
knowledge and experience toward achieving this goal.
1
CHAPTER 1
TAKING STOCK: DEFINING IMPACT INVESTING
AND SIZING THE MARKET
1.1. What Is Impact Investing?
An Increasing Number of Investors
Have Goals Beyond Maximizing Profits
The term “impact investing” emerged only in the last
decade.3 Its origins, however, can be traced in part to
concepts of ethical responsibility in many religious
traditions. Islam, Judaism, and Christianity, for
example, have aligned economic action with belief
by establishing directives on how to invest ethically
(Figure 3). The Quakers, for example, whose tradition
of embracing peace and nonviolence date back to the
18th century, actively avoid investing in enterprises
or products that oppress fellow humans. The modern
form of Islamic finance, which started in Egypt in the
1960s, aligns with many aspects of impact investing.
To promote financial inclusion, it encompasses ethical
and social criteria alongside financial returns.4
The 1960s saw the emergence of socially responsible
investing (SRI), a set of asset management strategies
originally developed, in part, to meet demand from
religious institutions with large endowments. The
earliest socially responsible strategy involved “negative
screening,” or excluding from investment portfolios
those industries that have negative social and
environmental impacts: for example, coal, tobacco,
firearms, and gambling. A series of events—ranging
from the civil and women’s rights movements to the
antiwar and environmental movements—served to
increase awareness about social responsibility. These
concerns also broadened to include management and
labor issues, as well as antinuclear sentiments. In the
1980s, the decision of some universities and pensions
FIGURE 3 Recent History of Responsible Investment
Source: Oxford University.
3 According to the Rockefeller Foundation, the term was coined at a conference held by the organization in 2007.
See https://www.rockefellerfoundation.org/our-work/initiatives/innovative-nance/.
4 Hussain et al. 2015.
1800–early 20TH century
Berle & Means (1932)
“Modern Corporation &
Private Property”
1950–1990s 1990–2008 2008–today
• Faith-based investing
• Negative screening
• Exclusion of ‘sin’ stocks
• First SRI mutual funds
established based on exclusions
• Catalysts: Vietnam War,
nuclear power plant accidents,
apartheid in South Africa
• First socially-based investor
resolution (proxy ballot at GM)
• First SRI Index: Domini 400
Social Index
• CSR movement
• Heightened focus on
corporate governance
• 2004 UNEP FI reports
coins term ESG
• 2006 UN PRI
• Global Financial Crisis
reignites discourse on
long-term investing
• Growing number of
academic studies on ESG
• Growth of impact and
thematic investing
Friedman (1970) “The Social Responsibility
of Business is to Increase its Profits”
Moskowitz et al (1984) “100 Best Companies
to Work for in America”
2015 UN Sustainable
Development Goals
Paris Agreement
2005 UNEP-Freshfields
fiduciary duty study
2
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
to divest from South Africa due to apartheid resonated
strongly across the world.5
As understanding of the environmental, social, and
governance (ESG) risks has grown, investors have
moved beyond simple inclusion/exclusion portfolio
decisions to strategies that assess and mitigate the ESG
risks of all assets in the portfolio—an approach known
as ESG integration or sustainable investing. The goal
of this approach is to maximize risk adjusted return
by considering additional relevant information, but
in general not to alter the environmental and social
impact of investees. In 2005 the United Nations created
the Principles for Responsible Investment to encourage
institutional investors to commit to this approach.
Today, asset owners increasingly demand products that
integrate ESG, and Deutsche Bank predicts that by
2030, 95 percent of professionally managed assets will
have some form of ESG mandate.6
Assets managed under specific SRI strategies, including
ESG integration and negative screening, have been
growing rapidly, at 14.6 percent annually from 2011
to year-end 2015, when they accounted for $23.2
trillion in assets under management (AUM), or 8.6
percent of total financial assets.7 Growth has been
more than double the rate of growth for all assets
under professional management, which during the
same period was 6.0 percent.8 Negative screening is
especially popular in Europe, where 76 percent of
assets managed under this strategy are held,9 while
ESG integration is relatively more popular in the United
States, Canada, Australia, New Zealand, and Japan.
Although increasingly popular, a large body of
empirical literature reports mixed results with respect
to the financial performance of screened funds when
compared to an unconstrained index.10 The willingness
of investors to apply certain strategies such as negative
screening, which offers demonstrably below-market
returns, suggests that some investors are willing to
sacrifice the size of their returns in order to align their
investments with their values.
Impact Investments are Made With
the Specific Intent to Contribute to
the Achievement of Measurable
Social Objectives
Impact investing goes a step further as, alongside
financial return, it elevates the achievement of positive
social and environmental impact to that of a primary
investment objective. Initially, this approach grew
out of philanthropies and foundations seeking a more
financially sustainable model for achieving impact than
just grant giving. The approach also grew as a result
of responsible investors seeking to go beyond “do no
harm” to achieving good. In its early growth, impact
investing was closely associated with the financing of
social enterprises and innovative business models, and
especially those serving the “base of the pyramid” (the
poor or near-poor).
In this report, we synthesize various definitions that
have been used in the industry (Online Annex A) to
define impact investments as those:
investments made into companies
or organizations with the intent
to contribute to measurable positive
social or environmental impact,
alongside a nancial return.
5 While divestiture has an important impact in signaling that social issues are important, there is little evidence that it has a material effect on stock
prices. For example, a price index for U.S. rms operating in South Africa moved little in response to divestment announcements by investors. This is
consistent with a view that the demand curves for stocks are highly elastic and so have little downward slope. Teoh et al. 1999.
6 Deutsche Bank Research 2018.
7 For total nancial assets, see Online Annex B.
8 PwC 2017.
9 Ibid.
10 For examples, see: Knoll 2002; Renneboog et al. 2008; Friede et al. 2015; and Ferrell et al. 2016. As an example, the Norwegian sovereign wealth
fund, with a portfolio of $11 trillion, has, over the last decade, gradually excluded from its portfolio, the stocks of companies that produce tobacco,
nuclear arms, and cluster weapons. They also exclude companies that engage in coal mining and coal-red generation. Over this period, on an
annual basis, the constrained portfolio has underperformed the unconstrained benchmark by six basis points (0.06 percent). See “Return and
Risk: Government Pension Fund Global 2017.” Norges Bank Investment Management, http://www.nbim.no/en/transparency/reports/2017/return-
and-risk-2017.
3
CREATING IMPACT The Promise of Impact Investing
Here investment refers to the provision of debt or equity,
as well as the provision of guarantees or risk insurance,
which facilitates the provision of debt by a third party.
This definition encompasses three distinctive attributes
of impact investors’ approach that distinguish them from
other investors. First, the investors articulate an intent
to achieve a social and environmental goal alongside a
target financial return. Second, the investors follow a
credible narrative describing how their engagement in
this investment makes a contribution to the achievement
of that goal—that is, how it makes a difference. Third,
the investors have a system of measurement in place to
assess the difference they make.
In principle, every impact investment should begin
with a credible impact thesis that articulates the
improvement in outcomes that the investor intends to
achieve, and how the investment will contribute to that
improvement. Unfortunately, however, according to the
Impact Management Project (IMP), which is an industry
initiative: “No clear, authoritative definition [of an
impact thesis] currently exists.”11
In principle, an impact thesis has three components:
• An impact investor’s intent to improve social
outcomes leads him or her to
• Contribute investment capital or additional
assistance to the enterprise, which leads to
• Measurable improvements in the enterprise’s
outputs or processes (the services or products
it delivers, or the ways it produces them), or in
markets more broadly, that lead to measurable
positive social outcomes for the investor’s intended
beneficiaries.
An investor has a credible narrative about investment
impact only when these three components have been
well defined (Figure 4).
Here, given our understanding of how financial
markets function, we outline the specific challenges
that an investor faces in articulating an impact thesis
that is credible. In so doing, we also propose an
outline for an investor’s impact thesis, which may be
used to establish the manager’s contribution to the
achievement of impact.
INTENT
The first thing that differentiates impact investors
from traditional investors is their intent. In addition to
seeking financial return, they seek to achieve social and
environmental goals. Thus, they typically define their
intent by specifying measurable improvements in social
and environmental outcomes that will be pursued
through the investment (and who will benefit). It is only
by having an intent to achieve a specific, articulated
11 In its own words, the Impact Management Project is facilitating a global network of standard-setting organizations to coordinate efforts that can
accelerate widespread impact measurement and management.” See https://impactmanagementproject.com/glossary/#i.
FIGURE 4 The Impact Thesis of Impact Investing
INTENT MEASURABLE IMPROVEMENTSCONTRIBUTION
Creation or
improvements
of markets
Improvements in
enterprise’s outputs
or processes
Desire to
improve
social and
environmental
outcomes
Increases or
improvements
in social and
environmental
outcomes
Investment Capital
(either at market or
concessional terms)
Additional Assistance
(e.g., knowledge transfer,
control, inuence)
and /or
Enterprise (or Sector) Impact
Investment Impact
4
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
outcome that an impact investor can determine
what sort of firm to invest in—for example, health
services, housing, or farming—or be able to assess the
investment’s social impact.12
The key to an impact investment lies in the intent
of the investor, rather than that of the investee, to
create social impact. If the investor predicts that an
investment in a firm will contribute to its intended
social impact, it is not critical that the investee’s firm
share that intent. For example, an investor in a dairy
may intend to increase smallholder dairy farmers’
incomes. Although the dairy may only be interested in
selling milk for a profit, its activities may promote the
impact investor’s social goal.
