Impact Investing: More than a buzzword
This interview with OPIC’s President and CEO Elizabeth Littlefield was featured on the Inter-American Development Bank’s Partnerships for Development blog.
With all the buzz surrounding impact investing, perhaps it is best to go back to the basics and define what can be a powerful mechanism for sustainable development. What is the definition of impact investing? And how can we further develop an ecosystem in which it can thrive? OPIC’s President and CEO Elizabeth Littlefield talked to the Inter-American Development Bank (IDB) recently about Impact Investing and why categorizing of these projects is essential as impact investing gains a more prominent role in development.
Q. There is still debate about the definition of impact investing, with some being concerned that investments with impact (vs. impact investments), will somehow be viewed negatively. How do you respond to this?
The first category, those with more traditional business models, should never be regarded as a pejorative designation. We want to be emphatic and unequivocal about that. That first category is a necessary core of our portfolio and will remain so.
We are not creating a contest, we are trying out a new lens. We are simply asking the question: if there is a new type of model in development finance, what is a constructive way to think about its scale and performance relative to others?
There are and will be many traditional investments with impact that have profound and far-reaching positive effects. Conversely, there will be some impact investments that do not prove viable. The more patterns we can unearth in that somewhat noisy data, the better our decisions will become over time.
Q. You are co-leading the Development Finance Institution (DFI) Working Group on Social Impact Investment with the IDB’s Executive Vice President, Julie T. Katzman. How can the members of this group help develop the impact investing ecosystem?
Let me say first and foremost that the working group is very fortunate to benefit from Julie’s leadership. She has been very thoughtful about these issues. There is a phenomenal amount of enthusiasm around impact investing. People want to explore and develop this field, which we should encourage. At the same time, we have to be able to distinguish bona fide impact investment opportunities from those without a bankable business model, which is to say projects still in need of grant support, and from those traditional business models that may just carry an impact investment brand. For these genuine opportunities, we want to ensure that our criteria for qualification are solid, our financial instruments are appropriate, and there are mechanisms to help them collectively establish a credible track record. If we are able to sustain credible growth, the future looks very bright. There are scores of creative, dynamic people who are committed to seeing these investments and businesses become a force for good.
Q: OPIC mobilizes private capital to help solve critical development challenges and it is the largest impact investor in the US government. What is the role of impact investing in OPIC’s work?
Everything OPIC does it does with the private sector, and every project is expected to have positive impact contributing to sustainable economic development in that country, be it in Africa, Asia, Latin America, or the Middle East. As the U.S. Government’s development finance institution, that is our mission. We invest carefully to evaluate the type and scale of this impact as each project proceeds. In the case of our impact investing portfolio, this development objective is a core, hard-wired driver of the business model. Impact investors have an explicit and inherent intent at startup to create development impact and to do so while generating robust financial returns. That’s why we review this “impact investing” to ensure clear intent. For me, one quick gut check is: “Could this sponsor be finding a lot of easier ways to make money? Is addressing a social issue while generating a profit at the heart of their efforts?”
Q: You recently tagged your portfolio by type of impact. Can you explain what this means and why you did it?
The idea is actually fairly simple. As a development finance institution, you always want to know as much about the performance of your portfolio as you can. You want to know how sectors fare when compared with each other, how regions fare, how different types of financing compare. Across all projects, you want to know where you could have, or are having, the most development impact.
A few years ago, we started working with impact investors, which have a new type of business model, so we decided it might be useful to create a new framework for comparison, a taxonomy if you will. This involved sorting investments into three categories.
First, we have our overall commitments last year of $3.9 billion, all of which are designed to have some type of impact, even if the investor did not start with that intention.
The second category is a subset. It includes companies with somewhat traditional business models that aim to invest in extremely challenging, capital-starved sectors, such as housing, sanitation, education, health care, renewable resources and SME lending, among others. We call those “high impact” sectors, and those commitments were about $2.7 billion.
The third category is an even smaller subset–$222 million. These “impact investors” not only aim to be financially viable in high-impact sectors, but their entire business model is dedicated to achieving that purpose. These investors declare an explicit intent that addressing a development challenge is the purpose of their business.
We will use this categorization by type of impact as one tool to track and inform our investment decisions, but it would never dictate them. We simply wanted to do this to bring more clarity to the ongoing debate about the definition of “impact investing.”