Impact Investing

Do Impact Investors Expect Too Much?

The history of microfinance shows how far off-mission social enterprise can go under the weight of massive investment.

Today, microfinance is estimated to be a $68 billion industry worldwide, with a track record of substantial private investment now stretching 10 years or more. The industry provides financial services that help clients manage their resources—a crucial function when income and assets are stretched. They also help meet both routine and extraordinary demands such as food to stave off starvation after a bad harvest, or hospital care and pharmaceuticals during a health emergency. While these undoubtedly help poor clients better manage their poverty, the impact of the industry toward increasing the income of the poor and eliminating poverty—its original ambition—has fallen short.

What went wrong? How did a movement dedicated to ending poverty fall so far short of that goal after nearly 40 years? And is there any reason to think that other well-intentioned, mission-driven businesses won’t find themselves heading down the same path?

We believe that two features have combined to produce the disappointing result:

  1. First practitioners and then the impact investors who together propelled microfinance to scale assumed that it would increase income and reduce poverty, and have other social benefits. They never saw the need to specify the metrics and benchmarks that would demonstrate when that was or wasn’t the case, and provide information on how to adjust and redesign as necessary. Most investors consider any involvement with microfinance as impact investment and don’t demand evidence of the social impact of the companies they back.
  2. The shift from nonprofit to for-profit vehicles, while helpful in attracting capital and scaling up, encouraged the industry to evaluate its success in terms of profitability and other financial indicators, rather than preserving the focus on poverty and lasting impact on the lives of people at the bottom of the pyramid.

There is no reason why profitable, shareholder-funded microfinance companies—or other businesses dedicated to reducing poverty—can’t set clear goals for social impact, and be held accountable for the income and wealth they increase, the health they improve, or the schooling they extend. However, assuming a disciplined framework is in place to preserve those priorities, what is the proper financial return on investments in such companies? How much is enough?

In reality, we tend to sell investors short in terms of their requirements and motivations. There are plenty of upper- and middle-class consumers globally who will drive the extra miles and pay the higher price to buy premium, organic ice cream made with locally sourced milk free of growth hormones, or accessorize and decorate with handicrafts made by Indian dalits or African women’s cooperatives. But we assume that this impulse is entirely absent when it comes to the investment portfolios of these same consumers. While many of the same people are prepared to sacrifice some basis points of return on their savings or retirement accounts, if the sacrifice translates into impact on poor people, investment professionals take for granted that only competitive or superior returns will do for their investments. The common good becomes risk reduction; concern for the planet becomes brand equity. Unlike consumers’ motivation, the motivation for investors reduces to a single value: maximizing financial returns.

This defies both logic and recent data. The most recent J.P. Morgan Global Impact Investing Network (JPM/GIIN) survey reported that of the 125 impact investors surveyed (which together reported impact investments exceeding $10 billion in 2013) 54 percent expect “competitive market rate” financial returns; 23 percent target below-but-near market returns and 23 percent seek capital preservation. This supports the notion that many investors do not in fact require “superior” or competitive financial returns, but rather are evolving their concept of return as impact.

Even if we reject as impact investors the 54 percent who seek competitive market rate returns, the remaining 46 percent of investors leave ample room for consideration of social and environmental impact.

Can investors extract extraordinary returns from the poor? Of course. The history of the microfinance field and other “bottom of the pyramid” businesses is rife with examples. But, moral and ethical considerations aside, must investors take home such bountiful rewards to mobilize sufficient capital flows to go to scale? Though some might say yes, data and logic suggest that as the impact space develops, and priorities and values become clearer, the answer increasingly is no. And high-impact investment opportunities do exist for the nearly one out of every two impact investors who are willing to accept the higher risk associated with serious anti-poverty ventures.

Still, far too many impact investors are confused about the meaning of profit in a social enterprise. In addition to the financial return on investment, an impact investor must consider above all the mission that drives the enterprise—and the company’s success in fulfilling it. For example, if an impact investment is intended to fight poverty, it must enable poor people to increase their income. In other words, profit must be seen as the source of financial and other benefits to the beneficiaries as well as to the investors. Similarly, if a social enterprise has set out to reduce carbon emissions by marketing solar energy products or services, any prospective investor in the company—an impact investor—must evaluate its success in reducing carbon emissions as well as returning an acceptable rate of financial return. These requirements would seem to be self-evident, but, surprisingly, many impact investors leave them unexamined.