That said, investors are generally more likely to
achieve their intended outcomes when their investees
are committed to those same outcomes. The Omidyar
Network, a pioneer impact investing fund, “target[s]
companies that have social impact ‘embedded in their
business model’—regardless of whether they explicitly
As in many countries, small and medium enterprises (SMEs) are vital to Vietnam’s economy. They comprise
more than 98 percent of businesses and provide 50 percent of employment across the country. IFC
estimates that the unmet demand for credit by women SME owners in developing countries is at least $1.5
trillion (IFC, 2017). Hence, IFC’s goal is to make it easier for banks to lend to women-owned SMEs, which
often face lenders’ biases as well as roadblocks related to their lack of collateral. This was the case with an
electronics shop opened by a a woman named Ngan and her husand in 2016.
When Ngan’s shop started doing well, she approached Vietnam Prosperity Commercial Joint Stock Bank
(VPBank), an IFC partner, to help her business grow even more. VPBank loaned her $25,000—with her
receivables pledged as security. This turned out to be a turning point for Ngan’s business. The bank’s
nancing allowed her to approach new corporate clients in her neighborhood, and she started installing
air-conditioning systems for them. In just six months after receiving her loan, the value of Ngan’s
company grew fourfold to $400,000. These are exactly the kind of results that IFC envisioned when it
provided a $125 million nancing package to VPBank in 2016.
An IFC market study in Vietnam found a nancing gap of $1.19 billion for women-owned SMEs across
country. Even though female entrepreneurs bring in average annual revenues similar to those of men,
women in Vietnam still receive fewer bank loans than their male counterparts. This limits opportunities
for women—and that is where VPBank saw a chance to make a difference. It was one of the rst
Vietnamese banks to adopt a strategy specically designed for women-owned SMEs. Its partnership with
IFC also goes beyond funding; it includes advice from IFC that facilitates women-owned SMEs accessing
non-nancial services that make it possible for these entrepreneurs to share experiences with each other,
and through networking, nd new opportunities for their businesses.
The program achieved strong results within just a year of its launch, during which time VPBank lent
$600 million to about 2,000 women entrepreneurs. This accounts for 25 percent of the bank’s total SME
client roster. There have also been gains in other aspects of the business as well: for example, nearly
2,500 women opened savings accounts, valued at almost $180 million.
BOX 1 Women Entrepreneurs in Vietnam
12 The following would be suggestive (though not determinative) of an investor’s intent to create social impact: (a) the expected risk-adjusted
nancial return of the investment is concessionary, that is, below what a commercial investor would demand, and (b) the expected return was
not concessionary at the time the investor decided to make the investment, but became concessionary by the time he or she had to make a
commitment, and would, nonetheless, at least seriously consider making the investment because of its social impact.
5
CREATING IMPACT The Promise of Impact Investing
pursue such impact.”13 Bridges Fund Management,
another pioneer, looks for investments where financial
success and impact are in “lock-step.”14
Intended project outcomes
Many impact investors target improvements in
outcomes that directly relate to project stakeholders,
such as customers, employees, or suppliers. We call
these project outcomes. An example of a project
outcome, which has been the focus of many impact
investors, is an increase in loans provided to female
borrowers (Box 1).
Intended market creation
Beyond project outcomes, impact investors also have
intent to create markets, or influence a sector. For
example, the Omidyar Network (ON) believes that
“by helping to build or shape a new market, a
company can generate social impact that far exceeds
its firm-level impact.”15 ON takes three basic
approaches to creating markets:
• Providing industry infrastructure. ON may
support infrastructure that enables markets where
no single market player will assume the cost and
risk (especially when an investment may benefit
potential competitors). ON’s investment in a
company that helps microfinance institutions hedge
foreign currencies is an example.
• Pioneering a new model. For example, one that
serves low-income or rural consumers, with the
goal of inspiring other firms to follow suit, resulting
in competition that eventually drives down prices,
increases quality, and sparks innovation. Examples
include ON’s investments in microfinance and
consumer solar products.
• Inuencing policy. ON has also sometimes
prompted governments to improve the policy
environment for a particular business model—for
example, private elementary and secondary schools
that complement public education in Africa.
An example of a market creation impact is IFC’s
investment in Colombia’s Financiera de Desarrollo
Nacional (FDN), one of the first infrastructure debt
funds in Colombia, which is now opening a path for
pension funds to invest in road projects that are crucial
for the country (Box 2).
Negative impacts
Like any other decisions, impact investments may have
unintended negative consequences. For all the social
good they intend to bring about, impact investors
should “first do no harm.” An important strategy for
both achieving positive impact and avoiding unintended
negative consequences is to seek out and listen to one’s
intended beneficiaries and other stakeholders.16 Avoid i ng
unintended consequences can also be a strategy to
reduce investment risk, a key motivation for the use of
ESG criteria in evaluating investments.
CONTRIBUTION
Contribution is the difference that the investor makes
to the firm or the market. This difference is what
allows the investor to achieve impact—the investor
provides something (additional financing or other value
addition) to the firm that changes the activities of the
firm—quantitatively or qualitatively in ways that cause
an improvement in social and environmental outcomes.
These positive effects are sometimes called increases
in “social value” or “social value added.” In terms of
a results chain, contribution consists of the inputs that
an impact investor provides that have a causal effect on
social or environmental outcomes, and the channel of this
causal effect is through the activities of the firm, which
turn inputs into outputs, leading to outcomes.
It is worth noting that in the realm of impact investing,
it is seldom possible to attribute a result to a single
activity. A well-articulated impact thesis describes what
the impact investor offers investees, which is distinct
from what traditional investors would allow for partial
attribution. Thus, the thesis is a credible narrative that
explains that although the investment may not be the
13 Bannick et al. 2017.
14 Barby and Goodall 2014.
15 Bannick et al. 2017.
16 Twersky et al. 2013. All things being equal, consumers’ demand for a product reects their needs, or at least their wants. But ignorance or human
behavior may undercut this easy assumption. For example, in some instances, the easy availability of micronance loans, rather than foster nancial
independence has bankrupted the borrowers. For example, see: Acharya 2018; Rubtsova 2018.
6
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
sole cause of the outcome, the outcome would not have
occurred—at least not to the same extent—without the
investment.
The Dierence that the Contribution Makes Relative
to a Counterfactual
To say an investment makes a difference implies a
counterfactual of what would have happened without
it. This may be hard to establish conclusively, but each
impact investment is based on a thesis that it enables
the creation of more social value than would have
happened otherwise. There are many ways to estimate
the counterfactual, ranging from experimental and
quasi-experimental evaluation techniques, to plausible
theories and hunches.
The simplest thesis, which has been used from the
earliest days of impact investing, is that the investor
provides capital in amounts, or on terms, not available
from other investors. This thesis is most credible in
countries and sectors where capital is scarce. It is
less credible in markets where capital is plentiful.
This thesis may also be more credible in the case of
Every morning before rst light, Wilson Medina’s truck bounces along the pitted dirt roads of Colombia’s
central Andes range, collecting fresh milk from two dozen family farms tucked into the green hills.
Business is good. The farmers’ production has increased eightfold since they pooled their resources and
founded a cooperative several years ago. However, transportation remains a major challenge. Rutted
roads slow down Medina; the longer he is on the road, the greater the odds of spoiled milk. And the route
takes so long, the cooperative cannot collect milk from new farms. “Even an hour can make a difference,”
said Medina.
Colombia’s poor infrastructure has slowed economic growth for decades and, as a response, the
government put forward an ambitious infrastructure initiative called the fourth-generation (4G) road
program, which includes 32 projects to build about 8,000 kilometers of roads. This was no small task
and required signicant resources and expertise to succeed. The government turned to IFC for advice on
designing the concession model, developing standardized contracts, and setting out project management
processes. IFC also helped structure the rst three transactions for the 4G program. But even with this
initial success, the cost of nancing the entire 8,000 kilometers was seen by some as prohibitive: $25
billion over the next seven years. That was when IFC helped the government nd innovative ways to
attract long-term nancing.
Colombia partnered with IFC to create Financiera de Desarrollo Nacional (FDN), a nancial institution
that catalyzes investment in Colombian infrastructure and addresses market failures that undercut
infrastructure nancing. FDN then leveraged new local capital-market regulations that make it easier
for pension funds to invest in infrastructure projects. These regulations were developed with support
from the World Bank. With this new regulatory framework in place, IFC helped launch one of the rst
infrastructure debt funds in Colombia, opening a path for pension funds to invest in road projects that are
crucial for the country.
