Paul Brest, Ronald Gilson, and Mark Wolfson’s article is a welcome contribution to the literature on impact investing as it brings a sober and analytical perspective to a fast-growing, but still loosely defined, investment practice. We appreciate the rigor of their approach and their efforts to bring both public and private market investing into the scope of the conversation. Perhaps their most important contribution is the clarity they bring to the differentiation between values aligned investing and value creating investing.
We do have a few comments specific to the part of the article about non-concessionary private impact investment funds (Bridges Ventures’ primary strategy in the United Kingdom and the United States).
First, the authors are mistaken in assuming that there is a linear correlation between the amount invested in a business and the delivery of socially valuable outputs. Bridges looks for businesses where commercial success and social value move in lock step, and after an initial period of equity investment to acquire a company or to support the start-up costs, we expect the business to generate profits that will finance future growth and impact. While many of our growing companies do need to access capital to finance growth, they often tap into socially-neutral financial institutions for this capital, such as working capital lines of credit.
The authors suggest that a non-concessionary impact investor will be reluctant to share an investment with other impact investors, preferring to “reserv[ing] the opportunities for [its] own limited partners in order to attract more investors to its funds”—and that by doing so, they will necessarily restrict social impact. Even if the former were true (and in our experience it isn’t), the latter is certainly not.
Second, their Venn diagram does explain why some very narrow impact strategies struggle to deliver both a financial return and increased social outputs when their area of overlap is too small. If a fund’s area of focus is too narrow—for example health care investments in New England, or financial services companies based in Chile—it can be challenging to achieve market returns. The article would have benefited from a reference to Josh Lerner’s excellent book, Boulevard of Broken Dreams, which chronicles the challenges of place-based venture capital as a policy tool for economic development in the United States and Europe.
Third, we agree that funds should be measured against the relevant financial and social benchmarks. But in the conclusion the authors write about the need for funds to disclose their financial returns without acknowledging the regulations, at least in the United States, that limit the promotion of financial performance of private funds to unaccredited investors. While all of Bridges’ investors are given access to fund performance both before and after making an investment, impact investors, like any venture fund or private equity firm, are highly circumscribed by financial regulators like the SEC and FINRA in what information they can share with whom, and when they can share it.
We agree with the authors’ assertion that it is “special knowledge” that can allow for an investor to deliver market rate returns and measurable social or environmental impact. In our experience, this special knowledge means having a deep understanding of the social or environmental challenges the companies we invest in are trying to address, and an eye for the solutions that have real growth potential and the ability to improve outcomes, which might be overlooked by other investors. But impact expertise also adds both impact and financial value post-investment: providing “impact management” support can improve customer outreach or operational efficiency or workforce motivation, all of which can translate into better impact and financial performance.
We agree with the authors, however, that there does need to be more rigorous analysis and transparent presentation of social “value addition” by impact investors. We increasingly call it ‘value-added’ (and not additional) because we can’t prove additionality by running control trials of what the capital markets would have done anyway, but we can judge the nature and extent of our value added, and estimate how this translates into greater social outcomes, using a consistent and transparent scoring system. To date, our impact analysis has been conducted specific to each investment but shared with our investors and more publicly. We hope that industry measurement standards of which we are strongly supportive—like SASB, the GIIRS rating, and the IRIS standards—will continue to not only track enterprise-level impacts, but also find ways to measure investor impact as the authors define it.
As the impact investment market matures, we see real opportunity for greater harmonization in terms of how the industry understands and describes investors’ social “value-added.” This would not only help align expectations upfront along the capital chain (among asset owners, intermediaries, entrepreneurs, and beneficiaries of the products and services); it would also encourage each player in the capital chain to manage explicitly against these expectations by learning and communicating whether value addition is really occurring.
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