Portfolios That Make a Difference: John Simon on Impact Investing

A new approach to investing  is seeking to connect investors with businesses that both make a profit and provide goods and services that advance development. Just what is impact investing? How big can it  get? I’m joined this week by John Simon, a visiting fellow here at the Center for Global Development. Together with co-author Julia Barmeier, he has written a new report that explores the potential of impact investing and offers recommendations for a variety of stakeholders.

John begins by defining impact investments and explaining how they differ from socially responsible investments and from corporate social responsibility programs. Beyond avoiding businesses that engage in morally questionable practices or diverting a portion of corporate profits towards charitable ends, impact capital seeks out companies whose core mission is development. In short, says John, “impact investments seek both a financial return and a social return, and they hold themselves to account for both.” He gives the example of a company that clears overgrown rubbertree plantations in Liberia, improving the land for local farmers and exporting the wood to Europe as a renewable energy source.

This nascent financial industry has attracted a monumental amount of buzz. A new JP Morgan report declared impact investments a new asset class, and projected that the sector would grow from a few billion dollars a year today to as much as $500 billion a year within the coming decade. At that level it would be about four times current official aid flows. The potential benefits are huge. However, as John wrote today on the Acumen Fund blog, allowing the hype around impact investing to outstrip the reality would be deeply harmful.

“Failure to produce performing investments with quantifiable results could create a backlash damaging the brand for years to come.  It can also lead to some bad results on the ground or, worse, lowering our standards for impact to the point where the distinguishing feature of impact investments is that they cannot attract commercial capital.”

Listen to the Wonkcast to hear John’s recommendations for what practitioners, development finance institutions, and regulators can do to help impact investing live up to its hype. For full details, read the new report.

Have something to add? Ideas for future interviews? Post a comment below, or send me an email. If you use iTunes, you can subscribe to get new episodes delivered straight to your computer every week.

My thanks to Wren Elhai for his production assistance on the Wonkcast recording and for drafting this blog post.