The new road network is expected to provide a long-awaited boost for Colombia’s competitiveness and
productivity by having a 1.5 percent multiplier effect on GDP during the construction period, with long-
term GDP growth reaching 4.6 to 5.6 percent. A long-term reduction in unemployment of 1.5 percent is
also expected. With wide-reaching benets for the country, the new road network will be connecting
Colombian businesses and citizens like Medina to markets, jobs, and opportunities.
BOX 2 Colombia—Bringing Jobs, Opportunities, and Growth
7
CREATING IMPACT The Promise of Impact Investing
financing for micro, small, and medium enterprises
(MSMEs), including some venture capital or angel
investments. The MSMEs financed are at too early a
stage to receive capital from other sources that are not
motivated by the potential impact of the business. An
impact investment’s contribution can also stem from it
being managed differently from non-impact investors.
For example, impact investors are often called “patient
capital”—that is, they are willing to wait longer to
realize a return on their investment.
Beyond their financial contribution, there are two
other key ways that investors can make a difference: by
providing the investee with knowledge and assistance,
and by controlling or influencing management decisions.
Here we describe in detail the narratives that various
investors have developed about their contributions. This
discussion focuses on how an investor might (or might
not) contribute to meaningful improvements in the
investee’s enterprise and in the outcomes generated.
Financial Contribution
The most fundamental activity of all investors,
including impact investors, is funding their investee
enterprises through equity or debt, or by providing
risk insurance. The financial contribution is through
enabling either an expansion of the activities of the
company—for instance through additional financing.
Or it is through an improvement in the financial
sustainability of the activities of the company—for
instance by lengthening maturities, or lowering interest
rates or risk. A financial contribution may also be
concessional in nature, in that the investor only expects
sub-commercial returns.
When defining financial contribution, is useful to
consider the full spectrum of grants and investments,
which are well illustrated by the chart from the
Omidyar Network (Figure 5):17
• At the far-right of the chart are grants, which are
not “investments” at all, since they produce no
financial returns. From a financial point of view, a
grant is a total loss.
• At the other end are commercial investments that
expect a risk-adjusted market return.
• Between these poles lie sub-commercial investments,
that expect to sacrifice some financial return to
achieve social impact. The amount of the sacrifice is
the functional equivalent of a donation or grant.18
17 Bannick et al. 2017. What the authors term “commercial” and “sub-commercial” investments are sometimes referred to, respectively, as
non-concessionary and concessionary. See Brest et al. forthcoming.
18 The U.S. Internal Revenue Code characterizes certain noncommercial impact investments by U.S. private foundations as “program related
investments” and treats them like grants in many respects. Not only the amount of the sacrice, but the entire investment counts toward a
foundation’s required annual minimum distribution of 5 percent of its assets, and the value must ultimately be redistributed as grants or PRIs if it is
repaid. See: https://www.irs.gov/charities-non-prots/private-foundations/program-related-investments.
FIGURE 5 The Full Spectrum of Investment Options That Can Create Social Value
Source: Stanford Social Innovation Review.
EXPECTED FINANCIAL RETURN
A
COMMERCIAL
B
SUBCOMMERCIAL
C
GRANTS
Expected Direct Impact
A1
Market-
validated
B1
Positive
absolute
returns
C1
80–100%
cost
coverage
A2
Not mar ket-
validated
B2
Capital
preservation
C2
20–80%
cost
coverage
C3
0–20%
cost
coverage
8
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
It is worth saying a few words about the role of
grants and sub-commercial investments. In addition
to serving conventional philanthropic objectives,
grants are sometimes used to create sector impact
along the lines mentioned above.19 Along with
grants, sub-commercial investments may be used to
prove the viability of an idea that is still too risky to
attract commercial investors (for example, the Bill
& Melinda Gates Foundation’s early investment in a
mobile money company in Bangladesh) or to subsidize
services that do not earn revenue for the investee firm
(for example, the Gates Foundation’s investment in a
biotech company, coupled with a requirement that the
company’s technology be made available in developing
countries at below-market prices).20
Most impact investors seek investments in the
“commercial” category; that is, they seek risk-adjusted
market returns.21 To say that an investment is market-
validated means that ordinary commercial investors are
also investing in the enterprise. A non-market-validated
investment may have other impact investors, but no
commercial investors.
For ON, market-validated investments are in
companies where, despite the presence of commercial
investors, ON believes that additional capital or
technical assistance can add to the investees’ social
impact. ON’s non-market-validated investments tend
to involve promising new companies in developing
markets that serve low-income consumers, which are
overlooked by commercial investors.
Financial Contribution in Private markets
Many impact investments have taken place in
private markets—in private equity, including all
stages of venture capital, private debt, real estate,
infrastructure, and natural assets. It is in these
markets where it is most straightforward to articulate
an investor’s contribution to impact, because in these
markets it is most plausible that the investee’s cost of
capital would have been higher in the absence of the
impact investment.
Referring to the returns continuum above, some impact
investments may be sub-commercial, in that the investor
seeks only below market returns. In the words of the
Impact Management Project, an industry initiative, these
investments “provide flexible capital, by recognizing
that certain types of enterprises do require acceptance of
lower risk-adjusted financial return to generate certain
kinds of impact.”22 Here, the flexibility of capital is an
investor’s contribution: it directly lowers the investee’s
cost of capital, thus allowing an improvement in the
firm’s socially relevant outputs or processes.
But many if not most impact investors seek commercial
returns, similar to traditional investors. Therefore,
when seeking commercial returns, impact investors
make a differential contribution by taking risks that
others might not. In the words of the IMP, they
may “grow new or undersupplied capital markets,
by anchoring or participating in new or previously
overlooked opportunities. This may involve more
complex or less liquid investments, or investments in
which some (but not impact investors) perceive risk to
be disproportionate to return.”
Private markets thrive on private information. Some
impact investors’ advantage, therefore, lies in their
expertise in assessing the financial potential of
companies whose outputs fit their social value goals.
For example, the Omidyar Network argues that it is
better able to assess the risks of these companies than
commercial investors because ON “may have greater
familiarity with a given geography (such as Africa) or
sector (such as financial inclusion) or more confidence
in a particular entrepreneur.”23
Financial Contribution in Public Markets
Aside from their possible long-term signaling function,
impact investors seldom make a contribution merely
19 For more information, see “Amplifying Voices” at https://www.accountabilitycounsel.org/.
20 Bank 2016.
21 A recent Barclay’s survey found that 82 percent of investors would expect close to, or above, market returns from an impact investment. Respondents
to the 2018 GIIN survey were more likely to target below market rate returns, with only 64 percent targeting risk adjusted, market-rate returns, or
greater. See Barclays 2019.
22 Bannick et al. 2017.
23 Ibid.
9
CREATING IMPACT The Promise of Impact Investing
by trading securities in large-cap, secondary public
markets.24 Impact investors who value the company’s
social or environmental outcomes buy the company’s
shares in the hope that their purchase will cause the
company’s share price to increase, thus causing its cost
of capital to fall, and thereby allowing the company
to produce more socially valuable goods. As explained
immediately below, however, this is unlikely to happen.
It is reasonable to assume that the marginal investor in
public markets cares only about financial returns and
is indifferent to social or environmental outcomes.25
Therefore, in public markets, any premium in the
valuation of shares that results from impact investors’
clamoring to own them presents an opportunity for
commercial bargain-hunters to profit from selling
shares that are overpriced (from a purely financial
perspective). For example, if two companies are alike in
all respects except that one produces socially valuable
goods and the other does not, any increase in the share
price of the former will prompt purely commercial
investors to sell their shares and buy shares of the
latter. This arbitrage process would continue until
the stock prices of the two companies were identical,
thereby eliminating any share price impact based on the
socially-motivated trading, and thus neutralizing any
social value added.26
An alternative theory is that an impact investor may
have specific information about a company’s financial
as well as social value that is not known in the broader
marketplace, leading the impact investor to provide
capital that ordinary commercial investors would
not. In the absence of unlawful insider information,
however, an impact investor is highly unlikely to have
better knowledge about publicly traded companies
than the vast number of investors who are only
interested in commercial returns. Although certain
good ESG practices may well increase a company’s
long-term shareholder value, impact investors are not
better positioned to assess this value than commercial
investors, at large. (We will discuss below how
investors might leverage their ownership in a company
to influence management decisions.)
The same arguments hold for deep markets for debt
securities: buying and selling of them is unlikely
to change the issuers’ cost of capital in markets
where most investors are indifferent to social or
environmental value.
KNOWLEDGE AND TECHNICAL ASSISTANCE
Venture capital and private equity firms provide
their investees with various forms of knowledge and
assistance for networking and fundraising, as well as
for addressing internal management and organizational
issues. Impact investors in private markets can provide
similar assistance to their investees, ensuring their
social impact as well as their financial sustainability.
An impact investor’s contribution to social impact in
this manner can only be assessed one investee at a time.
