Mara and Chris, thank you for voicing this view on impact investing, as it is interesting to see what others are seeing in the space. Especially coming from big nonprofits like Oxfam and Shell. You seem to have a very different view than those of us on the for-profit side of impact investing.
We are not lacking dealflow, and not lacking opportunities that can make a positive societal and/or environmental impact, and at the same time return (or potentially return) the same risk/reward tradeoffs as the far more common software startups.
I’m turning away more of these than I can fund, in part due to the myth that impact investing is a form of philanthropy.
If Oxfam and Shell are lacking such dealflow, I invite you to partner with Fledge to create an accelerator and for-profit fund to help the companies I’m forced to turn away.
And I invite both of your organizations, along with any individuals, families, funds or foundations who consider themselves impact investors to join investorflow.org, a new, free network I’ve helped launch to help impact investors share their global dealflow, whether it be market rate or not.
My my seat, I’d say the problem isn’t dealflow, it’s the global nature of impact capital. The entrepreneur sitting next to me today in Peru today is from Rwanda, likely to be eventually funded by investors from four continents. The Nicaraguan honey exporter probably only three continents. Either way that’s a challenge these companies can’t do without global entities and global organizations that can reach and fund the global dealflow that is the reality of impact investing.
Important article. Well observed and articulated. We share the author’s overall stance, but turn the question on its head by focusing on portfolio-level returns which solve for our client’s personal benchmark, which is in turn derived from a detailed lifetime discounted cash flow analysis. This allows us to intentionally consider what would be “below market rate”, high-impact investments without putting at risk the financial returns our clients require to accomplish their family or foundation goals. But this level of transparency and intellectual honesty is not captured by the binary, false-choice narrative of “grants vs. market rate”. In other words, one *can* invest for market rates of returns, but one *need* not do so.
This is a courageous article. Discussing the Impact Investing priority o returns is squeezing good ideas out of the market. I understand low-interest loans for housing. That works well. But other attempts at real social impact are as you say, hardly producing those current rates. This is too close to the greedy efforts of a few micro loan endeavors that turned into IPO’s
I think a discussion about rates of return must include consideration of the timeline. The classic 1-3-5 year measurement periods perpetuated by mutual funds is already obsolete as exit timelines for non-impact venture investors has stretched out to 7-10 years. Impact investing is relatively new, at least on its current scale, and it is too early to assess what the returns are. My most recent exit on a non-impact investment was 30x and it took 9 years. I was quite happy with a 46% compounded annual return. But had you asked me in year 5 or 7 or 8, it was still a big fat zero. Patience.
Bolis and West hit the nail on its metaphorical head with this thought piece. I have been in the impact investing space now for seven years and am also skeptical of the “no tradeoffs” approach. You can’t extract value from a community or a landscape for decades and then suddenly expect that—with a loan—you can continue to derive the same value. It’s completely disconnected from reality. I suspect this is only going to get worse though as more online lenders begin to differentiate by referring to themselves as impact investors—all while pitching investors on 10x returns. For someone who’s done this work in some of the poorest areas of the country, it’s maddening! I full-heartedly believe the industry needs a “come to Jesus” moment where it can discuss what’s fair and what isn’t regarding collateral requirements and returns. I also would like social entrepreneurs to receive more education on what IS and IS NOT an impact investment, as I’m seeing a lot of snake oil salespeople these days.
Thanks for taking the time to pen this great piece. There is great truth in much of what you say. And, I believe that you, Matthew Weatherly-White and Luni Libes are all right, depending on the type of money we are discussing and the type of impact we are attempting to achieve.
And more than anything, this goes to your point of impact transparency. But I would add an important clarification.
When we talk about impact investing (ie., where a causal connection exists between the capital deployed and the impact achieved), we might be talking about base-of-the-pyramid enterprises that help lift people of extreme poverty, or we might be talking about carbon mitigation strategies that use debt to help fund carbon credits and offsets, or we might be talking about resource impact through a forest conservation project. To look at it another way, we might be talking about an equity investment (to help some of the enterprises that Luni works with) or we might be talking about a fixed asset investment (similar to the type of investments made by an Ecotrust Forest Management, a Lyme Forest Conservation Fund or an Equilibrium fund). And importantly, we might be trying to compare an enterprise in East Africa (such as Sanergy focused on human waste disposal and fertilization) with a consumer goods company in the United States (such as FEED Project), with a software company seeking to do good (take your pick).
Not surprisingly, these are differences that matter.
They matter in terms of expected impact. And they matter in terms of expected returns.
But so far, all we can do is talk in terms of broad brushstrokes regarding impact success, and write articles about myths, based upon anecdotal evidence around the nexus between impact success and financial returns.
This can no longer stand.
We can’t continue to talk about all of these asset classes, strategies and geographies as if they are going to attract the same type of capital and produce the same type of return, investment by investment, and the same type of impact.
For this reason, Matthew’s organization (and others like them) are pursuing a portfolio approach on behalf of families who are seeking total impact with all their capital. And in many cases, these investors are not distinguishing between investment and philanthropic capital. For them, the difference in returns, given the asset class, the strategy, or the geography is not a myth, it is the reality they are leaning into, with tools that can help them understand, investment-by-investment, “how” their money is having impact, and “where” their money is having impact, and can show them that overall impact on a portfolio aggregated basis, just the way that they can see their overall financial return on the portfolio aggregated basis.
This is the type of transparency we are dedicating ourselves to bring to the impact investing arena with iPar. We are committed to providing investors with the tools they need to be able to compare, contrast, benchmark and decide on investments based upon detailed impact data, added to the already copious amounts of financial data they have on returns.
Our vision? That with impact transparency, we can stop talking about myths and move to a future where the transparency facilitates more capital deployed to encourage human flourishing.
Thank you! We have been saying this for years and we believe that the developing world needs a “new category” of risk capital. Capital that is willing to think beyond mainstream business like lending/ microfinance /rural distribution/supply chains. Capital that is willing to take much higher risks by investing in science and technology based products, capital that is ok with sub optimal returns, capital that is not paranoid about exit ........Since no one was doing anything about it, we have built our own innovation, incubation, acceleration and investment model in India. We invest in social sector companies with an approach which promotes “impact first with financial sustainability” or a “lot for loss” paradigm with very simple entrepreneurs friendly terms. I think impact investing is too hyped up, with very little focus on impact. In practice, every company that generates jobs and creates economic activity is driving impact and therefore every investor by definition is an impact investor.
Mara and Chris, Thank you for an insightful article. As professional who has focused on Impact Investing, your thoughts helps to reflect on our work and ensure we stay on mission. I would be like to make a few observations.
1. If you look back long enough, almost every industry in the US received some subsidized capital in its infancy. Either in form government funded academic research that help launch as industries or through philanthropic foundations that had capital and social mission. e.g. touch screen technology was conceived more than 30 years in academic labs. Impact Investing is not as exception. There is room for grants and low cost capital for businesses that are experimenting on new business models to deliver essential goods and services at affordable prices. Commercial capital is required to bring to scale to those ideas that work.
2. Totally agree on permanent capital vehicles. PE model is usually to too short term for a businesses that are trying to serve a new market using a business model. It takes time.
3. Unfortunately, when it comes to the emerging consumer, there are familiar condescending assumptions that drive opposition to impact investing. One of the main ones is the thinking that there is no way businesses can profitably provide a high quality, affordably priced essential goods and services to the people in emerging markets. The thinking is that the only way you can do it is through charity work and unprofitable businesses. We have seen commercial innovation in developed markets drive costs down and increase access to products and services while also increasing profitability. We expect the same in impact investing. We expect social enterprises to see the emerging consumer for what they are, consumers. Businesses that take time to understand needs, wants, dreams and aspirations of the target consumer will ultimately do well both in terms of impact and commercially. The social enterprises and the communities they serve deserve the dignity of commercial risk. Ultimately, investors’ willingness to take commercial risk on the target communities and those communities’ willingness to be held accountable for that risk is what will move them out of poverty.
Yes patience is the key. So through impact investing if any one want to create impact in social and environmental sphere. I think they should keep investing for longer time horizon.
Great article. The cause of this, which is entirely predictable, is that investment service providers are keen to label what they have got as “impact investments” but they are unable to settle for lower financial returns, as businesses. They have huge marketing budgets and have unfortunately somewhat hijacked the agenda as they push to include what fits their business model into the definition of “impact investing”.
Chapeau for these open, respectful and insightful comments. In particular, I’d like to flag Todd Johnson’s comment about an “impact continuum”. While it may be tempting to establish a minimal floor for impact performance, I suggest that there is a rational argument to be made for “better” in all asset classes and investment strategies, just as there is a clear distinction between “deep” (innovative, risky, subsidy-requiring) impact and more established verticals (like renewable energy project finance, which has seen cost of capital drop sharply over the past several years due, in part, to the early commitment of impact capital). Yes, the goal of impact investing has always been to harness the power of the capital markets to create durable, measurable social and environmental value. But it is also to force-evolve the capital markets to internalize what heretofore have been externalized costs. Yes?
I also couldn’t agree more with Mr. Milroy. One of the pervasive risks as impact scales is the dilution of standards to accomodate capital flows from institutions more interested in market share and revenue growth than they are in legitimately pursuing a different form of investing.
Always such a pleasure to read SSIR’s reader discussions!
Thank you Todd for a wonderful overview of the breadth of impact investing and Simba on the reminder that even “tech” was once funded by grants.
Those and the other comments remind me that I’m seeing more and more rounds of blended capital. The successful blended capital rounds match the needs and mandates of the funders, mixing grants, loan guarantees, debt, and sometimes equity.
We read Mara Bolis and Chris West’s thoughtful critique of the evolution of impact investing with great interest. Bolis and West argue that impact investors have become increasingly “seduced” by the promise of strong financial returns and strong social impact. Bolis and West worry that impact investors’ hopes and expectations of strong financial returns will lead them to sacrifice social impact, diminishing the impact in impact investing.