Many of today’s self-styled impact investors tend to expect too much, and when their expectations aren’t met, they find that they never were clear about their priorities and their reasons for committing to an impact investment. It’s time for businesses that seek funds from impact investors to establish benchmarks and metrics for the economic and social impact they seek to accomplish—and for impact investors to engage in some serious soul-searching if they find themselves looking only at how much profit they can extract.

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  • BY William Maddocks

    ON January 8, 2015 11:32 AM

    At the last MicroCredit Summit in Merida, Mexico in September 2014, Chuck Waterfield CEO of Microfinance Transparency (MFT) tried to ask this very question “How much profit should microfinance institutions be able to make from their poor clients?” Several large Mexican MFIs charge in excess of 100% interest on their loans. Noticeably missing from the plenary and from the entire Summit was the largest MFI in Mexico, the Acción affiliated Banco Compartamos, which made $275 million in profit in 2013, which represents a contribution of $107 from each poor Mexican client.  While the microfinance industry has tried to promote self-policing of their members through efforts like the SMART Campaign (funded by Acción who profited handsomely from investing in Compartamos), the Social Performance Task Force and Truelift, fall short of keeping away loan sharking MFIs since they are voluntary and lack the teeth that regulatory agencies should have. Government regulation of MFIs in many developing countries is non-existent or weak and so poor clients are often on their own to ward off the legal loan sharks. This means, as far as impact investors are concerned, the check and balance system to prevent investment into usurious and disreputable MFIs must begin with the investors themselves and the Microfinance Investment Vehicles (MIV) where they often park their funds. There must be agreement about how much profit is ethical and deep understanding that institution oriented, profit-maximizing investment can be disastrous to poor people and that investors must insist on client centered, anti-poverty oriented policies by the institutions where they invest.

  • BY Elena Moreno

    ON January 8, 2015 03:27 PM

    Government legislations regarding MFIs in most establishing international locations is non-existent or poor therefore very poor consumers are often independent to reduce the chances of the authorized bank loan sharks.

    This means, as far as effect investors come to mind, the check in addition to sense of balance technique to avoid expense straight into usurious in addition to disreputable MFIs have to commence with the investors independently along with the Microfinance Expense Automobiles (MIV) exactly where sometimes they recreation area their money.

    There ought to be contract about how precisely precisely very much revenue is ethical in addition to strong knowing that establishment driven, profit-maximizing expense can be unfortunate to the indegent and this investors have to require client focused, anti-poverty driven guidelines with the corporations exactly where they spend.

  • BY Glenn Thomas

    ON January 9, 2015 06:52 AM

    The goal of “maximizing” financial return on investment cannot live in a sustainable triple bottom line business model.  Such a model requires intentional balance.  Achieving minimum stated goals with the possibility of exceeding them is a more honest approach. 

    No investor wants to be limited in an equity investment, but shareholders who believe the goal is to “maximize” financial ROI will instinctively abhor expenses which do not directly contribute to it. 

    Please, no arbitrary maximums.  Let’s not even ask the question, how much is enough, lest we destroy the instincts we hope to “capitalize” on.

  • BY David Brookes

    ON January 18, 2015 05:19 PM

    A timely question to ask.  There is currently a little too much hype around impact investment from my perspective.  Many social investors are not seeking market based financial returns as highlighted by the JPM/GIIN survey. 

    Supporting social enterprise to start up and grow is increasingly being seen as an opportunity to invest in sustainable social impact as distinct from securing market rate returns.

  • HITESH BHATT's avatar


    ON January 23, 2015 07:39 PM

    The rejection of paying bribes has led me to destruction of family life, enormous mental & physical torture, disturbance in professional life, disturbance in education for my daughter. __ and all these acts can be considered as the inhuman, unpardonable & heinous acts which cannot be forgotten or forgiven in any way. All these 11-12 years I have lost all my precious time & energy to fight for the cause ___ &, you know time once lost cannot be redeemed. 