When, as in Bridges’ ideal scenario, financial returns
and social impact move in lock step, the fund manager
need not make any financial sacrifice in providing
assistance to achieve social goals. When the investee’s
financial returns are negatively correlated with
improvements in outcomes, the fund manager must
devote extra resources to assist with the latter. At least
for a large fund, the additional costs needed to promote
social impact may be insubstantial and, in any event,
not passed on to the fund’s limited partners.
INFLUENCE OR CONTROL OF MANAGEMENT
There is a long history of shareholder efforts to
improve corporations’ practices, particularly relating
to ESG criteria.27 The IMP describes how impact
investors can “engage actively,” using their “expertise,
networks and influence to improve the environmental/
societal performance of businesses. Engagement can
include a wide spectrum of approaches—from dialogue
with companies, to creation of industry standards,
to investors taking board seats and using their own
team or consultants to provide hands-on management
24 Primary markets, where stocks are rst issued, have greater resemblance to private markets.
25 Above, for example, in 2015, SRI investment covered just 8.6 percent of total nancial assets.
26 Brest et al. Forthcoming. The best socially neutral investors need not own the overpriced shares to accomplish this arbitrage. They could borrow the
shares owned by others, and sell the borrowed shares—a common practice called short-selling.
27 For example, Ceres (Coalition for Environmentally Responsible Economies) has advocated to corporations for environmental sustainability since its
founding in 1989. See https://www.ceres.org/ and https://en.wikipedia.org/wiki/Ceres_(organization).
10
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
support (as often seen in private equity). This strategy
should involve, at a minimum, significant proactive
efforts to improve impact.”28
One direct approach to influence and control in private
markets is what may be called impact covenants. Here
the investor could tie the realization of certain impact
metrics to paying performance bonuses to management—
in the case of an equity investment—or to reducing
interest rates or waiving certain debt covenants.29
It is in public markets where influence is more
challenging, given the presence of other shareholders
that may be indifferent to the social or environmental
consequences of investment. We examine these issues
below in the discussion of corporate engagement and
shareholder action strategies.
MEASURABLE IMPROVEMENTS
The impact thesis ends with the measurable
improvements in social or economic outcomes that
the investor seeks. Modern practices of commercial
investing depend on investors being able to measure
their investees’ financial outcomes on a regular basis.
The observation that “you can’t manage what you
can’t measure” applies to social impact no less than
financial returns.
Impact measurement, thus, is the third defining
attribute of impact investing—it demonstrates
the commitment of investors to manage toward
improvements in social and environmental outcomes.
In addition to providing valuable information on
the impact intent and results of a portfolio, impact
measurement allows investors to make decisions based
on the social and environmental outcomes affected
by a business.30 It also allows the investor to tell a
clear, compelling story about private sector solutions
to problems affecting people and the planet, which is
critical for attracting capital and growing the impact
investment market.31
Soon after the concept of impact investing was
created, impact investors recognized the need for
a credible, independent, common set of standard
indicators to provide a foundation for market
infrastructure that could facilitate the efficient flow
of capital to enterprises aligned with an investor’s
impact objectives.32 This formed the basis for Impact
Reporting and Investment Standards (IRIS)33 and the
Global Impact Investing Rating System (GIIRS),34
among others, which promote standard indicators
and other aspects of standardization. Today, these
common indicators are used to track social and
environmental improvements.
Value-aligned Investments May
Have Intent, but Lack Contribution
or Measurement
A recent global survey of 7,100 investors by the asset
manager Natixis found that 75 percent thought it was
important that they invest in companies that reflect
their personal values.35 IMP describes value-aligned
investments as a “signal that impact matters […] A
commitment to factoring in the impact an enterprise
has, such that—if all investors did the same—it would
lead to a ‘pricing in’ of social and environmental
effects by the capital markets. This strategy expresses
the investors’ values and is an important baseline. But
alone, it is not likely to advance progress on societal
issues when compared to other forms of contribution.”36
While many investors may make investments with
the intent of impact, these investments are not
impact investments if the investor lacks a credible
narrative of how the investment contributes to impact.
28 Impact Management Project 2019.
29 Aquino-Hagedorn and Doran 201 7.
30 Schiff et al. 2016.
31 Salmon 2018.
32 Bouri 2011.
33 “What is IRIS?” Impact Reporting and Investment Standards (IRIS). For more information, see https://iris.thegiin.org/.
34 “GIIRS Funds.” B-Analytics. For more information, see http://b-analytics.net/giirs-funds.
35 Natixis 201 7.
36 Impact Management Project 2019.
11
CREATING IMPACT The Promise of Impact Investing
Alternatively, impact investments may have a credible
narrative of contribution, but lack a system of impact
measurement. We call such investments value-aligned.
THE ABSENCE OF CONTRIBUTION
To understand this idea, it is first helpful to distinguish
between two concepts that are frequently confused,
the impact of the enterprise (or sector), and the impact
of the investor (Figure 4). Enterprise impact refers to
the social value that the enterprise creates through the
goods and services it sells, the jobs it provides, and so
on. Value-aligned investors may hold stock in a firm
that already creates social value, but without changing
the amount of social value the firm produces.
For example, value-aligned investors may select
investments based on a firm’s outputs—its products
and services. For example, they might want to own
stock in a solar power company or avoid owning
shares in a cigarette company. Or, investors may be
concerned about a firm’s practices—the way it produces
its outputs. Or investors might want to own stock in
companies that meet high ESG standards and eschew
companies with poor ESG ratings.
But selecting investments based on enterprise (or sector)
impact alone does not imply contribution. Consider,
for example, an investor who invests in a microfinance
institution (MFI), with the goal of increasing low-
income individuals’ access to finance, with these three
alternative scenarios:
1. Because of the impact investment, the MFI can
provide more loans, or loans on better terms,
to borrowers, with an ultimate improvement in
their welfare. In this case, we would say that the
investment had impact.
2. The MFI does not expand or improve its lending
practices, but simply uses the investment to pay
down some more expensive debt or to pay out
more dividends to equity holders. In this case, the
investment did not have impact, because it did not
lead to a change in outcomes from MFI borrowers.
3. Finally, suppose that the MFI is using additional
capital to benefit its low-income borrowers.
However, there is a surfeit of commercial money
seeking to invest in the MFI on the same terms
as the impact investor. Further, the MFI does not
receive any special non-financial assistance from
the investor. In this case, although the impact
investor’s desired outcome may have occurred, their
investment did not contribute more to the outcome
than commercial investors would have, and thus,
ultimately, it did not have any impact.
For an investment to be an impact investment, it must
have both an enterprise and an investment impact.
Scenarios 2 and 3 would be examples of a value-
aligned investment, whereas only Scenario 1 provides
an example of an impact investment.
ABSENCE OF MEASUREMENT
An investment may also be value-aligned if it is made
without a system in place to measure the impact that
is made. Consider, for example, green and social
bonds, whose key feature is that the use of proceeds is
explicitly tied to environmental or social projects, thus
allowing the managers of funds holding these bonds to
demonstrate the investments’ links to those social and
environmental outcomes. The Green Bond Principles
were first established in 2014, while the Social and
Sustainability Bond Principles have been more recently
developed.37 According to the International Capital
Markets Association, which maintains the Principles,
projects are eligible for green or social bond issuance
if they correspond to certain social and environmental
themes such as renewable energy or affordable housing.
Although there is no evidence yet that green bonds
change the issuer’s cost of capital,38 investments in such
bonds may, in some cases, still have a credible narrative
37 For more information on “Green, Social, and Sustainability Bonds,” visit International Capital Market Association at https://www.icmagroup.org/
green-social-and-sustainability-bonds/.
38 A study of municipal green bond issuance has found that, for the same borrower, pricing is identical when comparing green and non-green bonds.
This is not surprising given that holders of green and non-green bonds from the same issuer have similar rights under the principle of pari passu, and
are therefore exposed to identical credit risk. What this study does not establish however is whether market pricing of credit risk is a function of the
share of a rm’s nance through green bonds. Just as ESG risk factors are used to predict credit risk, the fact that a rm secures nancing through
green bonds may provide information to the market that is ultimately reected in prices. It is too soon to tell, however, the extent to which this is
true. See Larcker and Watts 2019.
12
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
of contribution. Because markets for these securities
are nascent, participation in a first issuance and even
in purchases in secondary markets may contribute to
growing the market, which is an impact in and of itself.
This is an example where (to quote the IMP) an impact
investor’s “signal that impact matters”39 may help
attract other investors.40
Measurement is required so that green and social
bonds satisfy the definition of impact investments:
one must verify the allocation of proceeds. The Green
Bond Principles recommended that the issuer make and
keep readily available current information on the use
of proceeds. This includes a list of projects to which
proceeds have been allocated, a brief description of the
projects, and their expected impact. Regular reporting
of this information allows for impact measurement.