Could Bolis and West’s characterizations of impact investors’ beliefs, practices, and ultimate impact be correct? Yes.
But, is there rigorous research to support (or to refute) most of their claims? No, not yet.
Where Bolis and West see facts – evidence that impact investing has gone awry – we see hypotheses to be tested. Bolis and West’s claims are great fodder for research – research that the field of impact investing badly needs to achieve the kind of impact we’re all hoping to see.
Here are some of the thought-provoking and important hypotheses that Bolis and West advance:
• “According to the prevailing view, the achievement of both social impact and market-rate financial returns is the norm – not the exception.”
We know of no rigorous research on individuals’ beliefs about the ease of achieving both social impact and market-rate financial returns. We have no doubt that some individuals believe, as Bolis and West assert, that achieving both is the norm, not the exception. But, given prior research documenting that people believe that “nice guys finish last” – that is, people believe that truly altruistic individuals and companies do not benefit from their acts of altruism – we suspect the prevailing assumption may be opposite to what Bolis and West suggest. Many members of the public may believe that if a company truly has a positive social impact, it can’t generate strong financial returns. We’d love to see rigorous research examining individuals’ beliefs about the relationship between social impact and financial returns. We also wonder what shapes individuals’ beliefs. Do individuals’ beliefs reflect their experience, training, politics, or even their personality? We’ve got a lot to learn from research on this topic.
• “Achieving predetermined financial returns has become the primary goal, with the needs of investors taking priority over the interests of the communities their funding seeks to remedy.”
Bolis and West’s statement implies that funds that seek market-rate financial returns make investments that generate less social impact than funds that seek concessionary returns. This is certainly possible. But, as above, we know of no rigorous research testing this hypothesis. At the Wharton Social Impact Initiative, we’re building a data base that will allow researchers around the world to test this and related hypotheses. From our initial research, we know that impact investing funds differ substantially in the financial returns they seek. Even the impact investing private equity funds in WIRED (the Wharton Impact Research and Evaluation Database) that identify as “market-rate-seeking” vary widely in how they use the term – from a 4% target net IRR to well above 20%.
We don’t yet know from our research whether impact investing funds that seek higher returns achieve the same, more, or less social impact than funds that seek lower returns. Clearly, this is a critical question for the future of impact investing. Is a fund’s social impact positively related to its financial performance, negatively related, or unrelated? As we grow and strengthen WIRED, we hope and expect that researchers at Wharton and beyond will examine in depth the relationship among funds’ financial goals, financial performance, and social impact.
• “Social entrepreneurs often accept financial terms and conditions that pressure them to drift from their social mission.”
This, too, is an interesting and important hypothesis for research. To the best of our knowledge, researchers have yet to document the experience of social entrepreneurs as they seek and gain impact investments. We would love to know the extent to which private equity impact investing funds support, tolerate, or challenge portfolio companies’ achievement of their social impact goals. In the finance research literature, we’re seeing studies of the strategies that traditional PE funds employ to maximize the value of their investments. How different are impact investing PE funds? The legal documents – limited partner agreements and term sheets, for example – that we’re collecting in WIRED will provide important empirical insights. In coming years, we hope and expect to see increasing research on the experiences of social entrepreneurs as they seek and gain impact investments. There are plenty of important questions here for impact investors, social enterprises, and for researchers in law, finance, management, and more.
As the field of impact investing grows, so grows the need for rigorous research on impact investing practices and effects. While Bolis and West make some strong assertions, they also note a need for “more independent research” and “greater transparency in reporting the social return as well as the actual financial returns (gross and net) achieved by impact investors.” We could not agree more.
If you’d like to help us build the evidence base for impact investing – especially if you’d like to submit your data – we would love to hear from you. Please contact the Wharton Social Impact Initiative at .(JavaScript must be enabled to view this email address) to learn how you can get involved in our research efforts.
Read with interest the article and the comments but felt it was missing two key points.
Years ago I worked in venture capital and pitched my university endowment office an Investment with the added benefit that I could steer firms toward hiring students. I was “educated” that they were evaluated on their ability to grow the endowment not student jobs. If they could hit their targets investing in cow manure futures they do so, otherwise they wouldn’t have a job long.
As socially responsible investing moves toward the mainstream one must consider the individual motivations of the investor. Some will be willing to accept below market returns for their whole portfolio, some part, and some none.
Which leads to the second point, impact investing is not just a single type of investment. Private deals/boots-on-the-ground type efforts can have the most direct impact but good deals are hard to come by and one needs access to those deals. Access to many are reserved for institutions and the high net worth.
Debt offerings, like school bonds or to improve municipal water systems have been the easiest to access, and can produce market or near-market returns—for its bond category benchmark not the stock market. To professionals investors that is like comparing apples to oranges.
The third category of impact, which makes up less than 10% of the market according to GIIN, is public equity. While it is harder to draw relationships to a direct action-reaction, it encourages investors to commit capital toward beneficial areas, target a market return, feel like they are making a difference….and importantly get them comfortable investing in this manner and open them up to future private opportunities.
The public side of impact investing is evolving. For it to truly take hold and attract a greater share of the trillions invested in public equity, one must attempt to target the returns achieved by other equity products in the market.
For one methodology, please check out the SSI Impact Index (ICANNDX) http://impactindexsolutions.com which represents 20 challenges affecting society and the environment, is aligned in many ways with the UN SDGs, and that provides an equity benchmark for a diversified portfolio of public equities whose products and services operate in Impact categories from clean water to eldercare.
Full Disclosure: I am invested in Fledge with Luni.
Great article and comments. The term “impact investing”(SI) is used so widely that I largely ignore it and focus almost entirely on the type of investments, people involved and realistic expected outcomes, as I do with all my personal investments. That said, I approach anything I define as an SI investment with a lower threshold for expected returns and a longer horizon (for the returns to materialize). This mindset is informed by a personal opinion that SI investing is not mainstream, and in reality, is almost by definition a passionate effort by an entrepreneur from the “outside” to battle against the prevailing norms (cultural/societal, business, political, etc…) to bring about a change for greater good; oh, yeah, and to build a sustainable business that eventually returns a profit.
To be clear—I firmly believe one can have a profit motive in making “social impact” investments, but one needs to be acutely aware that the risk profile is higher and time to exit most likely longer than one would normally expect. That is my experience, but it is solely anecdotal.
The academic studies outlined above (by all of the scholars who have contributed to this discussion) are important in defining the arena, the history and a more robust database of expected outcomes/timelines for potential investors in SI projects, now and in the future.
I look forward to learning more about the research being done in this area.
We thank the authors for this thoughtful article on an important topic. As impact investing becomes more popular and widely adopted, it is ever more important to ensure that we maintain the rigor of practice and the focus on impact that has always defined the space.
It has been shown that impact investing is an approach to deploying capital that can be applied across myriad strategies and asset classes. Naturally, this leads to a variety of possibilities in terms of risk, return, and impact, and attracts investors across the spectrum, from those that principally seek opportunities targeting risk-adjusted market rate returns to those seeking opportunities that target below-market returns.
It is exciting for many in the industry to observe the growing evidence base that shows that risk-adjusted returns are feasible in specific segments of the market. Such data is also proving critical for industry growth, making impact investing a viable option for many institutional investors and bringing in much-needed capital with which to tackle social and environmental challenges. However, we should not presume that all impact investing opportunities can – or, for that matter, should – generate market returns. Indeed, some do not and may never do so. Our research indicates that impact investors – both those seeking market-rate returns and those seeking below-market returns – universally recognize the critical roles that below-market capital plays in the industry. These roles may include financing investments that do not lend themselves to market-rate returns, acting as a bridge between philanthropy and market-rate capital, and helping to de-risk investment opportunities for other investors.
The idea that there is a clear yes/no answer to the question about whether there is a trade-off between financial performance and impact performance is, in our view, oversimplified. The true answer – as with any complicated question – is “it depends.” It certainly stands to reason that pursuing impact can often be good for the bottom line. As other recent research has confirmed, taking into account the best interests of one’s customers, suppliers and employees – or for that matter, the planet – simply makes good business sense in the long run.
Impact investing has enjoyed tremendous growth over the past ten years. We are now at a critical juncture. The authors are right to emphasize the need to develop a robust evidence base on the impact side of the equation. Performance research to date has focused on financial returns both because of the strong demand in the industry for financial performance data and due to the fact that while widely agreed upon measures exist for aggregate financial performance, they don’t yet exist for impact performance. However, for the industry to continue to succeed and achieve its full potential, we fully recognize the need for greater transparency on impact. There are several promising initiatives on this front – such as The Impact Management Project – with which the GIIN is involved. Further, the GIIN is also exploring what a code of practice/principles would look like, to clarify expectations for people calling themselves impact investors.
The scale of social and environmental challenges facing the world today are enormous. As is widely known, trillions of dollars are needed annually if the world is to meet the sustainable development goals set for 2030. As such, more capital is required at every stage of the investment spectrum if this need is going to be met and impact investing is going to be successful.
Abhilash Mudaliar
Director of Research
Global Impact Investing Network
Thank you to Mara and Chris for a thoughtful and though-provoking commentary.
Our firms is the grateful inheritor of a 65-year history of impact investing. Our predecessor, MEDA, began as an impact investing company in 1953, investing in small business in LATAM, and then Africa and Asia, for a clear double bottom line: social and financial. Because of this history, JP Morgan, in its first impact investing report in 2010, identified Sarona/MEDA as perhaps the first impact investing firm. That’s rubbish: impact investing is not a shiny object we all just discovered in the last decade. There have been good people investing in other good people since the beginning of time.
