Impact Investing Trends in 2019 Include Greater Focus On Gender

Impact investing is not just growing, it is evolving. At the same time, the definition of the practice is being shaped and molded by new products and practices, creating tension among some players about what it is and what it should be.

For this article, I reached out to about 50 thought leaders and practitioners in the space, asking for insights about new, less-well-documented trends in impact investing. After receiving dozens of suggestions, I asked the same group to evaluate whether those observations (without attribution to their respective authors) were a) in fact new trends, b) individual experiences that shouldn’t yet be considered trends or c) established, well-documented trends.

What follows are eleven distinct trends observed and confirmed by the panel to be new 2019 trends in impact investing. While I could have combined some of these overlapping or related ideas, I concluded that each item brings its own nuance and should be kept on the list.

Cecile Blilious, founder and managing partner at Impact First Investments in Tel Aviv, commented on the list of candidate ideas. “It seems that many of the trends listed are US-biased. It's possible that the world is not following as fast so there should probably be a distinction between impact investing in the US market (which is in growth stages) and the rest of the world (which is beginning).”

With that word of warning, I invite you to consider the following trends.

More attention on gender lens, gender-focused investing - it's smart investing.

Matthew Davis, CEO of Renew LLC, explains “In Africa, where we invest, the development community has been playing a role - raising awareness, disseminating analysis, etc. about the benefits of backing women-led and owned companies. And the investment community is responding. A recent women-led investment package we put out to our angel network was oversubscribed.

There is a new awareness within the impact investment community that investing in women and minority-led businesses is critical to creating a more equitable world AND makes for great investments.

Lisa Curtis, founder & CEO of Kuli Kuli, which sells moringa-based products, recently closed on a $6.2 million funding round, making her one of the women-led businesses that has received capital as part of this trend.

Impact investing drives more capital to female founders than traditional VC capital. And women make up larger percentages of impact investing asset management teams than traditional asset management.

Tim Freundlich, CEO of ImpactAssets, highlights the fact that not only are impact investors betting more capital on women-led enterprises, but they are also employing more women in the practice of impact investing than traditional VCs.

Impact investing organizations like ImpactAssets have funneled venture capital to organizations led by women. As of year-end 2018, 39% of companies funded by ImpactAssets were led by women founders or CEOs. Women founders made up just 2.2% of funding by traditional VCs.

Similarly, asset managers in the impact investing space have significantly higher percentages of women. The ImpactAssets 50 (IA 50), a publicly available, online database of private capital fund managers that deliver social and environmental impact as well as financial returns notes that nearly 9 in 10 (86%) IA 50 managers have 25% or more of their investment professionals are women and/or from under-represented groups, while half have teams with 50% or more women and other under-represented groups, a significantly higher percentage than investment industry averages.

Deployment of alternative deal structures to align to different phenotypes of social enterprises.

Thane Kreiner, executive director of the Miller Center for Social Entrepreneurship, explains, “There is growing recognition that the appropriate impact investing vehicles differs for different segments or phenotypes of social enterprises. We see promising movement towards the development and deployment of alternative financial deal structures that better align to the nuanced needs of social enterprises.”

“The emergence of ‘blended capital’ structures forming around specific investment opportunities at the same time is some evidence of this trend,” he says. “Layered funds might pay the most risk-averse investors first but at a lower yield. In parallel, a handful of large post-Series A equity rounds (Angaza, Husk, PEG) demonstrates the viability of high growth social enterprises as one phenotype.”

“Bottom line: different segments need different capital models,” he concludes.

Greater attention to understanding the wide spectrum of impact investing.

Gary White, CEO of Water.org and WaterEquity, expands his thinking on this trend as follows:

For impact investors, the state of downstream investing really varies from sector to sector – with some sectors (like financial inclusion) very mature, and other sectors (like water and sanitation social enterprises) very early stage/nascent.  For those just getting interested in impact investing, it is important to understand that there are very different capital needs/demand and return expectations, depending on the stage of development. While the term impact investing is widely applied, there are significant differences between investment opportunities in terms of their impact profiles and trade-off of financial returns for social benefits.

Impact investing is trending towards a more focused thematic or sector-based approach as opposed to general micro and SME investments.

Jyoti Patel, global director for impact investments at Habitat for Humanity, sees first-hand how nuanced focus is changing the field.

“Aligning the need for capital to promote affordable housing, renewable energy, water and sanitation and similar sector focus is on the rise to create a more meaningful impact on families across the globe,” she says.

An explosion of new products.