1.2. Why Impact Investing?
Impact Investing Can Help Spur
Progress toward the SDGs
The investment needs required to meet the SDGs are
tremendous. A 2019 estimate suggests that meeting
the SDGs in just five key areas (education, health,
roads, electricity, and water and sanitation) will require
additional annual spending in 2030 of $0.5 trillion in
low-income developing countries, and $2.1 trillion in
emerging market economies.41 In emerging markets,
this additional spending amounts to 4 percentage
points of GDP—an amount which is large, but not
necessarily unobtainable, relative to increases in tax
revenue that government might be able to achieve.42
39 Impact Management Project 2019.
40 BIIIX, Black Rock’s Impact Bond fund, provides a more ambiguous example. The portfolio mostly holds securities issued by Freddie Mac and Fannie
Mae, two U.S. state-owned enterprises focusing on development of the mortgage market, and mortgage backed securities. The use of funds in
these bonds is linked to a specic social goal: the expansion of home ownership. Given the depth of U.S. debt markets, however, it is unclear that
purchases of these securities will have any effect on the number of mortgages issued.
41 Gaspar et al. 2019.
42 Indonesia, for example, has mainstreamed the SDGs into its national development plans, and the authorities are considering a medium term-
revenue strategy to raise government revenue by 5 percentage points of GDP over the medium term. Gaspar et al. 2019.
Social bonds, in which the use of proceeds are tied to specic social projects, are distinct from social
impact bonds (SIBs), which are structured more like pay-for-performance contracts than debt securities.
SIBs are public-private partnerships designed to deliver social programs to underserved communities.
These contracts—also called pay-for-success contracts—leverage private investment and expertise
from service providers to improve the social outcomes of publicly funded services. Unlike typical bonds,
investors who buy social impact bonds receive a xed payment or return on their investment only if the
desired social outcomes are achieved. In this respect, impact and nancial goals are aligned without the
need for undesirable trade-offs.
When properly implemented, SIBs have the potential to improve the efciency and effectiveness of
targeted social programs. Pioneered in 2010 by a United Kingdom program, Social Finance Ltd., to reduce
the rate of recidivism at Peterborough Prison in Cambridgeshire, the market for SIBs is now expanding.
In 2017, 108 impact bonds that raised more than $300 million were operating in 25 countries. Only six out
of these 108 bonds are in low- and middle-income countries. The rst Peterborough SIB has proven
successful, with the recidivism of short-sentenced offenders declining by 9 percent, and the investors
repaid in full. However, in the United States, these bonds have shown mixed results—the Utah High Quality
Preschool Initiative to improve low-income preschooler school achievement has shown promising results,
while a juvenile offender program in New York did not reduce recidivism.
BOX 3 Social Impact Bonds
13
CREATING IMPACT The Promise of Impact Investing
In low-income countries, however, the challenge is
much greater. There, investment needs amount to 15
percent of GDP, and tax revenues will not be enough to
finance this investment. The development community
has also recognized that it, alone, cannot support such
a level of financial commitment.43 The private sector
will have to fill the gap.
Recognition of this reality comes at a time when
traditional investors show some reluctance to invest
in poorer regions. In February 2019, the traditional
private equity fund manager Blackstone exited its stake
in BlackRhino, an infrastructure investment vehicle
focused on Africa. Only a few years prior, the manager
had talked of investing up to $5 billion in sub-Saharan
energy projects by 2019.44 KKR similarly disbanded its
Africa deal team in 2017 because it could not find large
enough companies to buy.45
Impact investors take a different approach compared
to traditional investors. They have specified intent to
contribute to improvement of measurable social and
environmental outcomes. Considering this, today
we see a convergence of interests between DFIs—
traditionally focused on social development in low- and
middle-income countries—and impact investors, who
seek to solve challenging social and environmental
problems through the deployment of private capital.
Increasingly, impact investors frame their intent in
terms of a contribution toward achieving the SDGs.
As we show below in Section 1.3, this has led to an
increased focus on low- and middle-income countries,
where the financing gaps to achieve the SDGs are
greatest. The differential way that impact investors
manage their investment process may lead them to
seek out and finance projects that others would not,
or to manage investments in such a way that they will
generate more social value than would be the case if the
investments had been made by traditional investors.
Of course, to say that a differential investment process
automatically leads to differential outcomes is not
correct. It is unclear whether impact investors, the
majority of whom demand commercial returns, will
find ways to invest capital toward social goals in
places where others have found limited deal flow. An
impact investor may act differently, and it is our hope
that this causes differential impact, but it need not be
the case.
Impact Investing has the potential to change the
world, but only if it leads to different outcomes than
traditional investments. Impact investors can prove that
they make this additional contribution in two ways.
MOBILIZATION OF EXTRA FUNDS
First, they may support the mobilization of extra funds
dedicated to impact beyond what the market would
have sourced. Impact investing has emerged, in part,
because of changing investor preferences: 86 percent of
respondents to a survey by the Global Impact Investor
Network, who are mostly private investment fund
managers, said they had made impact investments in
response to client demand.
These preferences may reflect the changing attitudes of
investors about their role in society. In North America
alone, $30 trillion in wealth will be transferred from
baby boomers to Generation X and millennials over the
next three decades.46 Younger investors state a stronger
interest in socially-motivated investment strategies.47
A recent Barclay’s investor survey found that the most
important issues to investors relate to SDGs such as
health, education, and water and sanitation—the
sectors in which service provision has typically been the
remit of the public sector.48 Hence impact investment
may be used as a channel to direct additional resources
toward social objectives.
43 UN 2015.
44 Burkhardt and Metcalf 2019.
45 Clark et al. 2017.
46 Skinner 2015.
47 For example, an investor survey by Morgan Stanley (2017) found that 38 percent of respondents ages 18-35—“millennials”—were “very interested” in
“making investments in companies or funds which aim to achieve market-rate nancial returns while pursuing social and/or environmental impact,”
relative to 23 percent of the general population. This response coincided with younger respondents also being more likely to believe that such
investment implies a nancial trade off (59 versus 53 percent of the general population).
48 Barclays 2019.
14
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
ADDING VALUE IN THE DEPLOYMENT OF FUNDS
Second, by managing their investments in a different
way, impact investors may help investee firms to
increase their impact on social objectives. This may
involve supporting a business to expand a bottom-of-
the-pyramid retail strategy, or to provide services to
underserved segments of the population. By managing
with intent for impact—which involves a focus on their
contribution to measurable outcomes—impact investors
may differentiate themselves from “impact washers,”
who report on pro-social goods produced by their
investee companies, but without contributing by helping
their investees produce more of those goods than would
have been produced by traditional investors.
1.3. How Large is the Market Today?
Measuring the Size of the Market is
Subject to Several Complications
There is considerable uncertainty about the size of
the market for impact investment today. Widely cited
numbers range from $228.1 billion—the total assets
managed by the 226 respondents to an annual survey
by the Global Impact Investing Network (2018)—
to as high as $1.3 trillion. This includes direct and
indirect investments by over 450 signatories to the
United Nations’ Principles for Responsible Investing
(PRI), which have been made in companies generating
revenues from goods or services linked to specific
environmental and social themes.49
Measuring the size of the market according to a
consistent definition is subject to several complications.
On the one hand, investor surveys, which are the
sources of both the numbers above, include only those
who chose to respond. This suggests the universe of
impact investments may be larger than the AUM of
respondents to surveys such as those above. On the
other hand, impact means different things to different
people. For example, though the GIIN provides its
definition of impact investing to survey respondents,
it notes that respondents applied it to their portfolios
“as they saw fit.”50 This element of subjectivity implies
that different respondents may have classified their
AUM as impact investments according to different
interpretations of the definition, some of which are
possibly more credible than others.
The consequences of this may be seen most clearly
when defining whether an investment has a narrative
of contribution, which may be less credible in public
markets. Both the headline GIIN and PRI numbers
include investments in publicly traded securities. As
discussed previously, however, in a world in which
many investors trade only based on securities’ financial
performance, it is difficult to argue that merely trading
the securities of public companies, based on social or
environmental criteria, will affect the quantity of the
social value they produce. If one is clear-eyed about the
functioning of financial markets, only a subset of assets
in the GIIN and PRI numbers may constitute a credible
contribution to the achievement of impact.
Two other aspects of impact investments are that they
have been made by an investor with intent for impact and
a system of impact measurement. These are attributes of
an investor’s approach, rather than of particular assets.
This implies that the relevant size of the impact investing
market is the AUM of investors following an investment
approach of impact intent and measurement.
This observation makes clear how the threat of “impact
washing” looms large for the industry. Sector-based
estimates of the impact investment market opportunity
such as PRI (2018) are extremely valuable as they help
investors direct capital toward social and environmental
problems. An additional value is that they describe the
value of the capital that one could feasibly impact-wash,
in the sense that it is possible—without independent
verification of their investment process—for investors
to claim that they have contributed to impact, while not
having intended it or measured it at all. The PRI survey
identifies $1.3 trillion in assets of signatories linked
to sectors related to specific social and environmental
goals. Without further information on their investment
49 Environmental themes include: energy efciency, green buildings, renewable energy, sustainable agriculture, and sustainable forestry and water.
Social themes include: affordable housing, education, health, and inclusive nance. Investments are not linked to certain SDGs: (5) gender equality,
(10) reducing inequalities, (12) responsible consumption and production, (13) climate action, (16) peace, justice and strong institutions, and (17)
partnerships for the goals, which recognizes that some problems may be difcult to solve through a market system, as impact investment requires.
