> Posted by Anne Ackermann, Marika Canonica, Emaan Mahmood, and Laura Spicehandler, Credit Suisse Virtual Volunteers
Why are investors in some countries so much more involved in “impact investing” – including microfinance – than their counterparts in other countries? Investing in microfinance in developing and emerging markets has gained more traction in certain continental European countries, for example, than it has in the United States and United Kingdom.
Last year the CFI undertook a project in partnership with a group of “Virtual Volunteers” from Credit Suisse to examine how legal and tax frameworks in various countries influence investors’ willingness to invest in microfinance. The Credit Suisse Volunteers examined the policy and regulatory frameworks surrounding impact investing, particularly in microfinance, in five countries: Luxembourg, the Netherlands, Switzerland, the United States, and the United Kingdom. Volunteers also conducted interviews with a variety of actors from impact investing in each country.
This describes some features of the framework for impact investing in the U.S. and U.K. A subsequent post will examine the European countries – Luxembourg, Switzerland, and the Netherlands – in an effort to illustrate the differences.
The challenges faced by U.S. and U.K. investors are similar. They include lack of track record for impact investment funds, lack of market infrastructure (advisory services, corporate finance function, etc.), and a lack of transparency in the sector.
The United States is currently the farthest behind its European counterparts in terms of international impact investing, yet an expressed interest in the field has emerged over the past few years, particularly from investors seeking a guaranteed return on principal for low risk investments. A survey conducted by Hope Consulting in May 2010 revealed that 48 percent of U.S. investors are open to impact investing, though only 12 percent currently invest.
Regulations in the United States do not favor impact investing in international microfinance institutions (MFIs) or many other developing world organizations. Retail investors can only invest in registered securities that are in full compliance with federal and state regulators. Substantial infrastructure and financial resources are needed to qualify and register, so as a result, most impact-investing intermediaries have not sought to attract retail investors, choosing instead to focus solely on the accredited investor market, which is free to invest in unregistered securities. For institutional investors, the size of microfinance investment vehicles (MIVs) creates a barrier, as most are small. Many institutional investors in the United States have a minimum investment requirement of US $10-15 million. There is also a lack of awareness surrounding impact investing, as some investors in the U.S. still view microfinance and other social enterprises as being funded by donations and grants, rather than as an investable area allowing for double bottom line returns and portfolio diversification.
Similarly, the range of funding and investment mechanisms in the U.K. social investment market is limited, and remains dominated by grant money. The development of impact investing in the U.K. will continue to depend on the support of subsidies until greater awareness, better track records, and more effective intermediation can facilitate the emergence of a differentiated marketplace.[1]
A recent development is the appearance of social impact bonds (SIBs). Originated in the U.K. and now appearing in the U.S., the SIB is a new financial instrument that aligns private investors, nonprofit organizations, and governments to provide capital for socially-beneficial services, particularly in a domestic context. Through SIBs, investors can provide capital to nonprofit organizations to implement social programs that reduce governmental expenditures. If an independent evaluator determines that pre-specified social outcomes have been achieved, the government repays investors their principal and a rate of return; otherwise, investors lose their capital. Companies such as Social Finance, which originated in the U.K. and now works in the U.S., are currently working with a number of state governments interested in launching these social bonds.
Another recent development in impact investing in the U.S. has to do with defined contribution (DC) pension funds. A report released by Mercer and the US SIF (The Forum for Sustainable and Responsible Investment) in September 2011 found that the number of DC retirement plans in the United States offering a socially responsible investing (SRI) choice could double in the next two to three years. DC pension funds that include SRI options have arisen mainly because of employee requests and efforts by non-profit, mission-based or public organizations to align investment options with organizational missions. As awareness and education grows in this market, there will be more opportunities for SRI options to be available in DC plans.
In the United States and United Kingdom, the impact investing community can learn from the European example and seek more favorable tax structures. At the same time, impact investing advocates should work to increase transparency by collaborating with ongoing initiatives (such as the Global Impact Investing Network) to increase availability of data regarding the returns from microfinance investments. As the field of impact investing progresses, potential investors will increasingly demand this information, so it will be beneficial to offer transparency from the start.
Stay tuned for the next blog post in this series, which will discuss impact investing in Luxembourg, Switzerland, and the Netherlands.
1 CAF Venturesome, The Impact Investor’s Handbook, 2011.
Image credit: hangartheatre.org
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