- GIIN: As the US Government’s Development Finance Institution (DFI), what do you see as OPIC’s role in impact investing?
- Elizabeth Littlefield: Every single one of OPIC’s staff is committed to helping developing countries improve the quality of life of their citizens, to making the planet healthier, to pushing deeper into lower income markets, and to using our financial and risk mitigation tools to stimulate private capital into sustainable economic development. We really see our role as filling market gaps that the commercial banks can’t fill. Impact investing is about harnessing private investment in the service of social and environmental benefit, and catalyzing business to improve the world. In many ways, DFIs like OPIC, IFC, FMO, and Proparco were among the first investors whose very business model was designed to generate both a positive development return and a financial return. Over the years, these DFIs have shown that investing in development--done with rigor, commercial principles, high standards, and smart risk mitigation--can be financially self-sustaining. So, the DFI model was an important precursor to impact investing. Your 2014 GIIN and J.P. Morgan survey underscored this in one powerful statistic: 42 percent of the investments in impact investing portfolios were made by public sector DFIs.
- GIIN: Last year, there was a lot of excitement and talk about OPIC’s work to identify your portfolio’s pure impact investments. Can you talk about the portfolio tagging process, what that entailed, what drove it, and what OPIC was looking to achieve?
Yes, we thought it would be useful for ourselves and others to learn what part of our $18 billion portfolio was generally undertaken to have a development impact and what part of it was invested in enterprises whose very business model was designed to solve a social or environmental problem. We thought transparency about our internal process and findings might be useful to others in the field.
In a nutshell, we found that, of our $3 billion in annual commitments, (all of which are expected to have a positive development impact), a large subset were in what we called ‘impact sectors’ – or sectors most strongly associated with an intent to generate high development impact – like education or healthcare and off-grid renewable energy. Only a unique subset of those were what we considered to be "impact intent enterprises," whose core business model expressly sought to have a positive development impact. This ‘impact intent’ enterprises subset comprised 16 commitments totaling $230 million.
- GIIN: What did this tell you about where the market is going in impact investing?
- EL: The results of the tagging process showed us that, despite our efforts and risk-tolerance, we had not found many of the very purest form of impact investments to support. Part of this is specific to us: OPIC lacks the grant instruments or first-loss capability these enterprises often need. But it is also consistent with what we see in the broader market of capital flows. The great news is that, because of the awareness-raising work of the GIIN and others, a number of large mainstream financial advisors are now --at long last--coming to us and saying their high net worth individuals and private clients are asking for impact investing products. But the “pure intent” end of the impact investing spectrum doesn’t offer the kind of investment products, with sizes, liquidity, and audited financials that they’re accustomed to offering to their clients. Therefore, many are looking to create sector fund vehicles to pool commercial investments in sectors--such as water funds, forestry funds, or renewable energy funds--that will appeal to impact-oriented investors. I expect the capital flows into these strategies to be large and to grow quickly, which is exciting.
- GIIN: You mentioned that other DFIs are starting to do similar tagging exercises—what has the feedback been like?
- EL: A number of agencies have consulted with our team on our approach, and several have started to develop similar systems. They and other market players have been appreciative that we came clean on the fact that we’re having a hard time finding many small-scale enterprises at the pure impact end of the spectrum, despite our efforts.
- GIIN: What about other efforts to create transparency?
This is just the beginning. Transparency around financial performance and risk adjusted returns in impact investing is crucial to making the case and I am so glad the GIIN is so focused on this. It has been challenging for all of us because, on the equity side, one needs exits to realize returns. Yet with no secondary markets, exits are hard and slow. On the debt side, with our long term loans we won’t be able to assess financial performance for years to come. That said, on a current performance basis, our portfolio of pure impact intent investments is performing in line with our other small and medium enterprise investments.
Also, to be honest, the tagging system was an in-depth manual task that required many people throughout our Agency. In the last few years, OPIC has invested deeply in management information systems and streamlining processes, automating processes, and shifting information to the web. Next year, we will roll out an agency-wide management information system which has been two years in the making. This new system will enable such exercises to become much easier in the future.
