Impact Investing on the Rise: Interview with the GIIN's Abhilash Mudaliar

The Global Impact Investing Network (GIIN) has published the seventh edition of its Annual Impact Investor Survey report, which shows continued progress in the dynamic impact investing industry, officially established only 10 years ago. The survey sample size and reported assets under management are the largest ever, illustrating the growth and growing engagement of the impact investing market. Additionally, investors report both widespread satisfaction with the financial and impact performance, and plans to increase impact investing activity.

Highlights include:

• In 2016, the 209 participants in the survey reported a total of $114 billion in impact investing assets under management, a new floor for the size of the impact investing market.
• Survey participants committed a total of $22.1 billion in 7,951 impact investment deals in 2016 and plan to increase capital committed by 17% to $25.9 billion via 9,557 deals in 2017.
• Fund managers, who play a pivotal role in the impact investing landscape, raised $11.1 billion in 2016, with plans to raise $18.5 billion in 2017.
• Impact Investors who responded to the survey reported that returns met or exceeded their expectations in both impact (98%) and financial performance (91%).

This year the GIIN also asked survey respondents about specific topics related to the development of the industry. Key issues addressed in the report include:

• Entry of large-scale financial firms into impact investing
• Progress on key indicators of market growth
• Commitment to the Sustainable Development Goals
• Continued commitment to impact measurement

I spoke with Abhilash Mudaliar, Research Director at the GIIN, about the survey, the current state of impact investing, and future opportunities in the impact investing field—Jason Howell

3BL:  What is leading to the growth seen in impact investing?

AM:  There are a range of factors. Growing client demand is certainly one. People want to make an impact with their investments. Also, money managers want to satisfy investors. Capital markets have a central role in helping impact investing—at the end of the day, people want their money to perform but also to have an impact.

This is our seventh annual survey and the preeminent source of information in the industry, it’s always eagerly anticipated. We had the largest-ever number of respondents, 209, who in aggregate manage $114 billion in impact investments. The markets are very diverse in terms of geography and sectors: there is approximately a 50/50 split between developed and emerging markets and sectors include financial services, energy, housing, healthcare, and food/agriculture. Equally important are the number of respondents satisfied with performance and impact (91% for performance and 98% with impact).

3BL:  In terms of returns—the vast majority of respondents reported they are targeting market or submarket returns. Do you see return targets shifting with the increase of capital in the industry and will attracting larger financial firms change this dynamic?

AM:  Great question. Typically, 60% of respondents target market rate, the rest below. From our research, below market capital plays a critical role in the industry and will continue to do so, although with new entrants this percentage may move more to market rate. One role submarket plays is as a bridge between philanthropy and investing. There is always the ongoing debate between finance or impact first. Regardless of one’s financial return targets, impact goals remain a central motivation for making impact investments.

3BL:  In terms of larger firms' entry into impact investing and mission drift, do you see this dilution as a possibility as real money financial firms enter the sector, and if so, what are ways to prevent it?

AM:  We define mission drift as where investors may not have an intentional or sustainable commitment to longer term impact. There is always the possibility of the risk for people to label their investments impact. For the large part our experience is that people have a real intention of making an impact. The risk does exist, but on the positive side, the majority of respondents are bullish on larger firms entering the sector, which should lead to modernization of the industry and new capital. There should be an element of “self-policing” with new investments. Overall, it should be a net positive for larger firms and new capital to enter impact investing.

3BL:  90% of respondents reported some or no competition for investments. Does this dynamic change with more money flowing into the sector, especially given that most investments at the venture or growth level require smaller amounts of capital?

AM:  The scale of social and environmental challenges are vast. Currently, the supply of capital is still far less than demand. There may be more competition but with more capital flowing in, there is still an ample need that is unmet.

3BL:  In terms of investments, the percentage of capital allocation to public equities is currently relatively low. Do you anticipate more investments in this asset class as capital increases, and perhaps a movement to looking at companies who have some measure of social impact but not direct impact in the traditional sense?

AM:  Great question. People currently invest in companies that have a positive and direct impact and where they can have influence—and influence is certainly more difficult in large public company. With growing demand we would expect firms to develop public equity products to meet increased money in the sector.  

3BL:  The GIIN has been at the forefront of impact measurement. Is the industry moving towards more standardized or generally accepted measurements, or is there much work to still be done in this space?  

AM:  This is an evolving field/practice but is becoming much more sophisticated. The GIIN’s IRIS platform is the standard taxonomy and widely considered a building block for impact measurement and management. The GIIN is at the forefront of leading standardization and developing conventions for impact measurement, providing norms and guiding principles. Measurement is an important focus area for the GIIN.

3BL:  What are the current trends in impact investing, and what do you foresee taking place in the next 12-18 months?

AM:  2017 is the 10-year anniversary of coining the term “impact investing”. The GIIN is embarking on a several-month consultation initiative, speaking to impact investors and policy makers to develop a bold plan for impact investing. The GIIN is also continuing to focus on building a convention for impact measurement. We want to describe what constitutes an impact investment and be able to show transparency. Finally, the GIIN is committed to promoting the impact investing industry and helping to increase new entrants, capital, and investments.