Impact investment is tranforming the landscape of charitable giving

THE CITY of London has learned a thing or two about bad press in recent years. But attention moves on, as it always does, and in 2015 it has been the turn of charities to face tough headlines.

The days of leaving the voluntary sector to get on with its work away from the glare of publicity have been disrupted. Chief exec pay has been scrutinised, and some appalling fundraising tactics have been exposed. The public examination of Kids Company, and its mismanagement of donors’ money, drags on and on.

The good news is that major charity philanthropists – city bigwigs among them – can help mend some of the damage. Nearly 300 charitable donations of £1m or more were made in 2014 according to new data from the wealth managers Coutts, up from the year before. Two-thirds came from the capital, which means that London accounted for over £1bn in these mega-donations.

A separate study of cash-giving, conducted by City Philanthropy, estimates that Londoners as a whole give more than £5.5bn each year. This is philanthropy on a staggering level. Money isn’t always given evenly across causes and regions, of course. But even taking this into consideration, charities clearly have a deep swell of financial support to help them through the bad times.

So we can ask a different, more interesting question. What does all this money actually do? Or to be more exactly, what more could the same resources achieve?

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Impact Investing in 2016

Most impact investing insiders would agree that 2015 was a watershed year for this dynamic new field. Study after study showed high and rising market demand for impact investment solutions, driven by several increasingly important market segments such as millennials and women. New research by mainstream players such as Cambridge Associates and the Wharton School offered greater clarity around financial performance of impact funds. Several top finance firms, including Bain Capital, BlackRock and Goldman Sachs, entered the space. And thousands attended the myriad of impact investing conferences and events.

This momentum is likely to continue. With the U.N.’s recently enacted Sustainable Development Goals and the historic Paris Agreement on climate change, there is a strong sense that making the world a better place is no longer viewed as some lofty ideal strictly reserved for academics, policy wonks, and activists. On the contrary, global business leaders are demonstrating unprecedented private-sector commitment to addressing the most important social and environmental issues of our time. This, in turn, promises to open up a range of opportunities for impact investors to drive change at scale. Simply put, the moment that many impact investing pioneers and experts have been envisioning for years is finally here.

But despite these important tailwinds, impact investing continues to face its share of challenges. In thinking about the next phase for impact investing, I see a number of competing factors that could complicate its trajectory. In particular, here are three key tensions that are likely to define impact investing in 2016 and determine its progress for years to come.

First, in recent months, we saw a number of high-profile organizations and individuals enter the impact investing space in a major way. This trend seemed to signal that impact investing has become an elite field that is highly desirable and dynamic. But this initial impression masks a stubborn reality at many organizations—a sense that impact investing is still an emerging area that hasn’t fully captivated the hearts and minds of the rank-and-file of the financial services industry. With this in mind, one of the primary goals in 2016 should be to cement the status of impact investing as an elite area within the broader investment management universe.

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Alternative financing to hit $34 billion mark in 2015

Could surpass venture capital and angel investing

Alternative financing emerged following the 2008 global financial crisis. Two of these alternative financing mechanisms are peer-to-peer or P2P lending and crowdfunding where funds are raised online. The growth of alternative financing has been consistent since its introduction, raising $2.7 billion in 2012 across the globe by funding over one million online campaigns using all types of crowdfunding. Since then, amounts raised through alternative finance platforms each year have consistently increased by more than 100 per cent annually, reaching $6.4 billion in 2013 and $16 billion in 2014. Following this growth trend, alternative financing platforms could likely raise up to $34 billion globally by the close of 2015.

Projected growth

In 2013, amounts raised using alternative finance platforms exceeded the expected $5.1 billion mark by about $1.3 billion. A study by the World Bank in the same year projected that amounts raised via crowdfunding globally in developed economies would range between $90 billion and $96 billion over the next consecutive 25 years. This amount is 1.8 times the current size of the venture capital industry globally.

Growth in alternative finance has been driven partly by the entry of established businesses into the crowdfunding and peer lending space. At first, alternative finance platforms featured nascent firms that wanted to raise capital to fund their seed stages when it became difficult to obtain capital from conventional sources. With time, the industry took a leap and is now capturing the attention of well established businesses largely due to the cost-saving opportunities it presents and the speed at which fundraising targets are met.

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For Financial Advisors: Enhance Your Practice through Impact Investing

As financial advisors, you serve a greater good – the financial well-being of your clients. You are tasked with anticipating global opportunity and navigating change while striving to exceed your clients’ expectations. It is a tremendous responsibility with exceptional rewards. Advisors can be found among a family’s most trusted relationships, participating in critical decisions and providing the dual blessings of wealth: freedom and security.

We find a growing number of clients seeking to align their investments with their values. For financial advisors, this trend coincides with the rise of impact investing, a market with the potential to reach $1 trillion by 2020, according to JP Morgan and the Global Impact Investing Network.1 Impact investments are investments made into funds, companies, and organizations with the intention to generate measurable social, economic, and environmental impact alongside a financial return.

Industry studies indicate that developing an impact investment offering is a critical element to better meeting the needs of your clients. According to the US SIF 2012 Report on Sustainable and Responsible Investment Trends in the United States, 72% of advisors stated that fulfilling client demands was the top reason they are incorporating environmental, social and corporate governance factors into their investment analysis.2 According to the U.S. Department of Education, women control 60% of wealth, and their numbers are growing at twice the rate of men’s – prompting estimates that by 2030, women will control two-thirds of wealth in the U.S. In the U.S. Trust study, 65% of women respondents believe it is important to view investments through the lens of their impact on society and the environment.

Figure 1: Reasons for Incorporating ESG Criteria into Investments, % of Money Managers Surveyed

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