What has changed is a recent opening of the discourse into an open community. Yes, the openly-stated sole objective of the investment sector’s mandate has, for the last 75 years, been shareholder value. But, in the villages and towns where family businesses were being launched and grown, a great many business owners sought to build up their communities. My mother used to say to me that, “A business owner should only eat after the employees have had more than enough to eat.” What’s new today, perhaps, is that we have brought that sentiment into an open community conversation.
Impact investing is not about providing capital to a niche social enterprise. That’s cute – and it should be done – but it won’t move the needle for the poor. Impact investing is about the broad adoption of social and environmental imperatives by the business community and the investment industry. Thankfully, that has begun to happen today. The world’s thanks go out to SSIR, to GIIN, and to each of the people responding to this article, people who care enough to raise their voice. Thank you!
Two years ago, I spoke to the UN as it assembled in Addis Ababa at the occasion of their Financing for Development conference. Country after country stood up to acknowledge (over the protests of Cuba) that “Business is not the problem; business is an integral part of the solution.” One after another, heads of state and other world leaders rose to acknowledge that economic growth mattered, and that a partnership with the private sector was critical to achieving the SDGs. Germany and Nigeria most clearly articulated acceptance of the private sector’s need for profitability and sustainability. A successful partnership, they said, required mutual acceptance of the others’ goals.
And at a hotel across the street, under the auspices of the World Economic Forum, corporate leaders from large companies down to smaller financial intermediaries rose to acknowledged that their ultimate success was dependent on a prosperous world for all, saying, “We recognise and accept our responsibility not only to shareholder value, but also to people, community and the environment.”
The dream is happening.
If we are going to move the needle for the poor, if we are going to deliver prosperity for all, impact investing must involve not only the NGOs and the niche social enterprises (yes, that too), but it must, slowly but surely, change the way Wall St. and Fleet St. thinks and acts.
Gerhard Pries
Managing Partner
Sarona Asset Management (yes, we’re working to change the world, to deliver prosperity for all today and for future generations.)
I can’t recall a thread as insightful, respectful, experienced and inspiring as this one. Thank you to Gerhard, Todd, the authors of the catalyzing piece and everyone else. Makes me incredibly proud to be a very small part of the ever-growing impact investing eco-system.
Thank you for this vibrant discussion. Your comments illustrate the vast heterogeneity of the space, alongside the need for more segmentation, transparency and independent research to untangle this ball of yarn. R Todd Johnson’s and Scott Sacknoff’s points about how different opportunities with vastly different risk profiles and projected outcomes are being thrown into one box together gets to the point precisely…. In the same article about impact investing the reader could envision either an investment in a cell tower project in Myanmar (which might have some positive long term impact but may operate without intentionality in its business operations) or a reusable sanitary napkin social business in Nigeria. Without better categorization, transparency, and, frankly, honesty, we are talking past each other.
That said, I agree with Rex Wardlaw, Fred Whittlesey that impact investing requires a shift in mindset from traditional investing— given the different goals of impact investing, the parameters and expectations must also be different. As Fred Wittlesley says the firms here are battling “against prevailing norms (cultural/societal, business, political…) to bring about change for greater good; oh, yeah and to build a sustainable business that eventually returns a profit.” To Simba Marekera’s point that social enterprises and people they serve deserve the dignity of commercial capital, I believe this brings us back to the binary paradigm – it’s either a hand out or its commercial capital. This stymies the energy to invent new financial products that are fit for purpose and instead forces firms into old products that were built for a financing regime that didn’t take social or environmental considerations into account.
This is not to say that there is a problem with a profit motive in “social impact” investing but rather that the parameters, behaviors and practices should adapt. It’s actually a design problem. By not designing around the investor’s needs instead of the enterprise/problem it is trying to solve, we are undercutting the creativity of the space, which means, as Tom Aageson states, that “good ideas are squeezed out of the market”.
To Abhilash Mudaliar’s point “The idea that there is a clear yes/no answer to the question about whether there is a trade-off between financial performance and impact performance is, in our view, oversimplified. The true answer – as with any complicated question – is ‘it depends.’ It certainly stands to reason that pursuing impact can often be good for the bottom line. As other recent research has confirmed, taking into account the best interests of one’s customers, suppliers and employees – or for that matter, the planet – simply makes good business sense in the long run.” Of course – we are trying to push all private sector actors in this direction. This also reflects Gerard Pries’ view that the end-game is to shift industry practices in a more pro-poor and pro-environment direction. To move the needle on poverty our goal “must [be to], slowly but surely, change the way Wall St. and Fleet St. thinks and acts.” Yes, absolutely. But what happens when profit and purpose aren’t in alignment? Who will win out – investors or disconnected/unrepresented populations who these investments purport to serve? Given levels of disclosure and the extent to which impact is often assumed rather than proven, how would you ever know the difference? In traditional finance, there is only one master to serve. In impact investing it’s more complicated. We need to build in oversight mechanisms that protect the purpose side from being over-run by profit objectives when times get tough. We should enter into this space wide eyed about the power imbalances and information asymmatries at play within the investment value chain.
Matthew Weatherley-White– I appreciate illustration of the heterogeneity of the space and completely agree that there is an argument for “better” in all asset classes and investment strategies. I’m intrigued by the statement, “to force-evolve the capital markets to internalize what heretofore have been externalized costs”. I think what you may be getting at is the need for better and more equitable risk sharing between the investor and the investee. Curious to hear more.
Simba Marekera– Could not agree more for the need to assist companies in the early stages with grants but somehow once social enterprises start earning revenue they are required to justify why they need grants at all. Many will have read the excellent Toward an Efficient Impact Frontier by Michael McCrelass in SSIR. In it, Michael recounts some reactions from donors as Root Capital sought grant funding, namely “’Why, given that you are generating revenue, do you need grant funding from us?’ ‘Is my grant just subsidizing returns for your investors?’ One donor asked outright, ‘Am I the dumbest money in the room?’”. In this way, social enterprises are not being afforded the runway that are afforded to impact agnostic tech entrepreneurs from elite universities. This is not to disparage their abilities nor to condescend to people living in poverty. In fact, it’s to afford them the privileges others receive.
Abhilash Mudaliar rightly reminds us of the “trillions of dollars are needed annually if the world is to meet the sustainable development goals set for 2030”. Without more research of the kind I know GIIN and others are pursuing to help clarify, we can end up not with “more” funding but with funding that has been re-labeled and re-categorized. MK’s point, “In practice, every company that generates jobs and creates economic activity is driving impact and therefore every investor is an impact investor.” In impact investing, we have the opportunity to try harder and do things differently than we have before. Without transparency, independent research and disclosures we don’t know how much is real change and how much is “marketing” as Richard Milroy says.
Nick Ashburn & Katherine Klein’s response is critical. Ours is a “viewpoint” piece that is a reflection of our lived experience and response to the prevailing literature. If this article spurs more independent research into some of the questions we’ve raised, we will consider this effort wildly successful. In particular, proliferation of research examining the experience of those seeking impact investing (such as Keystone’s What Investees Think and The Report of the Alternative Commission on Social Investment) is critical for the success of the field. Because, as stated above, the downside risk of a failed social enterprise – or failed social investment, to broaden beyond the socent space - is borne also by the community it was set up to serve.
First of all: THANK YOU MARA & CHRIS for writing this and responding thoughtfully.
How can I be in touch with you by email?
I would love to join you in the quest for your concluding points (code of the impact investor, commitment to outcomes, etc.) I have built this new spectrum proposal for impact investing, precisely because of this never ending, returns discussion: https://medium.com/@lauraom/a-new-kind-of-impact-investment-spectrum-the-holistic-spectrum-for-impact-ac221a6b44c6
I would love to hear your thoughts on it and ask you if you want to join me for this study, you would be truly appreciated.
My e-mail is .(JavaScript must be enabled to view this email address).
I am looking for visionary partners that see Impact Investing as an industry ripe for disruption and clarity.
All thought leadership of Impact Investing I’ve seen so far has come from the “global north” perspective so I find it challenging to be heard. (woman social entrepreneur from Latin America with no Ivy League University resources to publish her input).
My comments:
one thing I find hard to agree with you is this “risk-adjusted market-rate returns or close to market-rate returns. For any fund manager to generate a net 10 to 15 percent portfolio return,”——Where did you get the idea that market rate returns are 10 to 15%?
Market rate returns are elusive, mythical creatures in any asset class and in extractive or impactful investments.
We appreciate the insightful article shared by the authors, and find it encouraging at this juncture in impact investing. As more and newer investors consider how to invest their capital, identifying what is and is not an impact investment can be confusing. The authors declare that impact investing may be drifting from its original intention, and that proliferating claims of achieving market rate financial returns as well as social and/or environmental impact should be questioned.
The excruciatingly low to no tolerance for malperformance of impact investments supports the authors’ views. If an investment in Google (Alphabet) stock were to plummet, hardly many investors would entirely give up on technology stocks. The same leeway is not granted to impact investments, which are largely affected by spotty information that is not comprehensively or easily comparable. Few, if any, research reports have been able to compare impact investments across several asset classes, geographies, sectors or themes, and impact quality as the authors have noted. As a result, an exercise of determining whether a return “trade-off” exists for impact investments writ-large is like comparing return “trade-offs” between investing in a stock or a bond.
We have found from impact managers we have recommended that the conclusion referenced in the 2015 GIIN benchmark study of market rate returns being achievable is—accurate, and not to say that every manager has been able to achieve market rate returns, in every geography, in every asset class, in every vintage, addressing every type of problem. At the time, many wondered if impact investments only had great stories after being largely void of any extensive financial performance research.
Market rate returns may not be appropriate or even an option for some impact investors. Below market rate returns may not be appropriate or an option for some impact investors. The desire to achieve top risk-adjusted financial returns, itself, and impact, in many cases, aren’t mutually exclusive. Investors can minimize their opportunity costs and still make legitimate impact investments that achieve desired returns.
