We at Root Capital read the Cambridge Associates and GIIN Impact Investing Benchmark report from the vantage point of the “high-risk, low-return sweet spot” that is agricultural lending to small and growing businesses that in turn reach smallholder farmers, the vast majority of whom are living on less than $2 per day.

In the dusty back roads that we travel, we have found that there are indeed many creditworthy businesses, and even some to which we can lend profitably. For reasons described in more detail elsewhere, however, the economics of our business do not generate the type of market-rate returns described in the report. And on average, the financial returns get worse as the unmet need—and hence the impact—increases.

Root Capital is squarely in what the GIIN calls the ‘concessionary’ or what some call ‘impact-first’ segment of the impact investing market. We set out to address a particular social need, and secondarily, to see if we could generate some financial return along the way. ‘Finance-first’ investors set out to achieve market-rate financial returns and see if they could generate some impact along the way.

The term ‘impact investing’ currently encompasses both approaches. Both are valid and yet increasingly it seems that they have conflicting needs that are difficult to reconcile within the confines of one big tent.

Finance-first investors need the GIIN to help them build credibility with regards to their ability to place capital at scale and with market-rate or almost market-rate returns. They need the GIIN (or others) to confer upon them the imprimatur of the term ‘impact,’ but generally push back against efforts to measure impact. Indeed, some see the GIIN—co-founder and current home of the Impact Reporting and Investment Standards (IRIS) taxonomy of impact metrics—as being too focused on impact.

In contrast, ‘impact-first’ investors need the GIIN to facilitate the measurement of impact and to illustrate the relationships between different types and depths of impact and financial returns. Doing so helps individual investors benchmark and improve their performance, and bolsters the case for upstream capital providers to consider accepting lower-than-market-rate returns in order to address problems that would not otherwise be ameliorated by capital markets.

In short, impact-first investors need the GIIN to focus on impact measurement; finance-first investors need the GIIN not to over-focus on it.

In this context, we read the press release announcing the report with mixed feelings. The ability to create a benchmark for financial performance is indeed a step forward for the impact investing sector. But the press release seemed to imply that the report demonstrated impact as well as financial performance of the funds in the benchmark.¹ In fact, the report is explicit that it does not measure impact. Casual readers might even jump to the conclusion that because some types of impact can be generated without sacrificing financial return, then it should be possible to generate all types of impact without sacrificing financial return.

For this reason, we would encourage readers to click past the press release to the actual report itself, which is an excellent piece of research. It is nuanced and scrupulous, supporting its conclusions with careful analysis of painstakingly assembled primary source data. Its conclusion is that private investment funds that have intent to create a positive social impact and that target market-rate returns can achieve (nearly) market-rate returns.

The rub, of course, is in the intent. In the report as elsewhere, the GIIN defines impact investing by intent to create positive impact. Intentionality is a reasonable threshold to start with, given the challenges of measuring impact. We believe, however, that over time the bar should be raised from intentionality to additionality. Additionality refers to the extent to which an investor’s capital, as well as non-financial assistance and participation in investee governance, are additional to what would have happened otherwise.

In other words, if you want to change the world, you have to do something that wasn’t going to happen anyway. This terrain has been ably covered by Paul Brest and Kelly Born in two Stanford Social Innovation Review articles, “When Can Impact Investing Create Real Impact” and “The G8 Task Force Report: Making Impact or Making Believe?”; GIIN CEO Amit Bouri responded to the first article.

For our part, in our social and environmental due diligence of prospective borrowers, Root Capital evaluates the additionality of our capital and financial management. A recent quasi-experimental impact evaluation, though not definitive, indicates that our loans do represent capital that our clients would not otherwise have obtained, and that these enterprises use to increase volumes and prices of their purchases of agricultural products from smallholder farmers.

The publication of a benchmark for the financial returns of market-rate impact investing is an advance for the sector. The GIIN has also expressed a desire to publish a similar financial benchmark for concessionary impact investing funds, and we look forward to that report.

We call on the GIIN to use its leadership position in the industry to ultimately bring transparency not only to the financial returns of impact investing, but also to its associated impact, across the spectrum of financial return and impact. While market-rate returns with substantial impact may be available in some verticals, there may be tradeoffs between financial return and impact in others. Understanding these tradeoffs will enable investors to more efficiently allocate their capital to achieve the desired blend of returns and impact they desire. It is in every impact investor’s interest to avoid inflating expectations of impact beyond what we can demonstrate in the long run, when the world asks us, “So? Did impact investing have an impact?”

Read the rest of the responses.