Innovation

Misalignment of Capital and Social Impact Causes

October 29, 2019

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The pension funds and institutional investors have the trillions in capital to deploy. However, pensions, in addition to generating sufficient returns, are most interested in cash flow patterns to meet future pension liabilities. Unfortunately not all impact investing projects meet the minimum rate of return or cash flow requirements of pensions. Moreover, there is disdain by pension funds to be sold products by asset managers. Keep in mind that ESG or impact products marketed by fund managers are not the same as proactively investing in SDGs. As such, worthy impact projects that desperately need capital to pursue greenfield projects struggle to raise funding.

Classification of Impact Investing

Lumping SDG-related projects into the broad category of impact investing is not helpful. As there are style investing in investment classification, such as large-cap, growth, income, international and emerging markets, impact investing would benefit greatly through style classification. For pension schemes, they are interested in cash flow or income generating investments. Whereas private equity and venture capital are most interested in rate of return or IRR and multiples. Some impact investing projects might not have neither income nor growth and it’s important to designate the appropriate style category to properly market the projects.

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