50 GIIN 2018; page viii.
15
CREATING IMPACT The Promise of Impact Investing
approach, it is not possible to know which of these
investments were made with the explicit intent to
contribute to measurable impact, or a credible narrative
of their contribution to impact. The introduction of
Operating Principles for impact management (see
Chapter 2) will for the first time make it possible to
identify a set of investors following a common investment
approach, and to the extent they are widely adopted,
provide a basis for clearer estimates of market size.
In this subsection, we identify some types of investors
that may meet the definition of impact investors,
and some large asset classes that may be considered
impact investments. This discussion is summarized in
Table 1, which shows different pools of assets under
management, and the extent to which these pools
of assets may have the three attributes of impact
investment—intent, contribution, and measurement.
TABLE 1 Investors and Types of Assets, and Whether They Have the Three Distinctive Attributes of
Impact Investment
*Values refer to year-end, 2015.
Sources: Preqin, Impact Base, Impact Asset, EMPEA, Symbiotics, Bloomberg, Thompson Reuters, Global Sustainable Investment Alliance, PwC,
and Development Bank annual reports. Note: Asset values are not mutually exclusive.
ASSET POOL
AUM
US$,
billions
(2018)
MARKET(S) OF
OPERATION
DEFINING ATTRIBUTES OF IMPACT INVESTMENT
INTENT for social
or environmental
impact
Credibly established
CONTRIBUTION to the
achievement of impact
MEASUREMENT of
improvements in social or
environmental outcomes
Outstanding Private
Sector Operations
Portfolio of 25 HIPSO
Signatory DFIs
$742 Private YES, the investor
has an explicit
mandate to
promote social
and economic
impact
YES, insofar as the investor can:
(a) change the investee’s cost of
capital, (b) transfer knowledge
or technology to investees, or
(c) exert influence that induces
investees to improve relevant
outputs or processes
YES, the investor
uses indicators to
assess whether the
investment contributes
to improvement
Non-Treasury Assets
of 81 Development
Banks
$3,083
Private Investment
Funds with Intent
for and Measurement
of Impact
$71
Green and Social
Bonds Outstanding
$456 Public and
Private POSSIBLY, one
might purchase
the product
with intent to
create social or
environmental
value
The manager’s
marketing
materials may
emphasize
“sustainable” or
“responsible”
investment, rather
than “impact”
Alternatively, one
might purchase
the product with a
desire to gain (or
reduce) exposure
to ESG risk
factors
POSSIBLY, to the
extent indicators are
reported by investees
ESG integration
strategies*
$10,369 NO, particularly in public
portfolios, strategies are unlikely
to (a) change investee’s cost of
capital in the presence of other
investors indifferent to social or
environmental impact. Further,
limited direct relationship with
investees precludes managers
from (b) transferring knowledge or
(c) exerting influence
Negative screening of
securities (e.g., “sin”
or “dirty” stocks)*
$15,023 NO, securities negatively
screened may end up being held
by those who would prefer to
produce less social value
Corporate
engagement and
shareholder action*
$8,365 UNCERTAIN, given board
members’ fiduciary duty of
obedience to shareholders who
are indifferent to social value
YES, through
reporting on whether
engagements and
actions are successful
16
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
Private Investment Funds with
Intent for and Measurement of Impact:
$71 Billion
Impact investors can get exposure to private market
assets by investing directly through private managers or
through DFI co-investment vehicles. There is little public
information available on direct impact investments
by private investors, but we can find information on
investments through private fund managers.
Here, we identify the AUM of private investment funds
and managers whose operations have two attributes
of impact investment: intent and measurement. These
funds are assumed to have a well-defined contribution
by virtue of their operation in private markets.
Intent and measurement are verified through the
presence of a fund in various databases, which indicates
that it is indeed managed with the intent to create
measurable impact; or by the fact that it is owned or
managed by an institution using a recognized set of
private sector impact measurement tools: those of either
IRIS, B-Analytics, or Gresb, which relates to real estate
and infrastructure. By using these criteria, we ensure
that our estimate of market size accounts only for
those investors currently implementing the investment
approach required by our proposed definition of impact
investment. As discussed previously, this definition is
broadly consistent with other definitions that have been
used in the industry (Online Annex A).
Impact intent and measurement fund managers have
raised approximately $71 billion dollars for 417 funds,
in vintage years 2008–18, which is just more than
1 percent of all funds raised by traditional private
equity funds over the same period (Figure 6). In the
databases, we are also able to identify an additional
set of funds which we call impact intent funds—
those funds, for which measurement could not be
verified, but in a database survey the fund managers
expressed an “ethos” related to economic development,
microfinance, or social or environmental responsibility.
These funds have raised more—approximately $133
billion across 471 funds.
FIGURE 6 Private Investment Funds Raised by Asset Managers Since 2008
Sources: Preqin, EMPEA, ImpactBase, ImpactAsset50, Symbiotics, IRIS, B-Analytics, and Gresb.
Note: Includes all commitments to funds with a vintage year of 2008, or later, up to 2018Q2. In ImpactBase and Symbiotics, where some data
are missing, the inception year is used in place of the vintage year. For impact intent and measurement funds, fundraising by 417 funds has been
augmented with the additional AUM, not already identified in a fund, of 50 asset managers identified in 2018 by ImpactAsset 50 as managing
with intent for measurable impact. For these funds, the average fund size calculation does not include these additional assets.
Impact Intent and
Measurement Funds
Traditional Private
Equity Funds
Impact Intent Funds
5,070
14,228
356
471
283
417
131
13
37
1
NUMBER OF FUNDS
FUNDS RAISED 2008–18
in US$ billion
AVERAGE FUND SIZE
in US$ billion
17
CREATING IMPACT The Promise of Impact Investing
Until recently, impact funds have remained smaller
than the average private equity fund, suggesting
that—at least in the past—asset owners may have had
limited appetite for such products, and especially for
funds offering impact measurement. The average for
funds raised by all private equity funds since 2008 was
$356 million. For intent funds the average was $283
million, while for intent and measurement funds the
average was $131 million. The persistent average size
gap may reflect limited investor demand for impact
measurement, which may reflect impact measurement’s
limited track record. In our data, impact intent funds
are less likely than impact intent and measurement
funds to be those of first-time fund managers.
INVESTMENT FOCUS BY GEOGRAPHIC AREA
AND ASSET CLASS
Impact funds, however, have a higher proportion
of their portfolios in regions outside of Europe and
North America, or in emerging regions (Figure 7).
This suggests that impact investors have a special
willingness to invest in locations that traditional
investors may avoid, and also where the investment
needed to meet the SDGs is the greatest.51
Notably, approximately 8 percent of the assets of
impact intent funds are focused on Africa, as are 8
percent of impact intent and measurement funds, while
less than 1 percent of traditional private equity funds
go to the African continent. Intent and measurement
funds are also more likely to take global, rather than
regional, approaches to sourcing transactions. Eighteen
percent of the assets of impact intent and measurement
funds are focused on global emerging markets, whereas
no impact intent funds or traditional private equity
funds take this strategy.52 Among impact intent and
measurement investment funds, measurement is
disproportionately focused on North America, relative
to Europe, which may reflect impact investment’s
origins among United States philanthropists.
A large share of the investment needs identified
to meet the Sustainable Development Goals are in
51 On investment needs, see UNCTAD 2014; Rozenberg and Fay 2019.
52 Sourcing funds from a global, rather than a regional pool, however, may lead to additional costs of origination, which may be an issue, especially for
smaller funds with few investment staff.
FIGURE 7 Impact Intent and Measurement Funds Disproportionately Focus on Emerging Markets
Impact Intent and
Measurement Funds
Traditional Private
Equity Funds
Impact Intent Funds
TARGET INVESTMENT MARKET OF
PRIVATE INVESTMENT FUNDS
Share of fundraising 2008–18, in %
552311119
35351233118
49151244988
Global
Asia
Middle East
Global (EM)
Latin America and Caribbean
Europe
Africa
Oceania
North America
Sources: Preqin, EMPEA, ImpactBase, Symbiotics, IRIS, B-Analytics, and Gresb.
Note: Assets under management is given by cumulative fundraising since 2008. The number of traditional private equity funds included is
14,226; impact intent funds, 445; and impact intent and measurement funds, 417. The discrepancy in the number of funds between this and the
figure above is the absence of information on the regional focus for some funds.
18
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
infrastructure.53 While impact intent and measurement
funds are focused on emerging markets, very little
of their investment there (just 9 percent by AUM),
is focused on infrastructure as an asset class (Figure
8). This is notable because in developed markets, the
majority of such funds’ investment (62 percent) is
focused on the asset class. Specifically, in developed
markets, we have classified 25 infrastructure funds
as impact intent and measurement funds because
their managers are investor members of the Gresb, a
measurement system to evaluate the environmental
and social implications of infrastructure and real
estate investments; and because they self-report
having an “ethos” related to economic development
or responsibility, which we take as a proxy for impact
intent. Many of these funds have over $1 billion
AUM. In emerging markets, however, we identified
only four intent and measurement funds focused on
infrastructure, and they were also substantially smaller.