- GIIN: Is there one recent deal that you were or are particularly excited about?
- EL: There are many! We are partnering with Omidyar Network and other investors to support Bridge International Academies, which is providing primary school education to hundreds of thousands of students in Kenya for six dollars a month per student. Bridge is already generating test results that are superior to that of public sector alternatives as well as far lower rates of teacher absentees. Another is Arkansas-based Westrock Coffee, to which we’re providing support for a coffee milling project in Rwanda that is truly transforming Rwanda’s coffee sector by investing in training for its farmers around sustainable farming and business practices, and by connecting them directly with international buyers.
- GIIN: What are you seeing in the market for impact investing products? How has it changed over the years?
I believe that the impact investing sector is going to continue to grow. Perhaps not as fast as many would prefer, but I certainly accept the fact that Millennials and younger generations care deeply about investing their money in a way that’s consistent with their values. Consumers are opting for sustainably produced goods. Graduates are choosing purpose-driven jobs even at the cost of lower salaries. So it’s clear that sustainability and these values are permeating our society as never before. Into that open-armed market comes impact investing.
I believe the time has truly come for all variations of values-based investing. If we get the industry infrastructure and ‘plumbing’ right, and the right types of capital aligned with the stages of organizations growth, and we keep expectations in line with reality, this growth can be powerful.
Also, in terms of what we’re seeing in the market, I’ll reiterate that in the last year we have seen the arrival of the long awaited retail demand manifesting itself through financial advisors, investment banks, traditional portfolio managers, and fund managers. Clients want to invest in impact products, and to meet that demand, financial institutions are turning to the creation of mutual funds in sectors that can make important contributions in social and environmental objectives. So we anticipate that a significant amount of capital will be flowing into those kinds of investments: through vehicles invested in sectors that are impactful, but where the underlying investee company investment isn’t necessarily purpose-driven.
- GIIN: How is OPIC addressing any challenges and market gaps?
The most basic challenge is around the lack of agreement around the definition and goals of impact investing. The GIIN has done incredibly powerful work on both. However, there’s also a lack of clarity around the definition of success that can create friction, unrealistic expectations, and potential disappointment. What financial returns are realistic? How do we value stability of returns? What growth rates are realistic? We hope to contribute to learnings around this by gathering more robust data and hard evidence of risk-adjusted returns over the long run.
Regarding market gaps, OPIC spent a lot of the last year focusing on filling capital gaps. Just a couple of examples. First, we have developed a special product that we’re backing with our own capital which can provide financing to early stage enterprises that would not meet our standard investment criteria. Second, we are developing a number of partnerships that enable investors to invest equity alongside OPIC’s financing. Our Aligned Capital Program seeks to match potential investors with innovative entrepreneurs seeking financing for projects. The program gives interested investors a view into OPIC’s potential deal spectrum of developmental, impact sector and impact intent projects.
Third, we’ve developed a process to accept projects with bespoke structures that don’t fit squarely within either of OPIC’s traditional financing programs or traditional investment funds programs.
- GIIN: What are your thoughts on impact investing, and keys to making it a sustainable uptake as an investment approach?
We need to understand that impact investing will be a broad spectrum, with different investors along the spectrum making very personal choices about their objectives. The more open-minded and embracing we can be of different approaches to sustainable investing, whether it be SRI or whether it be impact investing, the better off we’re going to be.
I would also say, as we look to build the market over time, I’m cautious about letting expectations run ahead of reality because when expectations run higher and higher, disappointment and backlash are sure to follow. I hope that we continue to emphasize the importance of responsible, steady growth in values-based investing. We’re talking about nothing short of changing the way the world thinks about capital and that kind of revolution doesn’t happen overnight. The way capital markets are beginning to operate, the way financial markets are beginning to operate, is an awesome, enormous, seismic transformation that is allowing our values to infuse the way we manage our money. That requires bold, ambitious collective action, but it also requires patience and cool heads. It will take a generation.
A note to readers from the GIIN:
Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.