As always, I enjoy Paul Brest’s provocations to the impact investment world to be accountable for the hard work of actually creating social value, rather than just talking about it at conferences or hand-waving about ESG. I appreciate Brest and his co-authors continued drive for precision of language and thought as to what impact investing actually means.

I confess, however, that I continue to be overwhelmed by the plethora of frameworks, theories, and definitions from them and others. I am still seeking that basic insight into investor, fund management, and company behavior that will allow me to make sense of it all. When confused, as I often am these days, I return to the simplicity of incentives: human beings respond to incentives, whether financial or otherwise. Financial markets can work incredibly well in allocating capital through providing financial rewards for appropriately priced risk. And through this finely-tuned incentive structure have historically created extraordinary social value when financial risk-reward aligns with solving a social problem—in creating life-saving medicines, or enabling life-changing communications technologies.

But these same incentives often do not work, and even worse, can sometimes have negative consequences for our health, environment, and society. The simple question that the authors are trying to answer is how can impact investors create incentives for alternative social-value creating behaviors beyond existing financial risk-reward curves? I think that the reason we all get overwhelmed in trying to answer this question is because it depends—on the sector, on the market failure, on the human talent, on the regulatory environment, and on the historical evolution of the market. And the tools, frameworks, and metrics that we keep trying to define and refine often need to be created bespoke, or carefully adapted to the complexity of the social problem that we are trying to solve. Until we have more concrete data and non-sugar-coated insights on successes and failures from the first wave of impact investments, I expect continued befuddlement.

Despite my theoretical confusion, I largely agree with the authors’ concluding advice to investors that trying to influence public markets will be largely ineffectual unless pursued at the immense scale that are relevant to those markets, and integrated with broader public relations efforts. I am probably more positive than they are that for some sectors, especially those enabled by innovation such as health and digital infrastructure, financial markets can over time align well with social value creation. And because of this those sectors deserve additional allocation of capital from impact investors. I know too well that some of the most challenging and important social sectors, such as education, global health, and agriculture, are likely to require thoughtful use of subsidy to create the incentives for social-value creating behaviors.

At the end of the day, I am fundamentally optimistic that human beings seek more to life than financial incentives. Companies accessing capital from traditional financial markets must of course respond to the embedded financial risk-reward incentives, and we are foolish to expect them to do otherwise. But I know from experience that the people themselves working within the best companies in the world are more often than not motivated by solving problems and making the world a better place. For now, I see the role of impact investors as trying to figure out in a practical way how to give great people working in great companies even more space, time, and resources to do so until we have better evidence as to what works at a more systemic level.

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