IFC’s Gavin Wilson: Mainstreaming Impact Investing: How to Create a Market

The seemingly impossible can become doable.

Given the political and macro uncertainties facing us, it is not surprising that many investors remain focused on the short-term with a strong bias for liquidity. Nevertheless, at the same time, we continue to see a steady increase in the number of impact investors and the amount of impact investment.

Indeed, many of the largest global fund managers have over the last few years established impact investment funds where the focus is on promoting sustainable development. What will it take for impact investing to be scaled up? How do we turn a niche activity into a global market?

“A consistent focus on sustainability can give a company a five-year market advantage”

Sustainable development is just one area of focus for impact investors, but the sheer scale of the business opportunity that attends the UN Sustainable Development Goals is monumental. The Business & Sustainable Development Commission, on which I serve, estimates the global market opportunity at US$12 trillion, with as many as 380 million new jobs to be created if we do indeed achieve the goals by 2030.

These new markets will be seized by those businesses that spot the opportunities. Investing in sustainable production and services will in many ways define global business in the coming decades. The Commission’s analysis indicates that a consistent focus on sustainability can give a company a five-year market advantage. This is an important consideration for investors whether or not they aim for impact in their investments.

If the Global Goals are going to be implemented by private business, they will need to be funded by private capital. It is estimated that this will require as much as 5 per cent of the assets of the world’s institutional investors. How do we create a new investment market of this scale and impact? At least five types of action are needed.

First of all, impact investing has to be based on sound economic and financial thinking – right from the start. As it is now, it is often the case that impact investors seek a lower return on their investments compared with investors with a strictly commercial objective. However, in our experience at IFC, we do not see a trade-off between development impact and strong financial performance. Rule number one is that investments have to be based on a good business case in order to be sustainable in the long run. For impact investing to take off, it is important that we see more fund managers with a strong core set of financial skills entering the market.

Secondly, we need more data to build a powerful and evidence-based case for investing in sustainable development. Words and speeches are important to set the agenda, but they are not enough. It is key to have hard data and common standards to make the business case for sustainability – and the sustainability case for business. Stronger and more robust data on the link between good investments and sustainable development will also help to reestablish trust in the financial world and in the positive aspects of globalization.Thirdly, there is a particular opportunity for impact investors to focus more on inclusive business. By creating innovative business models, businesses both large and small can benefit their communities while boosting their bottom lines. Over the past decade, IFC has committed over US$14 billion to companies that work directly with people who live at the base of the economic pyramid—those who lack access to basic goods and services or who live on $8 or less per day. These inclusive businesses have integrated the poor into the fabric of their business models—creating new markets, enabling people to build their own livelihoods, and providing them with access to goods and services, often for the first time. This sense of promoting inclusive business must be at the core of impact investment.

Fourthly, we need to focus on the long-term systemic effects of our investments on markets. At IFC, we are trying to do this more strategically in both our investing and advisory businesses. By investing in projects and companies that help to create better functioning markets, we seek to catalyze other investment opportunities in the long run and crowd in more capital in the short run through providing co-investment opportunities for other investors. Development finance has been redefined and the mobilization of private capital is now at the strategic core of what we do. Consequently, to scale up this form of impact investing, it is essential to move beyond a narrow focus on project impact and focus strategically on demonstrating that sustainable investments really pay off for self-sustaining markets.

Finally, there is a call for regulatory reforms that promote long-term investment and avoid short-termism. This may be the most important point since sustainable development often requires a longer-term perspective. Institutional investors with long-term liability streams, such as pension funds and insurance companies, should be encouraged to match their liabilities with long-term assets. They are the natural providers of the capital that is required, for example in infrastructure investments.

These five actions will help create a deeper, broader impact investing market, but the sheer scale of the market development required remains daunting. Nelson Mandela once said that “it always seems impossible until it is done”. What gives me confidence is the additional market pull of the individuals on whose behalf the large institutions are investing.

According to a 2017 study by Morgan Stanley, no less than 86 per cent of Millennials – broadly defined as those born between the early 1980s and 2000 – have a preference for socially responsible investing, and Millennials are twice as likely to invest in a stock or a fund if social responsibility is part of the value-creation thesis. Extrapolate this trend forward a decade, add in the market developments described above, and we can see how the seemingly impossible can become doable.

Gavin E.R. Wilson is CEO of IFC Asset Management Company and serves as a Commissioner on the Business and Sustainable Development Commission.