Even without an impact constraint, asset managers struggle to beat market performance. According to the S&P Dow Jones Indices, from 2000-2016, only five percent of mutual funds investing in large U.S. companies that had a winning three-year record against the S&P 500 continued to beat their benchmarks in each of the three following years. It’s not surprising that manager selection has continued to be a leading factor in selecting impact investments for a desired financial return. It’s incumbent of those responsible for manager selection to ask the right questions to determine whether a manager ascribing to an impact label is legitimately an impact fund.
We realize that many managers are making worthy investments, but don’t belong or qualify as impact investors. Those that may target only market rate, risk adjusted investments as a duty to clients, should also take the same care and concern when certifying or recommending managers that have met a threshold capable of withstanding scrutiny. Establishment and adoption of characteristics useful and actionable by practitioners will surely reduce the “trade off” tension, and perhaps comfort those that believe that the achievement of top returns is only a result of playing by different or unclear rules.
Managers that are impact investors should have noticeable characteristics, among them include: (1) a clear expression of the social or environmental problem they seek to solve, (2) the core of their portfolio invested in products or services that have a social or environmental benefit, (3) factor impact into their investment selection process, and (4) measure and report on metrics relevant to the enterprise or portfolio.
Impact investing is the pursuit of a dual object of achieving both a financial and social/environmental return. Governments and non-profits alone won’t be able to address the enormous challenges facing us today or in the future. We appreciate the penetrating article and the views of commenters earnestly illuminating the value of clearer parameters for impact investors.
Laura - Thanks so much for your comment. I’ve heard somewhat repeatedly that many have struggled in the past to “see themselves” in the prevailing impact investing literature. Part of what drives my work is the hope that we can invite voices like yours into the conversation! I feel very strongly that there are important and heretofore disregarded voices who have much to add to the field. I will be in touch separately over email to hear more about what you are working on.
Re “market rate” - I hear you. It’s something we discuss often—is there even a discreet “market” for impact investing? What is a reasonable point of comparison given that ii is a/ a work in progress b/heterogeneous. That said, the GIIN “Introducing the Benchmark” says the following—“Again, in the interest of focusing on a relatively uniform set of data, this research restricts itself to those funds that target risk-adjusted market-rate returns. Specifically, this means private equity and venture capital funds with a target net internal rate of return (IRR) 4 of 15% or higher, and mezzanine funds with a target net IRR of 10% or higher. “
Andrew - I read this and said, Yes, yes, yes, yes, yes, yes. Yes. “The excruciatingly low to no tolerance for malperformance of impact investments supports the authors’ views. If an investment in Google (Alphabet) stock were to plummet, hardly many investors would entirely give up on technology stocks. The same leeway is not granted to impact investments, which are largely affected by spotty information that is not comprehensively or easily comparable. ” I just don’t understand it when impact investing carries a double burden of return + impact that is far from simple. Yet, there appears to be a penalty. These parameters that you lay out are, I believe, a helpful guide for others—“Managers that are impact investors should have noticeable characteristics, among them include: (1) a clear expression of the social or environmental problem they seek to solve, (2) the core of their portfolio invested in products or services that have a social or environmental benefit, (3) factor impact into their investment selection process, and (4) measure and report on metrics relevant to the enterprise or portfolio.” Thank you for sharing your thoughts!
Impact likely carries the double burden of return because the concept of investing for Impact and return is relatively “new”. Google is a known entity so fluctuations can be more easily tolerated. The way to overcome this is for more people to invest in public equity impact so they get comfortable with the philosophy.
Great piece and excellent comments, so thanks to all!
I would underscore Matthew Weatherly White’s comment and add that Total Portfolio Management http://bit.ly/2gJxCnP allows asset owners to look across the capital/impact continuum and assess what the right mix of financial and extra-financial returns are wrt their overall goals, etc.
In this way, one can structure right capital for the right instrument and better manage for Total Performance and Blended Value.
Scott - yes - remaining aware of Gerhard Pries comment that “there have been good people investing in good people” for eons, it does feel like we are in new territory and people still need to acclimate. As awareness of impact investing spreads, I think we have the opportunity to transition to something unique—even to a new conception of capitalism. That’s my optimists view. Others with more skeptical predispositions will roll their eyes. I think it’s in this eye-roll that social entrepreneurs can face an upward battle. A social entrepreneur working in education for low-income children I met recently told me that he was being asked by a group of finance-first investors whether his company could really meet their revenue targets given their tuition rates (too low) and right after he was asked by social-first investors whether his company could really meet their impact projections given their tuition rates (too high). His proposal seemed too good to be true but it was true! Here I come back to a leveling of the power dynamic between the social enterprise and the investor in this new financing paradigm and the importance of trust if it is to reach its full potential.
Jed - thank you for sharing Construction of an Impact Portfolio - http://www.impactassets.org/files/Issuebrief_No.15.pdf It is clearly written and provides useful examples throughout. It demonstrates agreement with our view that impact investing the need to demonstrate “the intention to make decisions in ways that prioritize impact”. Thank you also to Laura Ortiz Montemayor who shared—https://medium.com/@lauraom/a-new-kind-of-impact-investment-spectrum-the-holistic-spectrum-for-impact-ac221a6b44c6—Both demonstrate the vibrant creativity of this space. I would repeat the warning from the Impact Assets piece which starts with the heading, “The Bondage of Benchmarks” and reads—“Comparing any given investment strategy with a complimentary benchmark is the bread and butter of traditional investing. However, the use of benchmarks can be a limiting practice for both traditional and impact investors, having the effect of constricting one’s expectations of return and limiting one’s understanding of how any given strategy may be executed within a dynamic market. ” This is so important. It’s hard but vital to spot looming anachronisms to open up space for new/complimentary thinking of the kind that Laura Ortiz Montemayor presents in her piece.
Thought-provoking article and thread. I define seeking below-market impact returns as “philanthropic,” along the lines of program-related investments for foundations (PRIs). The article makes a fresh point about the history of philanthropic impact investments eventually catalyzing broader market-return opportunities. This is an important insight for philanthropic investors.
I like the thread in the comments that what is needed is a full and if possible standardized accounting of prospective and realized social and environmental returns from investment, so that investors can decide for themselves along a continuum of potential financial/social/environmental returns. Within the context of free-market investing, it is the investor that gets to choose what they are seeking, not the supplier of products.
Our products at New Summit Investments encompass a subset of impact investing opportunities – those that seek competitive returns with positive impact. It makes sense that there will be other philanthropic opportunities, which we don’t offer, that seek at times greater social/enviro impact and lower risk-adjusted returns.
Defining impact investing as philanthropic investing, as the authors are doing, seems overly narrow. Our definition at New Summit (we seek risk-adjusted returns with positive impact) does not exclude other approaches, it simply defines what we do. I wrote up our approach here in a short piece called “American Impact Investing” http://mailchi.mp/19dcb5e4b40a/thought-leadership-american-impact-investing
Again, thanks to all for your thought-provoking contributions.
From the social entrepreneur perspective, one that works like there is no tomorrow, trying to reach women and girls in the most difficult conditions with dignifying ways to manage their periods, this article is not only informative, but validating.
We cannot bundle all social entrepreneurs and their outcomes under the same umbrella, as it is not the same thing to sell organic juice at Whole Foods as it is to reach a schoolgirl with a solar lamp or a pair of panties in rural Uganda. Yes, we both work for a better world, nevertheless our outcomes in social good, financial returns, and what it takes to get them are completely different– as if from different universes.
Yes, we want market mechanisms to solve the lack of access to products and services to the most needed, yet those can’t thrive if there is no market development and the capacity of those users to pay for them. This puts an enormous load on social entrepreneurs: we expect them not only to develop new technologies, find new funding mechanisms to open new markets, and achieve attractive returns on the back of ultra-thin margins.
This generates an unexpected situation that makes it impossible for entrepreneurs to succeed without philanthropic capital. In fact, without access to long-term patient capital, which most often is semi or completely philanthropic, an entire generation of changemakers and entrepreneurs is facing a resource trap. It is important to address this before social entrepreneurship as a whole begins to get stuck in its own form of poverty traps.
Just remember that “social good” metrics are limited to controllable outcomes. Thus human/spiritual transformation is excluded. This insight from the bleeding edge of the Evaluation field is quite challenging for we who love concrete, controllable plans. 😉
For more, dig in on the Complex domain of the Cynefin framework. “Developmental Evaluation” is one good resource.
This is a rather obvious insight on reflection. Otherwise, we would all have perfect children 😊
COMMENTS
BY Naoki OKAMOTO
ON August 24, 2017 12:58 PM
Great Article. This is about the myth and reality of impact investing.
We must stress the role of the patient capital.
BY Luni Libes
ON August 24, 2017 01:34 PM
Mara and Chris, thank you for voicing this view on impact investing, as it is interesting to see what others are seeing in the space. Especially coming from big nonprofits like Oxfam and Shell. You seem to have a very different view than those of us on the for-profit side of impact investing.
We are not lacking dealflow, and not lacking opportunities that can make a positive societal and/or environmental impact, and at the same time return (or potentially return) the same risk/reward tradeoffs as the far more common software startups.
I’m turning away more of these than I can fund, in part due to the myth that impact investing is a form of philanthropy.
If Oxfam and Shell are lacking such dealflow, I invite you to partner with Fledge to create an accelerator and for-profit fund to help the companies I’m forced to turn away.
And I invite both of your organizations, along with any individuals, families, funds or foundations who consider themselves impact investors to join investorflow.org, a new, free network I’ve helped launch to help impact investors share their global dealflow, whether it be market rate or not.
My my seat, I’d say the problem isn’t dealflow, it’s the global nature of impact capital. The entrepreneur sitting next to me today in Peru today is from Rwanda, likely to be eventually funded by investors from four continents. The Nicaraguan honey exporter probably only three continents. Either way that’s a challenge these companies can’t do without global entities and global organizations that can reach and fund the global dealflow that is the reality of impact investing.
