Impact Investing: What is the Path to Scale?

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.

An issue many nonprofit and for-profit groups face is how to get beyond the pilot stage and scale up efforts. This is the crux of the issue in impact investing and was the focus of the “Bringing in Big Money” panel at this year’s Skoll World Forum.

Skoll World ForumIn many areas of EDF’s work, we’ve found that the capital needed for the issues we care about – turning the corner on climate emissions, bringing fisheries under sustainable management practices, and protecting natural resources – outstrips the availability of philanthropic and public sector budgets.

On the panel, Elizabeth Littlefield, president and CEO of the Overseas Private Investment Corporation (OPIC), commented about how amused she is by how widely quotes from academia range on the amount of capital that can be accessed – from the relatively small numbers of the “derisive minimizers” to the large estimates of the “breathless maximizers.”

Rather than focusing on the absolute amounts, she looks at the leverage entities like OPIC can create through guarantees, insurance and, in some cases, direct financing itself. These efforts by OPIC and multilateral institutions have led to a dramatic shift in the ratio of public sector to private sector finance. In contrast with 20 years ago when public sector grants exceeded the amount of private investment capital, today, it is the reverse $7 of direct private investment for every $1 from the public sector.

What, then, are the keys to amplifying this trend and repeating it in other sectors?

Andrew Stern, Executive Director of the Global Development Incubator, offered three takeaways from his research :

  • efforts to reduce transaction costs;
  • addressing information asymmetries, such as availability of data from comparables; and
  • testing new instruments, such as impact bonds.

Willy Foote, CEO of Root Capital, built upon that further and highlighted the type of collaboration that also has to occur – from investors willing to invest in long-term needs, such as infrastructure, to longer-range commitments of buyers of products for financial and technical capacity building to the investible entities, making them better able to manage the investments and generate a revenue upside. Charlotte Oades, Global Director at The Coca-Cola Company, seconded that, highlighting the importance of the “golden triangle” – government, civil society and business.

A few compelling examples of capacity building include Starbucks helping growers improve their practices so they can be certified Fair Trade and Organic to tap into price premiums, and nonprofits like Root Capital working with coffee organizations to teach them how to work with cash flows, balance sheets, and income statements.

Elizabeth Littlefield summed up the panel well – mobilizing private capital is about looking at the investment pool on a spectrum, and understanding how the different players can be mobilized to create returns that are likely, stable and liquid as well as impactful. We and others working in the impact investment space should take this advice to heart as we work to attract large-scale private capital to our issues.

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