Making a case for Impact Investing returns

A recent survey by the Centre for Effective Philanthropy has found that although many foundations are engaging (41%) or plan to engage with Impact Investing (6%) the amount deployed is still quite small averaging 2% of the endowment and 0.5% of program budget.

Both the foundations that do not currently plan to engage with Impact Investing and the small amount actually deployed by those that do certainly has something to do with perceived returns.  In the survey, 86% of the CEO’s surveyed said achieving a financial return was very important when making decisions about investing the foundations’ money, whereas only 36% said achieving philanthropic goals was very important and only 8% said investing in companies or organizations that align with the foundations’ values and/or mission was very important.

From this data and our experience working with stakeholders, it is clear that Impact Investments are seen to be more risky from a financial perspective than traditional investments.

But do impact investments really mean taking sub-par financial returns?

Although the level of data we currently have is low compared to the overall market, we are beginning to have access to data points and trends that imply Impact Investments & Sustainable Investing principles do not automatically underperform the market.

In fact, according to the Cambridge Report [Introducing the Impact Investing Benchmark] that was published this June, impact investing funds (started between 1998 and 2004) that raised under $100 million returned a net internal rate of return (IRR) of 9.5% to investors, handily outperformed similar-sized funds in the comparative universe (4.5%).

These smaller impact funds also outperformed impact investment funds over $100 million (6.2%) and funds over $100 million in the comparative universe (8.3%).

In the larger analysis, emerging markets impact investment funds returned 9.1% to investors versus 4.8% for developed markets impact investment funds with those focusing on Africa performing particularly well (9.7%).

In the public markets, MarketWatch reported in May that the social index Domini 400 (MSCI KLD 400) returned an average annual total return of 10.46% compared with the S&P 500’s 9.93% since 1990.

Certainly the jury is not out yet, and the recent ending of the New York City Social Impact Bond with Goldman Sachs losing $1.2 million of its investment shows that impact investing can be as tricky as traditional investing, but we are starting to have more and more data that says that returns may just be commiserate with this risk and philanthropic CEOs should certainly sit up and take notice if they can fulfill their philanthropic mission in an even greater way through putting more of their endowment into impact investing.

By: Aunnie Patton, Innovative Finance Lead at the Bertha Centre. 

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