BY Matthew Weatherley-White
ON August 24, 2017 01:37 PM
Important article. Well observed and articulated. We share the author’s overall stance, but turn the question on its head by focusing on portfolio-level returns which solve for our client’s personal benchmark, which is in turn derived from a detailed lifetime discounted cash flow analysis. This allows us to intentionally consider what would be “below market rate”, high-impact investments without putting at risk the financial returns our clients require to accomplish their family or foundation goals. But this level of transparency and intellectual honesty is not captured by the binary, false-choice narrative of “grants vs. market rate”. In other words, one *can* invest for market rates of returns, but one *need* not do so.
BY Brooks Tanner
ON August 24, 2017 02:11 PM
Finally! Thank you.
BY Tom Aageson
ON August 24, 2017 03:26 PM
This is a courageous article. Discussing the Impact Investing priority o returns is squeezing good ideas out of the market. I understand low-interest loans for housing. That works well. But other attempts at real social impact are as you say, hardly producing those current rates. This is too close to the greedy efforts of a few micro loan endeavors that turned into IPO’s
BY Fred Whittlesey
ON August 24, 2017 04:29 PM
I think a discussion about rates of return must include consideration of the timeline. The classic 1-3-5 year measurement periods perpetuated by mutual funds is already obsolete as exit timelines for non-impact venture investors has stretched out to 7-10 years. Impact investing is relatively new, at least on its current scale, and it is too early to assess what the returns are. My most recent exit on a non-impact investment was 30x and it took 9 years. I was quite happy with a 46% compounded annual return. But had you asked me in year 5 or 7 or 8, it was still a big fat zero. Patience.
BY Enrique Perez
ON August 24, 2017 05:25 PM
Bolis and West hit the nail on its metaphorical head with this thought piece. I have been in the impact investing space now for seven years and am also skeptical of the “no tradeoffs” approach. You can’t extract value from a community or a landscape for decades and then suddenly expect that—with a loan—you can continue to derive the same value. It’s completely disconnected from reality. I suspect this is only going to get worse though as more online lenders begin to differentiate by referring to themselves as impact investors—all while pitching investors on 10x returns. For someone who’s done this work in some of the poorest areas of the country, it’s maddening! I full-heartedly believe the industry needs a “come to Jesus” moment where it can discuss what’s fair and what isn’t regarding collateral requirements and returns. I also would like social entrepreneurs to receive more education on what IS and IS NOT an impact investment, as I’m seeing a lot of snake oil salespeople these days.
BY R. Todd Johnson
ON August 24, 2017 05:56 PM
Thanks for taking the time to pen this great piece. There is great truth in much of what you say. And, I believe that you, Matthew Weatherly-White and Luni Libes are all right, depending on the type of money we are discussing and the type of impact we are attempting to achieve.
And more than anything, this goes to your point of impact transparency. But I would add an important clarification.
When we talk about impact investing (ie., where a causal connection exists between the capital deployed and the impact achieved), we might be talking about base-of-the-pyramid enterprises that help lift people of extreme poverty, or we might be talking about carbon mitigation strategies that use debt to help fund carbon credits and offsets, or we might be talking about resource impact through a forest conservation project. To look at it another way, we might be talking about an equity investment (to help some of the enterprises that Luni works with) or we might be talking about a fixed asset investment (similar to the type of investments made by an Ecotrust Forest Management, a Lyme Forest Conservation Fund or an Equilibrium fund). And importantly, we might be trying to compare an enterprise in East Africa (such as Sanergy focused on human waste disposal and fertilization) with a consumer goods company in the United States (such as FEED Project), with a software company seeking to do good (take your pick).
Not surprisingly, these are differences that matter.
They matter in terms of expected impact. And they matter in terms of expected returns.
But so far, all we can do is talk in terms of broad brushstrokes regarding impact success, and write articles about myths, based upon anecdotal evidence around the nexus between impact success and financial returns.
This can no longer stand.
We can’t continue to talk about all of these asset classes, strategies and geographies as if they are going to attract the same type of capital and produce the same type of return, investment by investment, and the same type of impact.
For this reason, Matthew’s organization (and others like them) are pursuing a portfolio approach on behalf of families who are seeking total impact with all their capital. And in many cases, these investors are not distinguishing between investment and philanthropic capital. For them, the difference in returns, given the asset class, the strategy, or the geography is not a myth, it is the reality they are leaning into, with tools that can help them understand, investment-by-investment, “how” their money is having impact, and “where” their money is having impact, and can show them that overall impact on a portfolio aggregated basis, just the way that they can see their overall financial return on the portfolio aggregated basis.
This is the type of transparency we are dedicating ourselves to bring to the impact investing arena with iPar. We are committed to providing investors with the tools they need to be able to compare, contrast, benchmark and decide on investments based upon detailed impact data, added to the already copious amounts of financial data they have on returns.
Our vision? That with impact transparency, we can stop talking about myths and move to a future where the transparency facilitates more capital deployed to encourage human flourishing.
BY MK
ON August 24, 2017 06:01 PM
Thank you! We have been saying this for years and we believe that the developing world needs a “new category” of risk capital. Capital that is willing to think beyond mainstream business like lending/ microfinance /rural distribution/supply chains. Capital that is willing to take much higher risks by investing in science and technology based products, capital that is ok with sub optimal returns, capital that is not paranoid about exit ........Since no one was doing anything about it, we have built our own innovation, incubation, acceleration and investment model in India. We invest in social sector companies with an approach which promotes “impact first with financial sustainability” or a “lot for loss” paradigm with very simple entrepreneurs friendly terms. I think impact investing is too hyped up, with very little focus on impact. In practice, every company that generates jobs and creates economic activity is driving impact and therefore every investor by definition is an impact investor.
BY Simba Marekera
ON August 24, 2017 07:26 PM
Mara and Chris, Thank you for an insightful article. As professional who has focused on Impact Investing, your thoughts helps to reflect on our work and ensure we stay on mission. I would be like to make a few observations.
1. If you look back long enough, almost every industry in the US received some subsidized capital in its infancy. Either in form government funded academic research that help launch as industries or through philanthropic foundations that had capital and social mission. e.g. touch screen technology was conceived more than 30 years in academic labs. Impact Investing is not as exception. There is room for grants and low cost capital for businesses that are experimenting on new business models to deliver essential goods and services at affordable prices. Commercial capital is required to bring to scale to those ideas that work.
2. Totally agree on permanent capital vehicles. PE model is usually to too short term for a businesses that are trying to serve a new market using a business model. It takes time.
3. Unfortunately, when it comes to the emerging consumer, there are familiar condescending assumptions that drive opposition to impact investing. One of the main ones is the thinking that there is no way businesses can profitably provide a high quality, affordably priced essential goods and services to the people in emerging markets. The thinking is that the only way you can do it is through charity work and unprofitable businesses. We have seen commercial innovation in developed markets drive costs down and increase access to products and services while also increasing profitability. We expect the same in impact investing. We expect social enterprises to see the emerging consumer for what they are, consumers. Businesses that take time to understand needs, wants, dreams and aspirations of the target consumer will ultimately do well both in terms of impact and commercially. The social enterprises and the communities they serve deserve the dignity of commercial risk. Ultimately, investors’ willingness to take commercial risk on the target communities and those communities’ willingness to be held accountable for that risk is what will move them out of poverty.
BY Prakash kr
ON August 24, 2017 09:29 PM
Yes patience is the key. So through impact investing if any one want to create impact in social and environmental sphere. I think they should keep investing for longer time horizon.
BY Jayant Sarnaik
ON August 24, 2017 09:33 PM
This article is providing great insights and reality checks for stakeholders on the both side of the fence. Very useful
BY Larry English
ON August 24, 2017 11:25 PM
Confirms our experience entirely! We’re hitting those targets, but at what cost? Great article!
BY Richard Milroy
ON August 25, 2017 12:20 AM
Great article. The cause of this, which is entirely predictable, is that investment service providers are keen to label what they have got as “impact investments” but they are unable to settle for lower financial returns, as businesses. They have huge marketing budgets and have unfortunately somewhat hijacked the agenda as they push to include what fits their business model into the definition of “impact investing”.
BY Matthew Weatherley-White
ON August 25, 2017 06:03 AM
Chapeau for these open, respectful and insightful comments. In particular, I’d like to flag Todd Johnson’s comment about an “impact continuum”. While it may be tempting to establish a minimal floor for impact performance, I suggest that there is a rational argument to be made for “better” in all asset classes and investment strategies, just as there is a clear distinction between “deep” (innovative, risky, subsidy-requiring) impact and more established verticals (like renewable energy project finance, which has seen cost of capital drop sharply over the past several years due, in part, to the early commitment of impact capital). Yes, the goal of impact investing has always been to harness the power of the capital markets to create durable, measurable social and environmental value. But it is also to force-evolve the capital markets to internalize what heretofore have been externalized costs. Yes?
I also couldn’t agree more with Mr. Milroy. One of the pervasive risks as impact scales is the dilution of standards to accomodate capital flows from institutions more interested in market share and revenue growth than they are in legitimately pursuing a different form of investing.
Always such a pleasure to read SSIR’s reader discussions!
BY Luni Libes
ON August 25, 2017 08:02 AM
Thank you Todd for a wonderful overview of the breadth of impact investing and Simba on the reminder that even “tech” was once funded by grants.
Those and the other comments remind me that I’m seeing more and more rounds of blended capital. The successful blended capital rounds match the needs and mandates of the funders, mixing grants, loan guarantees, debt, and sometimes equity.
BY Nick Ashburn & Katherine Klein
ON August 25, 2017 08:06 AM
Has Impact Investing Been Seduced? That’s One Hypothesis
(Full text also available at: https://socialimpact.wharton.upenn.edu/general-news/impact-investing-seduced-thats-one-hypothesis/)
We read Mara Bolis and Chris West’s thoughtful critique of the evolution of impact investing with great interest. Bolis and West argue that impact investors have become increasingly “seduced” by the promise of strong financial returns and strong social impact. Bolis and West worry that impact investors’ hopes and expectations of strong financial returns will lead them to sacrifice social impact, diminishing the impact in impact investing.