This result highlights that the infrastructure investment
gap is more likely due to the absence of bankable
projects rather than an absence of capital. Investors
can only have impact if opportunities for commercial
returns are available. Impact and measurement funds
have shown a special desire to go to emerging markets,
but when they get there, so far, they have not been able
to invest in infrastructure as an asset class, or achieve
scale in doing so.54
A CHANGING MARKET?
For impact intent and measurement funds, fundraising
has consistently fallen below target by approximately
one third (Figure 9). Except for 2016, intent and
measurement funds have failed to meet expectations.
In contrast, traditional private equity funds have been
beating fundraising expectations consistently since 2012.
The market for managed private impact investment
funds may be changing, however, as four major private
equity managers have entered the market since 2017.
By 2017, TPG closed its Rise Fund, having raised
$2.1 billion, substantially more than its $1.5 billion
target.55 Bain Capital closed its Double Impact Fund
too, at $390 million, which is also more than its
target. In 2018, two other major private equity firms,
53 UNCTAD 2014; Rozenberg and Fay 2019.
54 Some private equity and debt funds may invest in smaller-scale renewable energy projects.
55 Information based on Preqin database.
FIGURE 8 Impact Intent and Measurement Funds are Focused on Infrastructure in Developed Markets
Developed Markets
Emerging Markets
TARGET ASSET CLASS OF PRIVATE INVESTMENT FUNDS
WITH VERIFIABLE IMPACT INTENT AND MEASUREMENT
Percent of fundraising by target market
2008–18 Q2, N = 417
13626514
6960 1015
Private Equity
Fixed Income/Debt
Natural Assets & Real Estate
Mixed
Infrastructure
Sources: Preqin, EMPEA, ImpactBase, Symbiotics, IRIS, B-Analytics, and Gresb.
Note: Assets under management is given by cumulative fundraising since 2008. The number of funds with impact intent and measurement is 417.
The discrepancy in the number of funds between this, and the figures above, is the absence of asset class information for some funds. Mixed refers
to funds reporting that they invest in multiple asset classes, as well as funds of funds. Developed Markets refers to Europe, North America, and
Oceania, which is primarily Australia and New Zealand; Emerging Markets refers to all others. Geographic focus information is only available at
the region level.
19
CREATING IMPACT The Promise of Impact Investing
Partners Group and KKR, each began fundraising
for an impact-focused fund with a target of $1 billon.
Each fund offers both intent and measurement. These
managers are among the largest in the private equity
industry, having raised $192 billion, collectively,
since 2018. The fact that impact funds have been
oversubscribed so far may indicate that demand for
products that offer impact intent and measurement is
changing, or that the credibility of a large manager is
particularly helpful to attract investors to funds with
impact intent and measurement.
Shareholder Action Strategies and
Green and Social Bonds May Oer
Investors Opportunities to Invest for
Impact in Public Markets: $8,821 Billion
In addition to private market investments, we can
identify two larger investment classes that offer the
potential for investors to invest for impact in public
markets, where the vast majority of assets, particularly
those of households, are held. We do not have enough
information on the purchasers of these assets to know
to what extent they buy them with the intent to achieve
impact, but we can quantify the total value of assets in
each investment class.
PUBLIC EQUITIES WITH CORPORATE
ENGAGEMENT AND SHAREHOLDER ACTION:
$8,365 BILLION
At year-end 2015, the last year for which global
data are available, $8,365 billion in assets, which
were generally public equities, were managed under
strategies of “corporate engagement,” or “shareholder
action.” These strategies seek to influence or
control investee companies through proxy voting or
shareholder resolutions, and also less direct attempts
at influence, such as writing letters to boards and
management regarding ESG issues.
Most corporate engagement today may be said to lack
intent for impact. Under these strategies, investors
typically voice an interest in shareholder value rather
than environmental or social outcomes. Governance
issues (the “G” in ESG), such as proxy access,
corporate political activity, and an independent board
chair, are among the most common issues raised in
corporate engagement.56 This is not surprising, given
56 US SIF Foundation 2018.
FIGURE 9 Impact Intent and Measurement Funds Have Consistently Failed to Meet
Fundraising Expectations
1.20
1.00
0.80
0.60
0.40 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
RATIO OF LIMITED PARTNER
COMMITMENTS TO TARGET AUM
Traditional Private Equity
Impact Intent Funds
Impact Intent and Measurement Funds
1.18
0.54
1.11
Sources: Preqin, EMPEA, ImpactBase, Symbiotics, IRIS, B-Analytics, and Gresb.
Note: Funds raised are commitments by limited partners (LPs). This only includes funds for which both target AUM and funds raised are
available. For ImpactBase, missing vintage years were proxied by inception year. The number of funds: in Traditional Private Equity (6,675); in
Impact intent (252); and in Impact Intent and Measurement (300).
20
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
the copious literature that has shown that weak
corporate governance can destroy shareholder value.57
However, shareholder action related to environmental
and social (ES) issues is on the rise, suggesting that some
of these strategies may be implemented by those with
intent for social impact. In the United States, where
segmented data on ES-specific resolutions are reported,
and where approximately 41 percent of the value of
all public equities is located, the number of resolutions
filed on ES issues has risen 19 percent over the last
decade, though more than half of these resolutions were
withdrawn or omitted, rather than put to a vote.58
Recently, efforts to influence firms on these issues got a
boost from the 2017 annual letter by Larry Fink, CEO
of BlackRock, Inc., one of the world’s largest index
funds, who wrote:59
To prosper over time, every company must not
only deliver financial performance, but also show
how it makes a positive contribution to society.
Companies must benefit all their stakeholders,
including shareholders, employees, customers,
and the communities in which they operate.
BlackRock can choose to sell the securities of a
company if we are doubtful about its strategic
direction or long-term growth. In managing
our index funds, however, BlackRock cannot
express its disapproval by selling the company’s
securities as long as that company remains in the
relevant index. As a result, our responsibility to
engage and vote is more important than ever. In
this sense, index investors are the ultimate long-
term investors—providing patient capital for
companies to grow and prosper.
In 2017, BlackRock voted for resolutions by
shareholders (and opposed by management)
requiring that Occidental Petroleum and Exxon
Mobil assess the impact of long-term climate change
on their businesses. And after the 2018 Parkland,
Florida school shooting, BlackRock urged firearms
manufacturers to assess the distribution of their
products, noting that it might vote against directors of
companies that did not respond appropriately.60
For the most part, perhaps because of uncertainties
about the fiduciary duties of corporate management,61
active ownership regarding environmental and social
issues has typically focused on information disclosure or
the establishment of review processes on specific issues.
For example, in 2017, BNP Paribas Asset Management
co-filed a resolution demanding that Exxon Mobil make
deeper disclosure of climate change risks and the extent
of research and development into low-carbon energy
sources.62 That same year, State Street Global Advisors
successfully exhorted Liquide S.A., a French industrial
gas company, to establish an Environment and Society
Committee to make recommendations to management
on a sustainable development strategy.63
It may be difficult for active owners to exert influence on
issues closer to day-to-day operations, leading to some
uncertainty about the ultimate contribution of such
strategies. For example, in 2015, a U.S. court blocked
a proposal by Trinity Church of Manhattan and other
shareholders to require Walmart’s management to
oversee the sale of “products that especially endanger
public safety,” with the goal of banning the sale of guns
with high-capacity magazines. The court concluded
that the resolution contravened a federal prohibition
against shareholders’ micromanaging “ordinary business
57 See Shleifer and Vishny 1997; Bebchuk et al. 2008; and Claessens and Yurtoglu 2013.
58 Institutional Shareholder Services (ISS), Voting Analytics U.S. Most shareholders have the right to le proposals. However, companies naturally seek
to quash them on the grounds that they interfere with ordinary management decisions. In the U.S, the Securities and Exchange Commission (SEC)
then decides whether to allow the proposal. If allowed, the company may negotiate with the proposer to make changes and persuade the proposer
to withdraw; or let it go to a vote. If it goes to a vote, it is not binding, but there is a lot of moral suasion and power.
59 BlackRock 2017.
60 BlackRock 2018.
61 It is not clear whether U.S. law requires corporate management to maximize shareholder value to the exclusion of social goals or to obey the
commands of shareholders. On this, see Blair and Stout 1999 and Elhauge 2005. Nonetheless, claims that management or directors are not
maximizing shareholder value have been used frequently to justify lawsuits or corporate takeovers. On this topic and the specic case of the
attempted takeover of the DuPont Corporation by activist investor, Nelson Peltz, see Strine 2017.
62 Williams 2018.
63 State Street Global Advisors 2017.
21
CREATING IMPACT The Promise of Impact Investing
op e rations.”64 Although Walmart did, in fact, stop
selling such guns in the Unite States that year, this may
have been in response to customer sentiment, rather than
shareholder action.65 Given the court’s ruling, had the
issue been less salient to the public, it is unclear whether
there would have been the same outcome.
