Impact investing: a preliminary analysis of emergent primary and secondary exchange platforms

Abstract

The purpose of this article is to present a brief synthesis of the impact investment market as it relates to barriers to the full development of this market. We examine some developments that have emerged to address these barriers. We include a brief overview of the impact investing field and the current landscape of social enterprises, the vast majority of which are non-profit organizations increasingly engaged in business activity. We address the lack of liquidity in this market and the need for secondary markets that enable investor exit. We present a preliminary summary of findings on a few exchange platforms – primary and secondary – that have emerged very recently to coordinate this market in several countries.

Keywords:

• impact investing
• social finance
• primary markets
• secondary markets
• exchange platforms
• social enterprise
• not-for-profit business

Acknowledgements

The authors thank Ashrafee Hossain, a PhD candidate at the John Molson School of Business, Concordia University, who collaborated with us in the early stages of this research; and the practitioners whose work is mentioned in the paper and whose contribution was crucial.

Notes

CURA brings together numerous researchers and practitioners across Canada, the United Kingdom and the United States engaged in responsible investment initiatives that now includes a broad range of activities with a complex nomenclature to describe processes of financial innovation within numerous organizations and institutions globally.

PRIs are investments that are made to qualified organizations to further the foundation's objectives, but – unlike grants – they also aim to generate financial returns, normally at below-market rates. MRIs are financial investments made in either for-profit or non-profit enterprises with the intent of achieving mission-related objectives and normally earning market-rate financial returns.

For example, the H.B. Heron Foundation invests 25+% of its assets in impact investing (Halliday, Penny, and Diener 2007).

In the United States, investments in PRIs are counted as part of the yearly disbursement quota for the duration of the investment (see Internal Revenue Service). In addition, introduction of the General Limited Liability Company Act in several states, which allows for the incorporation of low-profit limited liability companies (L3C), further expands investment options of foundations that are aligned with their mission, especially their MRIs.

The extensive and growing literature documenting social enterprises by and large refers to these new hybrid business forms, with exceptions. Indeed, social purpose business and innovations such as Benefit Corporations distinguish private enterprises with social objectives through codification and/or legislation. Still, the majority of social enterprises are non-profit and the important empirical studies internationally confirm this to be the case. Among other references, see Bugg-Levine and Emerson (2011).

In May 2012, British Columbia passed the Business Corporations Act to recognize a new business model known as the ‘Community Contribution Company’ (C3). This new model, the first one in Canada, is roughly based on the structure of Community Interest Companies in the UK. C3s blend aspects of both for-profit and non-profit ventures together in an effort to distinguish a commercial enterprise that provides rendering socially beneficial services.

Collective ownership is important to ensure stakeholder governance. As social enterprises become more prominent and engage in activity that brings social and/or societal value, governance is a critical issue. In contrast to owning shares, investment in these enterprises should, therefore, offer returns without ownership.

These investments have leveraged over $200 million in total investment, creating and/or consolidating approximately 1,700 jobs and providing 200 opportunities in training businesses (http://www.fiducieduchantier.qc.ca/).

The New Markets Tax Credit was introduced in 2000 in the United States as part of the Community Renewal Tax Relief Act 2000. It provides tax credit incentives to investors for equity investments in certified Community Development Entities, which invest in low-income communities (US Department of Treasury; http://cdfifund.gov/what_we_do/programs_id.asp?programID=5).

http://www.crfusa.com

Federal Reserve System, http://www.federalreserve.gov/communitydev/cra_about.htm. In Quebec, the critical and historic role of public policy in developing social finance has been noted by researchers. Financial innovation in Quebec is the result of enabling policy measures and the acknowledgement of the need to work with practitioners to develop these measures.

This is a sharp distinction from the perverse use of securitization in the subprime mortgage market that led to the recent global financial crisis.

Crowd-funding is a financing method that involves funding a project with relatively modest contributions from a large group of individuals. Usually done via the Internet, through a platform, it allows willing investors and funders, including individuals, to invest or donate to a profiled project.

http://www.bvsa.org.br/

http://www.ethex.org.uk

http://www.sasix.co.za

http://www.asiaiix.com

http://www.nexii.com

http://www.impactbase.org

http://www.ksix.or.ke

Some platforms are emerging to facilitate, in addition to impact investment, investments in private companies that meet specific environmental, social and governance standards; see e.g. Mission Markets in the United States. We decided not to include them for clarity purposes, as investments in publicly or privately held companies with good CSR policies do not belong to this impact investing category.

The findings reflect information existing, and conversations carried out, until the summer of 2012.

The Impact Reporting and Investing Standards (IRIS) is a set of standardized metrics that can be used to describe an organization's social, environmental, and financial performance. The metrics span an array of performance objectives and include sector-specific metrics for different areas. A contested issue with the set is that is it is tailored to the investment community and it is currently output focused, not able to capture outcomes. Therefore, the ability of investees to document social and environmental impact with this taxonomy may be limited. This issue is part of the measurement and metrics conundrum in the field more broadly.

Evenett and Richter (2011) present the current UK demand and supply mapped against the type of investee organization, investment instrument and investor types. See also Bug-Levine and Emerson (2011).

SharedImpact will enable secondary transactions of all forms and financial instruments in the sector, via a trading platform. This initiative will be launched in early 2013 in the UK, with later expansion to the United States.