Could Bolis and West’s characterizations of impact investors’ beliefs, practices, and ultimate impact be correct? Yes.
But, is there rigorous research to support (or to refute) most of their claims? No, not yet.
Where Bolis and West see facts – evidence that impact investing has gone awry – we see hypotheses to be tested. Bolis and West’s claims are great fodder for research – research that the field of impact investing badly needs to achieve the kind of impact we’re all hoping to see.
Here are some of the thought-provoking and important hypotheses that Bolis and West advance:
• “According to the prevailing view, the achievement of both social impact and market-rate financial returns is the norm – not the exception.”
We know of no rigorous research on individuals’ beliefs about the ease of achieving both social impact and market-rate financial returns. We have no doubt that some individuals believe, as Bolis and West assert, that achieving both is the norm, not the exception. But, given prior research documenting that people believe that “nice guys finish last” – that is, people believe that truly altruistic individuals and companies do not benefit from their acts of altruism – we suspect the prevailing assumption may be opposite to what Bolis and West suggest. Many members of the public may believe that if a company truly has a positive social impact, it can’t generate strong financial returns. We’d love to see rigorous research examining individuals’ beliefs about the relationship between social impact and financial returns. We also wonder what shapes individuals’ beliefs. Do individuals’ beliefs reflect their experience, training, politics, or even their personality? We’ve got a lot to learn from research on this topic.
• “Achieving predetermined financial returns has become the primary goal, with the needs of investors taking priority over the interests of the communities their funding seeks to remedy.”
Bolis and West’s statement implies that funds that seek market-rate financial returns make investments that generate less social impact than funds that seek concessionary returns. This is certainly possible. But, as above, we know of no rigorous research testing this hypothesis. At the Wharton Social Impact Initiative, we’re building a data base that will allow researchers around the world to test this and related hypotheses. From our initial research, we know that impact investing funds differ substantially in the financial returns they seek. Even the impact investing private equity funds in WIRED (the Wharton Impact Research and Evaluation Database) that identify as “market-rate-seeking” vary widely in how they use the term – from a 4% target net IRR to well above 20%.
We don’t yet know from our research whether impact investing funds that seek higher returns achieve the same, more, or less social impact than funds that seek lower returns. Clearly, this is a critical question for the future of impact investing. Is a fund’s social impact positively related to its financial performance, negatively related, or unrelated? As we grow and strengthen WIRED, we hope and expect that researchers at Wharton and beyond will examine in depth the relationship among funds’ financial goals, financial performance, and social impact.
• “Social entrepreneurs often accept financial terms and conditions that pressure them to drift from their social mission.”
This, too, is an interesting and important hypothesis for research. To the best of our knowledge, researchers have yet to document the experience of social entrepreneurs as they seek and gain impact investments. We would love to know the extent to which private equity impact investing funds support, tolerate, or challenge portfolio companies’ achievement of their social impact goals. In the finance research literature, we’re seeing studies of the strategies that traditional PE funds employ to maximize the value of their investments. How different are impact investing PE funds? The legal documents – limited partner agreements and term sheets, for example – that we’re collecting in WIRED will provide important empirical insights. In coming years, we hope and expect to see increasing research on the experiences of social entrepreneurs as they seek and gain impact investments. There are plenty of important questions here for impact investors, social enterprises, and for researchers in law, finance, management, and more.
As the field of impact investing grows, so grows the need for rigorous research on impact investing practices and effects. While Bolis and West make some strong assertions, they also note a need for “more independent research” and “greater transparency in reporting the social return as well as the actual financial returns (gross and net) achieved by impact investors.” We could not agree more.
If you’d like to help us build the evidence base for impact investing – especially if you’d like to submit your data – we would love to hear from you. Please contact the Wharton Social Impact Initiative at .(JavaScript must be enabled to view this email address) to learn how you can get involved in our research efforts.
BY Scott Sacknoff
ON August 25, 2017 10:13 AM
Read with interest the article and the comments but felt it was missing two key points.
Years ago I worked in venture capital and pitched my university endowment office an Investment with the added benefit that I could steer firms toward hiring students. I was “educated” that they were evaluated on their ability to grow the endowment not student jobs. If they could hit their targets investing in cow manure futures they do so, otherwise they wouldn’t have a job long.
As socially responsible investing moves toward the mainstream one must consider the individual motivations of the investor. Some will be willing to accept below market returns for their whole portfolio, some part, and some none.
Which leads to the second point, impact investing is not just a single type of investment. Private deals/boots-on-the-ground type efforts can have the most direct impact but good deals are hard to come by and one needs access to those deals. Access to many are reserved for institutions and the high net worth.
Debt offerings, like school bonds or to improve municipal water systems have been the easiest to access, and can produce market or near-market returns—for its bond category benchmark not the stock market. To professionals investors that is like comparing apples to oranges.
The third category of impact, which makes up less than 10% of the market according to GIIN, is public equity. While it is harder to draw relationships to a direct action-reaction, it encourages investors to commit capital toward beneficial areas, target a market return, feel like they are making a difference….and importantly get them comfortable investing in this manner and open them up to future private opportunities.
The public side of impact investing is evolving. For it to truly take hold and attract a greater share of the trillions invested in public equity, one must attempt to target the returns achieved by other equity products in the market.
For one methodology, please check out the SSI Impact Index (ICANNDX) http://impactindexsolutions.com which represents 20 challenges affecting society and the environment, is aligned in many ways with the UN SDGs, and that provides an equity benchmark for a diversified portfolio of public equities whose products and services operate in Impact categories from clean water to eldercare.
BY Rex Wardlaw
ON August 25, 2017 10:29 AM
Full Disclosure: I am invested in Fledge with Luni.
Great article and comments. The term “impact investing”(SI) is used so widely that I largely ignore it and focus almost entirely on the type of investments, people involved and realistic expected outcomes, as I do with all my personal investments. That said, I approach anything I define as an SI investment with a lower threshold for expected returns and a longer horizon (for the returns to materialize). This mindset is informed by a personal opinion that SI investing is not mainstream, and in reality, is almost by definition a passionate effort by an entrepreneur from the “outside” to battle against the prevailing norms (cultural/societal, business, political, etc…) to bring about a change for greater good; oh, yeah, and to build a sustainable business that eventually returns a profit.
To be clear—I firmly believe one can have a profit motive in making “social impact” investments, but one needs to be acutely aware that the risk profile is higher and time to exit most likely longer than one would normally expect. That is my experience, but it is solely anecdotal.
The academic studies outlined above (by all of the scholars who have contributed to this discussion) are important in defining the arena, the history and a more robust database of expected outcomes/timelines for potential investors in SI projects, now and in the future.
I look forward to learning more about the research being done in this area.
BY The Global Impact Investing Network
ON August 25, 2017 02:37 PM
We thank the authors for this thoughtful article on an important topic. As impact investing becomes more popular and widely adopted, it is ever more important to ensure that we maintain the rigor of practice and the focus on impact that has always defined the space.
It has been shown that impact investing is an approach to deploying capital that can be applied across myriad strategies and asset classes. Naturally, this leads to a variety of possibilities in terms of risk, return, and impact, and attracts investors across the spectrum, from those that principally seek opportunities targeting risk-adjusted market rate returns to those seeking opportunities that target below-market returns.
It is exciting for many in the industry to observe the growing evidence base that shows that risk-adjusted returns are feasible in specific segments of the market. Such data is also proving critical for industry growth, making impact investing a viable option for many institutional investors and bringing in much-needed capital with which to tackle social and environmental challenges. However, we should not presume that all impact investing opportunities can – or, for that matter, should – generate market returns. Indeed, some do not and may never do so. Our research indicates that impact investors – both those seeking market-rate returns and those seeking below-market returns – universally recognize the critical roles that below-market capital plays in the industry. These roles may include financing investments that do not lend themselves to market-rate returns, acting as a bridge between philanthropy and market-rate capital, and helping to de-risk investment opportunities for other investors.
The idea that there is a clear yes/no answer to the question about whether there is a trade-off between financial performance and impact performance is, in our view, oversimplified. The true answer – as with any complicated question – is “it depends.” It certainly stands to reason that pursuing impact can often be good for the bottom line. As other recent research has confirmed, taking into account the best interests of one’s customers, suppliers and employees – or for that matter, the planet – simply makes good business sense in the long run.
Impact investing has enjoyed tremendous growth over the past ten years. We are now at a critical juncture. The authors are right to emphasize the need to develop a robust evidence base on the impact side of the equation. Performance research to date has focused on financial returns both because of the strong demand in the industry for financial performance data and due to the fact that while widely agreed upon measures exist for aggregate financial performance, they don’t yet exist for impact performance. However, for the industry to continue to succeed and achieve its full potential, we fully recognize the need for greater transparency on impact. There are several promising initiatives on this front – such as The Impact Management Project – with which the GIIN is involved. Further, the GIIN is also exploring what a code of practice/principles would look like, to clarify expectations for people calling themselves impact investors.
The scale of social and environmental challenges facing the world today are enormous. As is widely known, trillions of dollars are needed annually if the world is to meet the sustainable development goals set for 2030. As such, more capital is required at every stage of the investment spectrum if this need is going to be met and impact investing is going to be successful.
Abhilash Mudaliar
Director of Research
Global Impact Investing Network
BY Gerhard Pries
ON August 27, 2017 10:30 AM
Thank you to Mara and Chris for a thoughtful and though-provoking commentary.