    The water resource should be made available to all irrespective of person’s, consumer’s, caste, creed, race, religion & origin & this can be done by enactment of law.

    I, my self domestic water connection at home being the effect of my own efforts through the recourse of available administrative support after toiling hard for 11-12 years.

    Half the job is accomplished still I am to get all other civic amenities. Other then domestic Water connection & domestic electricity after 11-12 years due to all corrupt officials of the whole systems in India.

    The illustration as done above is based on the experience I have had for not being able to get basic civic amenities like water connection, sewerage drainage line, street light, cleanliness area, leading approached road as town planning etc.. That too in an urban area & the city in which I am living has a population of 30 lakhs & is known to be one of the most literate, cultural, historical & moral ethics citizen cities of India.

    In view of pathetic living conditions I was living in 13-14 years ___ I had to leave the place of my earlier residence due to un-hygienic filthy living condition & have started living elsewhere thanks to all those corrupt, lethargic, whimsical, political illiterates’ elements & touts who have always wished to let me live under trying circumstances. The old residential place is now becoming threadbare as the days & years go by.___ Look up the matter & come out strongly to give me justice & punish the culprits who are still working in the systems enjoying all facilities, salaries & perks without sensing the feel of wrong doings.

    As mentioned above, I do not reside on the address Hitesh H Bhatt. R.R.Patel bunglow, Nr. Shanti sager society, 51/1, Plot No-3, B/h. Wadi-mohmmad talav, B/h. Ram-vatika society, Waghodiya Road, Vadodara-390 019. Gujarat specified, however, I am deprived of (Electricity connection 5-6 years & drinking water connection for 10-11 years in the past) & now, 11-12 years now & yet the basic need for getting sewerage drainage line, leading approached road to my resident, cleanliness surrounding my resident, street light etc…. at my residence in spite of having made several applications, & personal meetings with the Vadodara Municipal Corporation (VMC) officials.

  • BY Hugh Sinclair

    ON March 11, 2015 10:52 AM

    The answer could be even simpler. To what extent are social impact investors (or whatever the latest catchprase is) motivated be ideology rather than reality? Microfinance sang the right tune at the right time. Teach a man to fish, the power at the bottom of the pyramid, recycling credit, self-help, entrepreneurship, business creation. Here was a fresh alternative to vanilla aid. Everyone was a winner, and best of all, we could get our money back in the end, sometimes with vast profits. Whether it worked or not was, and remains, a detail to these folk. What evidence was there of the effectiveness of microfinance in 2005 when the UN declared the Year of Microcredit? What evidence of poverty reduction did the Nobel Prize folk have in 2006 when they awarded Yunus and Grameen the Nobel Peace Prize? These decisions are not made on rational, objective criteria, but feel-good ideological motivations mixed with some good old-fashioned greed. Microfinance became sexy, innovative, entrepreneurial. Silicon Valley took to it, big investment banks entered the fray, it was acknowledged and legitimized by everyone, from the (rather intransparent) Nobel Prize judges to the World Bank, Clinton, Oprah Winfrey, Bono, it even got on the Simpsons. And done cleverly it could generate ludicrous returns. Compartamos, mentioned above, is far more profitable that Apple or Google. Who cares if it works or not - that is a detail! Most social impact investors talk the talk, but don’t go any deeper. Those that do have invariably quit the microfinance sector entirely. Microfinance is simply commerical banking in unregulated environments to vulnerable clients, draped in an opaque veneer of “doing good”, and with a decent lobbying/marketing campaign behind it. The few effective operators have no need, nor intention to become household names and keep well below the radar. To fix this sector we need transparency, financial literacy, and formal regulation - the three things the sector detests the most. Providing financial literacy training is expensive and reduces returns. Transparency is good for other people, but not for the investment community or their investments. And regulation is the mother of all evils - the free market must reign unchallenged. This is, alas, the sector we have created, and while I fundamentally question the grounds upon which Yunus received his Nobel Prize, I agree with him when he lamented “I never imagined that one day microcredit would give rise to its own breed of loan sharks”.

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