Impact Investing

Avoiding the “Hope Bubble”

We must invest in the financial literacy of social entrepreneurs and in the social literacy of investors.

For many years, we have been trying to stimulate entrepreneurial activity to address some of the most stubborn as well as newly arising social needs and problems. Today, we are at an inflection point: the path forward looks different than the one we’ve travelled. While access to financial capital remains important, providing financial capital alone isn’t enough to encourage innovation or to scale and replicate solutions that work. A new industry financing social impact can be built only “along with” and not “on top of” existing support mechanisms and funding vehicles for social ventures and enterprises.

“Impact investing” is predicted by analysts to become a $500 billion industry. It has been growing in popularity in the past few years, attracting a diverse set of players with a range of expectations regarding financial returns. Across the globe nearly 200 impact investment funds are now registered and many foundations, networks, and mainstream financial institutions are becoming active in this space.

But the growing excitement around the overall market potential and the higher return expectations of some newer entrants raises a number of questions. Are we creating yet another hype based on a bubble filled with good intentions and hope? Are we too narrowly focused on financial markets and thereby missing out on more holistic approaches to support social innovation?

I have the pleasure to chair a group known as the Global Agenda Council on Social Innovation. This council is in a unique position to discuss such questions in a frank and open way. The council, initiated by the Schwab Foundation for Social Entrepreneurship in collaboration with its sister organization, the World Economic Forum and guided by Mirjam Schoening and Katherine Milligan, brings together leading academics in the field of social entrepreneurship, pioneers in impact investing, and globally recognized social entrepreneurs to address some of the most pressing issues facing the impact investing industry. Greg Dees, Jacqueline Novogratz, Alvaro Rodriguez Arregui, Andrea Coleman and Asad Mahmood are just some of the leaders who contribute to this generative effort ensuring that this nascent industry reaches its potential and promise.

In our discussions, a number of issues pop up again and again.

1.Many studies offer unrealistic estimates of the size of the industry, raising expectations beyond what the sector can currently deliver.
2.Despite the current focus on generating returns, subsidized capital from philanthropists or foundations will continue to be critical.
3.Local knowledge is highly underestimated but remains the “x” factor as social needs are related to problems with local root causes.
4.The needs of young social ventures requiring seed capital is largely neglected, indicating that the industry might under-invest in its future pipeline.
5.As more social ventures are involved in traditional capital market operations, there’s an increasing risk of mission drift.
These are just some of the trends identified by our group and that warrant honest debates and interaction among all the stakeholders involved.

My own conclusion for the future of funding social innovation is that we need to consider social and human capital as equally important as financial capital. We need to create a level playing field for investors and investees (social entrepreneurs and their organizations). Investing in the education and knowledge base of both parties will allow us 1) to better understand the nature and types of “risk” involved for investors and investees, 2) to generate new asset classes, investment vehicles and non-financial support activities that are reflective of local realities and challenges on the ground, 3) to develop meaningful schemes for evaluating outcomes and impact and develop fair schemes to compare social enterprises across issue domains and geographies, and 4) to speak with one voice when demanding new regulatory frameworks and legal forms.

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  • as a social activist and on the way of becoming social entrepreneur, my opinion on this article is its awesome, its so worthy for anyone who follows the concept that beneficiaries needs more of understanding of their social issues and their long term solution based on strategically planned investment opportunities rather than following traditional charity approaches, i mean please all the charity org stop stimulating the charity cycle more by throwing your money to unprivileged and making them dependent on them hence cutting their part in growth of their national economy. all the youth or even professional pursued social ventures need to understand that they don’t run on finance only , financial institutions or aid is just a driving force, but the solution/social innovation/humanitarian idea is the root strategy that can help people . there is a need to provide education to both needys and the donors about each other also about overall issue , there is need to provide genuine donors to needy and genuine needys to donors , this is just a side business, your every action has an impact in long term on those beneficiaries receiving aid, their economy and their poverty reduction, people can example of Pakistan where foreign aid had a devastating impact as foreign donors were not given proper feedback for where their money is going neither did they tried to find out because at first place they were just giving it help in current circumstances and not in long term poverty reduction .
    moreover new entrants are just creating an artificial hope bubble to help social innovation and are not able to cope up with promises and targets , but that too isn’t their problem all the time, badly governed states kills the social innovation and worthy ideas , red tape bureaucracy won’t allow you to move your butts so please help us ......its my personal experience and its worth knowing and spreading , reading this article I feel like someone has given words to my thoughts, experiences and problems I am facing .

  • BY Thien Nguyen-Trung

    ON February 14, 2012 05:45 AM

    Johanna, thanks for sharing the discussion “favorite issues”!

    To some of your points, just some (respectful) thoughts:

    1) “Are we too narrowly focused on financial markets and thereby missing out on more holistic approaches to support social innovation?” (Yes!)

    How about more provocatively: is the “impact investing” community perhaps catering a little bit too much nowadays to “play ball” by the rules that the traditional financiers go by, perhaps in hopes to get them to stay and play (bring money)? In other words, what have been your findings on the state of how many funds achieve the financial returns they promise? What’s the split conference participants “want money, and doing good is extra” and “want to do good, and making money is extra”?

    2) “[...] we need to consider social and human capital as equally important as financial capital.”

    If we did not consider social and human capital as equally important as financial capital, what is the actual definition then of impact investing? I assume you may come from the vantage point of traditional investors looking into doing “also socially good” investments?

    Also, is it inappropriate or presumptuous of me to assert that social and human “capital” is all that we have, and that financial whatchamacallit was only invented in the first place to advance those former ends? What meaning does “capital” in itself have otherwise?

    3) Finally, lest I have simply not found the links for it yet, a kind request to open up this somewhat “closed” discussion hosted by World Economic Forum and Schwab towards a wider audience (i.e. Internet) and allow participation of less-commonly heard voices in these gatherings. The topics you hinted at sound not just fascinating but utterly important to debate and solve out in the open. This is especially true if the (doubtful) $500 billion estimate of the impact investing industry is to materialize anytime soon.

    Thien Nguyen-Trung

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