Our firms is the grateful inheritor of a 65-year history of impact investing. Our predecessor, MEDA, began as an impact investing company in 1953, investing in small business in LATAM, and then Africa and Asia, for a clear double bottom line: social and financial. Because of this history, JP Morgan, in its first impact investing report in 2010, identified Sarona/MEDA as perhaps the first impact investing firm. That’s rubbish: impact investing is not a shiny object we all just discovered in the last decade. There have been good people investing in other good people since the beginning of time.
What has changed is a recent opening of the discourse into an open community. Yes, the openly-stated sole objective of the investment sector’s mandate has, for the last 75 years, been shareholder value. But, in the villages and towns where family businesses were being launched and grown, a great many business owners sought to build up their communities. My mother used to say to me that, “A business owner should only eat after the employees have had more than enough to eat.” What’s new today, perhaps, is that we have brought that sentiment into an open community conversation.
Impact investing is not about providing capital to a niche social enterprise. That’s cute – and it should be done – but it won’t move the needle for the poor. Impact investing is about the broad adoption of social and environmental imperatives by the business community and the investment industry. Thankfully, that has begun to happen today. The world’s thanks go out to SSIR, to GIIN, and to each of the people responding to this article, people who care enough to raise their voice. Thank you!
Two years ago, I spoke to the UN as it assembled in Addis Ababa at the occasion of their Financing for Development conference. Country after country stood up to acknowledge (over the protests of Cuba) that “Business is not the problem; business is an integral part of the solution.” One after another, heads of state and other world leaders rose to acknowledge that economic growth mattered, and that a partnership with the private sector was critical to achieving the SDGs. Germany and Nigeria most clearly articulated acceptance of the private sector’s need for profitability and sustainability. A successful partnership, they said, required mutual acceptance of the others’ goals.
And at a hotel across the street, under the auspices of the World Economic Forum, corporate leaders from large companies down to smaller financial intermediaries rose to acknowledged that their ultimate success was dependent on a prosperous world for all, saying, “We recognise and accept our responsibility not only to shareholder value, but also to people, community and the environment.”
The dream is happening.
If we are going to move the needle for the poor, if we are going to deliver prosperity for all, impact investing must involve not only the NGOs and the niche social enterprises (yes, that too), but it must, slowly but surely, change the way Wall St. and Fleet St. thinks and acts.
Gerhard Pries
Managing Partner
Sarona Asset Management (yes, we’re working to change the world, to deliver prosperity for all today and for future generations.)
BY Matthew Weatherley-White
ON August 28, 2017 08:47 AM
I can’t recall a thread as insightful, respectful, experienced and inspiring as this one. Thank you to Gerhard, Todd, the authors of the catalyzing piece and everyone else. Makes me incredibly proud to be a very small part of the ever-growing impact investing eco-system.
BY Mara Bolis
ON August 29, 2017 10:49 AM
Thank you for this vibrant discussion. Your comments illustrate the vast heterogeneity of the space, alongside the need for more segmentation, transparency and independent research to untangle this ball of yarn. R Todd Johnson’s and Scott Sacknoff’s points about how different opportunities with vastly different risk profiles and projected outcomes are being thrown into one box together gets to the point precisely…. In the same article about impact investing the reader could envision either an investment in a cell tower project in Myanmar (which might have some positive long term impact but may operate without intentionality in its business operations) or a reusable sanitary napkin social business in Nigeria. Without better categorization, transparency, and, frankly, honesty, we are talking past each other.
That said, I agree with Rex Wardlaw, Fred Whittlesey that impact investing requires a shift in mindset from traditional investing— given the different goals of impact investing, the parameters and expectations must also be different. As Fred Wittlesley says the firms here are battling “against prevailing norms (cultural/societal, business, political…) to bring about change for greater good; oh, yeah and to build a sustainable business that eventually returns a profit.” To Simba Marekera’s point that social enterprises and people they serve deserve the dignity of commercial capital, I believe this brings us back to the binary paradigm – it’s either a hand out or its commercial capital. This stymies the energy to invent new financial products that are fit for purpose and instead forces firms into old products that were built for a financing regime that didn’t take social or environmental considerations into account.
This is not to say that there is a problem with a profit motive in “social impact” investing but rather that the parameters, behaviors and practices should adapt. It’s actually a design problem. By not designing around the investor’s needs instead of the enterprise/problem it is trying to solve, we are undercutting the creativity of the space, which means, as Tom Aageson states, that “good ideas are squeezed out of the market”.
To Abhilash Mudaliar’s point “The idea that there is a clear yes/no answer to the question about whether there is a trade-off between financial performance and impact performance is, in our view, oversimplified. The true answer – as with any complicated question – is ‘it depends.’ It certainly stands to reason that pursuing impact can often be good for the bottom line. As other recent research has confirmed, taking into account the best interests of one’s customers, suppliers and employees – or for that matter, the planet – simply makes good business sense in the long run.” Of course – we are trying to push all private sector actors in this direction. This also reflects Gerard Pries’ view that the end-game is to shift industry practices in a more pro-poor and pro-environment direction. To move the needle on poverty our goal “must [be to], slowly but surely, change the way Wall St. and Fleet St. thinks and acts.” Yes, absolutely. But what happens when profit and purpose aren’t in alignment? Who will win out – investors or disconnected/unrepresented populations who these investments purport to serve? Given levels of disclosure and the extent to which impact is often assumed rather than proven, how would you ever know the difference? In traditional finance, there is only one master to serve. In impact investing it’s more complicated. We need to build in oversight mechanisms that protect the purpose side from being over-run by profit objectives when times get tough. We should enter into this space wide eyed about the power imbalances and information asymmatries at play within the investment value chain.
Matthew Weatherley-White– I appreciate illustration of the heterogeneity of the space and completely agree that there is an argument for “better” in all asset classes and investment strategies. I’m intrigued by the statement, “to force-evolve the capital markets to internalize what heretofore have been externalized costs”. I think what you may be getting at is the need for better and more equitable risk sharing between the investor and the investee. Curious to hear more.
Simba Marekera– Could not agree more for the need to assist companies in the early stages with grants but somehow once social enterprises start earning revenue they are required to justify why they need grants at all. Many will have read the excellent Toward an Efficient Impact Frontier by Michael McCrelass in SSIR. In it, Michael recounts some reactions from donors as Root Capital sought grant funding, namely “’Why, given that you are generating revenue, do you need grant funding from us?’ ‘Is my grant just subsidizing returns for your investors?’ One donor asked outright, ‘Am I the dumbest money in the room?’”. In this way, social enterprises are not being afforded the runway that are afforded to impact agnostic tech entrepreneurs from elite universities. This is not to disparage their abilities nor to condescend to people living in poverty. In fact, it’s to afford them the privileges others receive.
Abhilash Mudaliar rightly reminds us of the “trillions of dollars are needed annually if the world is to meet the sustainable development goals set for 2030”. Without more research of the kind I know GIIN and others are pursuing to help clarify, we can end up not with “more” funding but with funding that has been re-labeled and re-categorized. MK’s point, “In practice, every company that generates jobs and creates economic activity is driving impact and therefore every investor is an impact investor.” In impact investing, we have the opportunity to try harder and do things differently than we have before. Without transparency, independent research and disclosures we don’t know how much is real change and how much is “marketing” as Richard Milroy says.
Nick Ashburn & Katherine Klein’s response is critical. Ours is a “viewpoint” piece that is a reflection of our lived experience and response to the prevailing literature. If this article spurs more independent research into some of the questions we’ve raised, we will consider this effort wildly successful. In particular, proliferation of research examining the experience of those seeking impact investing (such as Keystone’s What Investees Think and The Report of the Alternative Commission on Social Investment) is critical for the success of the field. Because, as stated above, the downside risk of a failed social enterprise – or failed social investment, to broaden beyond the socent space - is borne also by the community it was set up to serve.
BY Laura Ortiz Montemayor
ON August 31, 2017 02:48 PM
First of all: THANK YOU MARA & CHRIS for writing this and responding thoughtfully.
How can I be in touch with you by email?
I would love to join you in the quest for your concluding points (code of the impact investor, commitment to outcomes, etc.) I have built this new spectrum proposal for impact investing, precisely because of this never ending, returns discussion:
https://medium.com/@lauraom/a-new-kind-of-impact-investment-spectrum-the-holistic-spectrum-for-impact-ac221a6b44c6
I would love to hear your thoughts on it and ask you if you want to join me for this study, you would be truly appreciated.
My e-mail is .(JavaScript must be enabled to view this email address).
I am looking for visionary partners that see Impact Investing as an industry ripe for disruption and clarity.
All thought leadership of Impact Investing I’ve seen so far has come from the “global north” perspective so I find it challenging to be heard. (woman social entrepreneur from Latin America with no Ivy League University resources to publish her input).
My comments:
one thing I find hard to agree with you is this “risk-adjusted market-rate returns or close to market-rate returns. For any fund manager to generate a net 10 to 15 percent portfolio return,”——Where did you get the idea that market rate returns are 10 to 15%?
Market rate returns are elusive, mythical creatures in any asset class and in extractive or impactful investments.
BY Andrew Siwo
ON August 31, 2017 07:33 PM
We appreciate the insightful article shared by the authors, and find it encouraging at this juncture in impact investing. As more and newer investors consider how to invest their capital, identifying what is and is not an impact investment can be confusing. The authors declare that impact investing may be drifting from its original intention, and that proliferating claims of achieving market rate financial returns as well as social and/or environmental impact should be questioned.
The excruciatingly low to no tolerance for malperformance of impact investments supports the authors’ views. If an investment in Google (Alphabet) stock were to plummet, hardly many investors would entirely give up on technology stocks. The same leeway is not granted to impact investments, which are largely affected by spotty information that is not comprehensively or easily comparable. Few, if any, research reports have been able to compare impact investments across several asset classes, geographies, sectors or themes, and impact quality as the authors have noted. As a result, an exercise of determining whether a return “trade-off” exists for impact investments writ-large is like comparing return “trade-offs” between investing in a stock or a bond.
