Impact investing: Harbinger of A Brighter Future and A Friendlier Bond Market?
inancial crises come and go. The bond market’s reputation endures. In the 1990s, Bill Clinton’s campaign advisor James Carville said, “I used to think if there was reincarnation, I wanted to come back as the president or the pope … But now I want to come back as the bond market. You can intimidate everybody.”
Two decades on, the bond market seems no less intimidating. “An investor who went from the stock market to the bond market,” observes Michael Lewis in The Big Short, his account of the global financial crisis of 2007–09, “was like a small, furry creature raised on an island without predators removed to a pit full of pythons.”
Such observations may seem entertaining but irrelevant in countries like India, where the mix of financial assets favours stocks over bonds by 45 % to 19 %, in contrast to the United States, where the mix favours bonds over stocks by 47 % to 35 %. Exclude government debt and the contrast grows starker. In 2006, before the crisis, private-debt securities constituted 36% of all financial assets in the United States versus a mere 2 % in India. And the denominator, remember, was larger in the United States, where financial assets amounted to $56 trillion versus less than $2 trillion in India.
Economic historians, understandably occupied with efforts to understand the crisis we now know was around the corner, can be forgiven for overlooking an event that may well take the edge off future crises: the International Finance Facility for Immunisation’s (IFFIM ) inaugural offering of bonds, which took place on Nov.14, 2006, in London and succeeded in raising $1 billion.
With some $70 trillion of bonds outstanding at the time, raising $1 billion may not seem like much, but there was something special about IFFIM’s bonds.
It was not their pedigree. IFFIM’s bonds were rated triple-A by the major rating agencies, but so were many others. Nor was it their price, for IFFIM’s bonds cost about as much as other sovereign and supranational issues.
What was unusual was that the proceeds of IFFIM’s bonds would pay for vaccines and health services in 72 of the world’s poorest countries. If its mission to raise $4 billion is successful (and later issuances have already brought the cumulative total to $3 billion), IFFIM will have succeeded in protecting 500 million children through immunisation.
That’s impact investing.
There are, of course, more meticulous definitions. Jessica Freireich and Katherine Fulton of the Monitor Institute, a think tank, define impact investing as “Actively placing capital in businesses and funds that generate social and/or environmental good and at least return nominal principal to the investor.” In 2009, Freireich and Fulton estimated that impact investing could, over the next five to ten years, grow to account for 1% of assets under management worldwide—about $500 billion.
Another way of getting to grips with impact investment is to ask how much money could be invested profitably in businesses serving those to whom C.K. Prahalad drew attention in The Fortune at the Bottom of the Pyramid. One team that took this approach was led by Nick O’Donohoe of J.P. Morgan and Antony Bugg-Levine of the Rockefeller Foundation. They defined impact investments as “investments intended to create positive impact beyond financial return” and found that “the market opportunity for [impact] investment is vast.” Even though they examined only five sectors of special importance to those living on less than $3,000 per year (water, health, housing, education and financial services), the researchers concluded that, over the next ten years, these sectors could absorb $400 billion to $1 trillion in capital and generate $183 billion to $667 billion in profits.
The emphasis on profits is no accident. “We raise charitable funds,” writes Jacqueline Novogratz, founder of Acumen Fund, a pioneer among impact investors, “but instead of using the money for giveaways, we make careful investments in entrepreneurs who are willing to take on some of the world’s toughest challenges. … We’ve seen what can happen when an entrepreneur views the market as a listening device that reveals how to tailor services and products to the preferences of low-income people who are viewed as consumers, not victims. The entrepreneurs are driven to build systems that can eventually sustain themselves and, ultimately, serve a wide swath of the population. The returns on such investments can be enormous.”