In any event, owners may be less constrained in the
influence they can exert when firms are structured
as benefit corporations (BCs), which have emerged
recently in many jurisdictions in the U.S. Under such
a structure, directors are legally obligated to consider
interests beyond those of shareholders, including those
of others materially affected by the business—workers,
customers, suppliers, the communities in which the
firm operates, and the environment. Further, BCs must
show that they deliver a public benefit, or “a material
positive impact on society and the environment […]
assessed against a third-party standard.”66
So far, more than 5,000 companies have adopted the
BC structure in the U.S. alone.67 Though a few are large
and publicly traded, notably Danone, the French food
company, which has adopted the structure for its the
North American subsidiary, most BCs remain small and/
or privately held. This reflects an initial motivation for
the structure, which is that it may allow entrepreneurs
to protect the values of their business in the event of
an acquisition.68 If large shareholders were to advocate
for firms to adopt a BC structure, it would give
investors greater scope to exert influence or control over
management, and thus greater scope to create impact.
Ultimately, growth in voting against management has
marked a significant break from the practice of large
fund managers, and offers a view of how impact—a
change in management behavior that creates new
social value—may be achieved in public markets.
Further, asset managers typically measure the success
of their engagements in reports to asset owners. In this
sense, corporate engagement frequently has impact
measurement. Some managers evaluate success based
on different criteria: while some firms focus only on
whether their action changes a company’s behavior,
others may show they have achieved success when they
feel they have influenced the opinions of other market
participants through their actions.69
GREEN AND SOCIAL BONDS OUTSTANDING:
$456 BILLION
Green and social bonds aligned with the Green Bond
Principles can channel funds to firms for environmental
and social purposes. As described above, this can also
make a contribution to the development of a nascent
market (Box 3). However, many outstanding green and
social bonds lack reporting on allocation of proceeds,
making impact measurement a challenge. The Green
Bond Principles, developed in collaboration with IFC
and other issuers, have created a common standard
for reporting on use of proceeds, and may, over time,
establish common impact reporting standards. The
establishment of the Principles in 2014 was instrumental
in attracting larger amounts of capital to this asset class.
The market has grown rapidly since 2007 (Figure 10).
As of 2018, $456 billion in green and social bonds was
outstanding comprising less than 1 percent of the total
debt securities, outstanding.70 So far, governments have
issued the greatest share of these bonds outstanding by
value (73 percent of social bonds and 38 percent of green
bonds), followed by financial firms (24 percent of social
bonds and 29 percent of green bonds).71 Non-financial
firms have the smallest share of the overall bond market.
64 Bainbridge 2016.
65 Tabuchi 2015.
66 Hiller 2013.
67 For a database, see http://benetcorp.net/businesses/nd-a-benet-corp.
68 On the incentives of shareholders to take such action see Hart and Zingales 2017.
69 For ex ample, BNP Paribas Asse t Manage ment denes success of an engage ment as when the company with draws the proposal and/or when BNPP
AM’s vote is change d in favor of the pro posal after a modicat ion of the resolution, or if addit ional information is obtain ed. For more information, se e
BNP Asset Mana gement 2018. State Street Glo bal Advisors (SSGA) den es the success of an engagement wh en at leas t one of the follo wing happens:
(a) a company impleme nts changes to th eir ESG-re lated programs, pr actices, or pro cesses, consist ent with SSGA’s engag ement or voting fee dback,
(b) several mar ket participant s, such as asset owners, as set managers, consult ants, regulators, and prox y advisory rms, are inu enced by SSGA’s
thought le adership on them atic ESG issues. F or more informati on, see State Street G lobal Advisor s 2017.
70 According to BIS, Capital Market Association, Bloomberg, and Thompson Reuters.
71 According to International Capital Markets Association, Bloomberg, and Thompson Reuters.
22
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
To help develop and coordinate public and private sector activity to combat climate change, the
IBRD and IFC launched their Green Bond Programs in 2008 and 2010, respectively. Green Bonds are
an innovative nancial instrument to address climate change. They are dened as any type of bond
instrument where the proceeds will be exclusively applied to nance or renance new or existing
projects that provide clear environmental benets. Hence, green bonds generate nancing for projects
in renewable energy, energy efciency, sustainable housing, and other eco-friendly industries. The
issuer assesses and, where possible, quanties these benets. The Green Bond issuer classies the use
of proceeds based upon its primary objective for the underlying projects and provides a description
of the use of proceeds in the underlying legal documentation. Issuers must inform investors of the
environmental sustainability objectives, the process used to determine that the projects t within the
eligible green project categories, and the process applied to identify and manage potentially material
environmental and social risks.
BOX 4 The Role of Investment Principles in the Growth of the Green Bond Market
Source: IFC 2018; p. 8.
FIGURE 10 The Green Bond Market Has Grown Rapidly, With an Increasing Share of Issuance
Coming from Corporates
160
140
120
100
80
60
40
20
020082007 2009 2010 2011 2012 2013 2014 2015 2016 2017
ANNUAL GREEN BOND ISSUANCE BY ISSUER TYPE
($ equiv. billion)
Energy / Utility Companies
Corporates / Banks
Agency / State / Munis / Other Government
Multilateral Development Banks (MDB)
23
CREATING IMPACT The Promise of Impact Investing
The green bond market has seen explosive growth in the past decade (Figure 10), presenting an
unrivaled opportunity in climate nance. Annual issuance has risen from zero to over $150 billion
globally. To promote issuance and maintain integrity, the green bond industry needed to be guided
by agreed environmental, social and governance standards and terms for transparency, responsible
investor behavior, and impact evaluation. For this purpose, the Green Bond Principles were developed
by the Executive Committee of the Green Bond Principles, a collaborative industry group combining
issuers, underwriters, and investors. The Green Bond Principles (GBP) were established in 2014 as
voluntary guidelines for issuers and underwriters of Green Bonds. They were created to promote
discipline in the Green Bond market, recommending transparency, disclosure and reporting of the
environmental sustainability of the underlying bond issues. The GBP focus on the use of proceeds
with the aim to support environmental sustainability through specic projects and foster an increase
in capital allocated to such projects. There are four core components of the GBP: 1) use of proceeds; 2)
process for project evaluation and selection; 3) management of proceeds; and 4) reporting. The GBP
also recommend that issuers have an independent external review to conrm the alignment of their
bond or bond program with the four core components of the GBP. Most green bonds have been issued
in developed nations, although many experts see great growth for green bonds in emerging markets.
Examples of Green Bonds that could qualify as impact investments in alignment with the
Operating Principles for Impact Management are:
1. Green Bonds issued by a signatory to the Principles: use of proceeds would fund
investments targeting positive and measurable environmental impact. As a signatory
to the Principles, the issuer will have provided a disclosure statement that it has an
impact management system to monitor the use of proceeds and measure impact of
the use of proceeds, bringing these investments in alignment with the Principles.
2. Green Bonds for which the issuer adheres to the GBP and:
a. the issuer manages, reports on and assesses the impact of the use of proceeds of
the bonds, or
b. the investor monitors the use of proceeds and assesses the impact of the proceeds
of the bonds.
Source: IFC 2018a.
24
CHAPTER 1. Taking Stock: Defining Impact Investing And Sizing The Market
Governments Are Also Impact
Investors, Through the Outstanding
Private Investment Portfolios of
Development Finance Institutions:
$3,825 Billion
Development finance institutions have been created
by governments to fill gaps in the market for certain
financial products such as long-term credit, or finance
for small and medium enterprises (SMEs). Typically,
DFIs have a mandate to pursue some combination of
economic, social and/or environmental goals, which
may be understood as intent to create social and
environmental impact.
These institutions have been included in many
estimates of the size of the market for impact
investment, comprising for example 45 percent of AUM
of GIIN survey respondents in 2018.
Across the world, we have identified at least 106
government-owned development banks with mission
statements that could be interpreted as intent for
impact (Online Annex B).72 Many of these banks invest
without sovereign guarantees, taking commercial risk.
Other parts of their operations seek sub-commercial
returns, for instance through the blending of
concessional capital from donors with funds seeking
commercial terms (Box 6).
INVESTMENTS IN FIRMS BY 25 HIPSO
SIGNATORY DFIS: $742 BILLION
25 DFIs have shown their intent to measure impact
by signing a memorandum of understanding on
Harmonized Indicators for Private Sector Operations
(HIPSO), which supports a framework for impact
measurement. Their combined outstanding private
sector operations portfolio is around $742 billion.
The largest of these banks by assets is the European
Investment Bank. By the Treaty on the Functioning of
the European Union, the European Investment Bank’s
intent is to “contribute […] to the balanced and steady
development of the internal market in the interest of
the U n i on.”73 The second largest is the International
Finance Corporation (IFC), whose chartered intent
is to “further economic development by encouraging
the growth of productive private enterprise in member
countries, particularly in the less developed areas.”74
This estimate of their outstanding portfolio comprises