We have found from impact managers we have recommended that the conclusion referenced in the 2015 GIIN benchmark study of market rate returns being achievable is—accurate, and not to say that every manager has been able to achieve market rate returns, in every geography, in every asset class, in every vintage, addressing every type of problem. At the time, many wondered if impact investments only had great stories after being largely void of any extensive financial performance research.
Market rate returns may not be appropriate or even an option for some impact investors. Below market rate returns may not be appropriate or an option for some impact investors. The desire to achieve top risk-adjusted financial returns, itself, and impact, in many cases, aren’t mutually exclusive. Investors can minimize their opportunity costs and still make legitimate impact investments that achieve desired returns.
Even without an impact constraint, asset managers struggle to beat market performance. According to the S&P Dow Jones Indices, from 2000-2016, only five percent of mutual funds investing in large U.S. companies that had a winning three-year record against the S&P 500 continued to beat their benchmarks in each of the three following years. It’s not surprising that manager selection has continued to be a leading factor in selecting impact investments for a desired financial return. It’s incumbent of those responsible for manager selection to ask the right questions to determine whether a manager ascribing to an impact label is legitimately an impact fund.
We realize that many managers are making worthy investments, but don’t belong or qualify as impact investors. Those that may target only market rate, risk adjusted investments as a duty to clients, should also take the same care and concern when certifying or recommending managers that have met a threshold capable of withstanding scrutiny. Establishment and adoption of characteristics useful and actionable by practitioners will surely reduce the “trade off” tension, and perhaps comfort those that believe that the achievement of top returns is only a result of playing by different or unclear rules.
Managers that are impact investors should have noticeable characteristics, among them include: (1) a clear expression of the social or environmental problem they seek to solve, (2) the core of their portfolio invested in products or services that have a social or environmental benefit, (3) factor impact into their investment selection process, and (4) measure and report on metrics relevant to the enterprise or portfolio.
Impact investing is the pursuit of a dual object of achieving both a financial and social/environmental return. Governments and non-profits alone won’t be able to address the enormous challenges facing us today or in the future. We appreciate the penetrating article and the views of commenters earnestly illuminating the value of clearer parameters for impact investors.
Andrew Siwo
Colonial Consulting
BY Mara Bolis
ON September 1, 2017 11:34 AM
Laura - Thanks so much for your comment. I’ve heard somewhat repeatedly that many have struggled in the past to “see themselves” in the prevailing impact investing literature. Part of what drives my work is the hope that we can invite voices like yours into the conversation! I feel very strongly that there are important and heretofore disregarded voices who have much to add to the field. I will be in touch separately over email to hear more about what you are working on.
Re “market rate” - I hear you. It’s something we discuss often—is there even a discreet “market” for impact investing? What is a reasonable point of comparison given that ii is a/ a work in progress b/heterogeneous. That said, the GIIN “Introducing the Benchmark” says the following—“Again, in the interest of focusing on a relatively uniform set of data, this research restricts itself to those funds that target risk-adjusted market-rate returns. Specifically, this means private equity and venture capital funds with a target net internal rate of return (IRR) 4 of 15% or higher, and mezzanine funds with a target net IRR of 10% or higher. “
BY Mara Bolis
ON September 1, 2017 11:42 AM
Andrew - I read this and said, Yes, yes, yes, yes, yes, yes. Yes. “The excruciatingly low to no tolerance for malperformance of impact investments supports the authors’ views. If an investment in Google (Alphabet) stock were to plummet, hardly many investors would entirely give up on technology stocks. The same leeway is not granted to impact investments, which are largely affected by spotty information that is not comprehensively or easily comparable. ” I just don’t understand it when impact investing carries a double burden of return + impact that is far from simple. Yet, there appears to be a penalty. These parameters that you lay out are, I believe, a helpful guide for others—“Managers that are impact investors should have noticeable characteristics, among them include: (1) a clear expression of the social or environmental problem they seek to solve, (2) the core of their portfolio invested in products or services that have a social or environmental benefit, (3) factor impact into their investment selection process, and (4) measure and report on metrics relevant to the enterprise or portfolio.” Thank you for sharing your thoughts!
BY Scott Sacknoff
ON September 1, 2017 12:01 PM
Impact likely carries the double burden of return because the concept of investing for Impact and return is relatively “new”. Google is a known entity so fluctuations can be more easily tolerated. The way to overcome this is for more people to invest in public equity impact so they get comfortable with the philosophy.
BY Jed Emerson
ON September 5, 2017 05:06 AM
Great piece and excellent comments, so thanks to all!
I would underscore Matthew Weatherly White’s comment and add that Total Portfolio Management http://bit.ly/2gJxCnP allows asset owners to look across the capital/impact continuum and assess what the right mix of financial and extra-financial returns are wrt their overall goals, etc.
In this way, one can structure right capital for the right instrument and better manage for Total Performance and Blended Value.
BY Mara Bolis
ON September 5, 2017 06:24 AM
Scott - yes - remaining aware of Gerhard Pries comment that “there have been good people investing in good people” for eons, it does feel like we are in new territory and people still need to acclimate. As awareness of impact investing spreads, I think we have the opportunity to transition to something unique—even to a new conception of capitalism. That’s my optimists view. Others with more skeptical predispositions will roll their eyes. I think it’s in this eye-roll that social entrepreneurs can face an upward battle. A social entrepreneur working in education for low-income children I met recently told me that he was being asked by a group of finance-first investors whether his company could really meet their revenue targets given their tuition rates (too low) and right after he was asked by social-first investors whether his company could really meet their impact projections given their tuition rates (too high). His proposal seemed too good to be true but it was true! Here I come back to a leveling of the power dynamic between the social enterprise and the investor in this new financing paradigm and the importance of trust if it is to reach its full potential.
BY Mara Bolis
ON September 5, 2017 06:46 AM
Jed - thank you for sharing Construction of an Impact Portfolio - http://www.impactassets.org/files/Issuebrief_No.15.pdf It is clearly written and provides useful examples throughout. It demonstrates agreement with our view that impact investing the need to demonstrate “the intention to make decisions in ways that prioritize impact”. Thank you also to Laura Ortiz Montemayor who shared—https://medium.com/@lauraom/a-new-kind-of-impact-investment-spectrum-the-holistic-spectrum-for-impact-ac221a6b44c6—Both demonstrate the vibrant creativity of this space. I would repeat the warning from the Impact Assets piece which starts with the heading, “The Bondage of Benchmarks” and reads—“Comparing any given investment strategy with a complimentary benchmark is the bread and butter of traditional investing. However, the use of benchmarks can be a limiting practice for both traditional and impact investors, having the effect of constricting one’s expectations of return and limiting one’s understanding of how any given strategy may be executed within a dynamic market. ” This is so important. It’s hard but vital to spot looming anachronisms to open up space for new/complimentary thinking of the kind that Laura Ortiz Montemayor presents in her piece.
BY Adam Seitchik
ON September 14, 2017 07:44 AM
Thought-provoking article and thread. I define seeking below-market impact returns as “philanthropic,” along the lines of program-related investments for foundations (PRIs). The article makes a fresh point about the history of philanthropic impact investments eventually catalyzing broader market-return opportunities. This is an important insight for philanthropic investors.
I like the thread in the comments that what is needed is a full and if possible standardized accounting of prospective and realized social and environmental returns from investment, so that investors can decide for themselves along a continuum of potential financial/social/environmental returns. Within the context of free-market investing, it is the investor that gets to choose what they are seeking, not the supplier of products.
Our products at New Summit Investments encompass a subset of impact investing opportunities – those that seek competitive returns with positive impact. It makes sense that there will be other philanthropic opportunities, which we don’t offer, that seek at times greater social/enviro impact and lower risk-adjusted returns.
Defining impact investing as philanthropic investing, as the authors are doing, seems overly narrow. Our definition at New Summit (we seek risk-adjusted returns with positive impact) does not exclude other approaches, it simply defines what we do. I wrote up our approach here in a short piece called “American Impact Investing”
http://mailchi.mp/19dcb5e4b40a/thought-leadership-american-impact-investing
Again, thanks to all for your thought-provoking contributions.
BY Diana Sierra
ON October 24, 2017 12:55 PM
From the social entrepreneur perspective, one that works like there is no tomorrow, trying to reach women and girls in the most difficult conditions with dignifying ways to manage their periods, this article is not only informative, but validating.
We cannot bundle all social entrepreneurs and their outcomes under the same umbrella, as it is not the same thing to sell organic juice at Whole Foods as it is to reach a schoolgirl with a solar lamp or a pair of panties in rural Uganda. Yes, we both work for a better world, nevertheless our outcomes in social good, financial returns, and what it takes to get them are completely different– as if from different universes.
Yes, we want market mechanisms to solve the lack of access to products and services to the most needed, yet those can’t thrive if there is no market development and the capacity of those users to pay for them. This puts an enormous load on social entrepreneurs: we expect them not only to develop new technologies, find new funding mechanisms to open new markets, and achieve attractive returns on the back of ultra-thin margins.
This generates an unexpected situation that makes it impossible for entrepreneurs to succeed without philanthropic capital. In fact, without access to long-term patient capital, which most often is semi or completely philanthropic, an entire generation of changemakers and entrepreneurs is facing a resource trap. It is important to address this before social entrepreneurship as a whole begins to get stuck in its own form of poverty traps.
BY Pete Holzmann
ON January 11, 2018 11:23 AM
Just remember that “social good” metrics are limited to controllable outcomes. Thus human/spiritual transformation is excluded. This insight from the bleeding edge of the Evaluation field is quite challenging for we who love concrete, controllable plans. 😉
For more, dig in on the Complex domain of the Cynefin framework. “Developmental Evaluation” is one good resource.
This is a rather obvious insight on reflection. Otherwise, we would all have perfect children 😊