Jake Raden, impact analyst at Swell Investing, explains, “Up until now almost all ESG/SRI products were just passively screened S&P500 index products with a few active mutual funds, but now we’re seeing a ton of ETFs actively selecting securities based on ESG data.”

He also sees increasing access to impact investing as a trend. “While you could always buy mutual fund shares from Calvert or Pax, sometimes they had really high minimums and other downsides from being mutual funds. Now with ETFs and SMAs available from impact investing platforms, these are much more accessible products for a larger group of people and increasingly in a digitally native experience.”

Joel Solomon, co-founder of the Renewal Funds, agrees. “There is an explosion of further creativity around using money for long term social change.”

“It’s becoming more collaborative and flexible rather than exclusive,” offered Daniel Jean-Louis, CEO of Bridge Capital in Haiti.

Impact Investing is increasingly getting drawn into the discussions about how to fix capitalism.

Nancy Pfund, managing partner at DBL Partners, an early investor in Tesla, adds, “It is seen by many as a way to make capitalism work better by driving investments to areas where social policies have not shown enough progress.”

Aliredha Walji, vice president of ShariaPortfolio, Inc., suggested that fund managers, in fact, have an obligation to use capitalism for good. “Impact Investing is moving the needle in the direction towards creating a more just and equitable society, where the bottom line is not the only factor being considered. Rather, it takes into consideration the effects of our actions on our environment. As practitioners in this space, we have a moral obligation towards our clients to keep in mind the world we are living in, and to try to use our platforms to enable good without compromising on values.”

Investors living in emerging markets are embracing impact investing

Dave Richards, managing partner at Capria, recently raised new, regionally focused impact funds in countries around the globe.

“Almost all of the initial impact investment risk capital came from investors based in developed markets,” he says. “We are now seeing a growing interest particularly from wealthy families in countries such as India, Kenya, Indonesia and others to invest for intentional scaled impact alongside commercial financial returns, especially in local, earlier-stage, high-growth companies.”

Philanthropic investment capital—passion-based and thematically oriented—is on the rise for impact investors. This risk-tolerant catalytic capital is critical for early-stage impact investments.

ImpactAssets’ Freundlich captures his second trend, noting the importance of philanthropic capital.

Whether it is climate change, poverty eradication, water and sanitation, or many other goals reflected in the UNSDGs and elsewhere, there is growing awareness that investment capital in philanthropic endowments—and particularly donor-advised funds—needs to move rapidly and fully to impact investing, rather than parked in the stock market doing neutral to negative on the impact scale.

This trend is illustrated by the growth ImpactAssets’ Custom Impact Investments, which in 2019 saw a record 108 impact deals totaling $17.34 million in private mission-driven businesses, impact funds and nonprofit organizations. Since 2011, ImpactAssets donor advisors have sourced and recommended $85.44 million in 589 direct deals at roughly $150,000 average per deal.

The space has attracted the attention of large PE platforms. Some of these groups have now raised funds and are members of ICM, fostering partnership with other, longer-active impact investing firms.

Emma Sissman, an analyst at SJF Ventures, explains this trend:

The impact investing space has attracted the attention of large private equity platforms and some like Bain, TPG, KKR, Partners Group and Jana Partners have now raised impact-focused funds. Impact Capital Managers, a new member association for private capital fund managers in the US and Canada investing for financial returns and impact, now serves as a network to connect these new, larger players with firms that have been dedicated to impact investing for many years.

 

There will be new trends to observe in the future. Growth is likely to continue, as Laura Callanan, founding partner of Upstart Co-Lab noted. “In the past week I've spoken with three investment committee chairs of endowed institutions who still don't ‘believe’ in impact investing. There is a long way to go despite the trillions of dollars of assets under management that have already moved to SRI and impact investing.”

Commenting on the impact investing trends, Matthew Weatherley-White, managing director and co-founder of Caprock, suggested an important trend among social entrepreneurs.

Three years ago, it was relatively rare for me to encounter an entrepreneur (outside of the social enterprise sector) to be using language that seemed tailored for the impact community. As a result, there was a lot of capital chasing relatively few ‘impact’ deals. Now, the entrepreneurs seem to have harnessed the language - if not yet the intent (at least not yet at depth) - of impact. This may be a craven ploy to expand the circle of potential investors... but I don't think so. I think that more and more entrepreneurs are doing their best to link mission to operations and seek impact (mission-aligned) capital in a structural way.

As impact investing continues to evolve, I’ll continue to connect with practitioners and thought leaders to gain insights into changes and trends.