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Tag, You’re It! How to Categorize Impact Investments and Why it Matters

By - Sep 4 2014

children-on-the-beachsmallTagging and categorizing deals is all in day’s work when you’re an impact investing pioneer. Just ask Elizabeth Littlefield, President and CEO of the Overseas Private Investment Corporation (OPIC), who recently shared her insight on impact investing with us. In her last post for Partnerships for Development, she provided clarity on the definition of impact investing and emphasized the importance of building an ecosystem in which this innovative mode of development financing can thrive. Today, she joins us again to explain the role of impact investing in her organization, and why tagging is essential as impact investing gains an ever more prominent role in development.

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.”

Check out Part I of our interview with Ms. Littlefield here.

About OPIC: OPIC, an organization that shares the IDB Group’s partnership approach to development, collaborates in the impact investing space with institutions such as Omidyar, Capricorn, Root Capital, Medical Credit Fund, and Citi, with whom it has partnered on 16 risk-sharing frameworks to guarantee $2.8 billion in emerging-market lending over more than a decade of cooperation.

Elizabeth Littlefield smallAbout Elizabeth Littlefield: Elizabeth L. Littlefield was appointed by President Obama as the President and CEO of OPIC, an Under Secretary level position. OPIC, as the US Government’s Development Finance Institution, manages an $18 bn portfolio of financing and insurance to support private investment in sustainable economic development, especially in the world’s poorest countries. Under Littlefield’s leadership, OPIC’s annual commitments to renewable resources projects grew ten-fold in three years to $1.5 bn, while generating increasing income for the U.S. federal budget. Littlefield has also instituted major reforms of the agency’s policies, systems, and processes, and has introduced new financial innovations to augment the agency’s development impact. 

From 2000 until 2010 Ms. Littlefield was CEO of CGAP (Consultative Group to Assist the Poor), a policy and research center housed at the World Bank dedicated to advancing poor people’s access to financial services. Prior to joining CGAP in 1999, Littlefield was JP Morgan’s Managing Director in charge of capital markets and financing in emerging Europe, Middle East and Africa, among other positions. Littlefield spent 1989-1990 in West and Central Africa consulting several start-up microfinance institutions. She is a graduate of Brown University and also attended Ecole Nationale de Sciences Politiques in Paris.

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