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.