Paul Brest and Kelly Born’s article provides useful rigor in helping a self-identified “impact investor” answer the question, “How can I be certain that my impact investment is creating an impact that otherwise would not have occurred?” This consideration is particularly relevant for philanthropic individuals or institutions who may be contemplating impact investing as an alternative use for the precious resource of dollars that would otherwise go to grants or concessionary program-related investments. Many of us in the impact investing field, however, find more compelling a different question, “How can we drive positive change to address the world’s problems as broadly, as rapidly, and as effectively as possible?”
If that is the outcome we seek, then it matters much less whether a particular investment counts as an “actual” impact investment. It also matters less whether the positive impact created was the central intent or an outcome or by-product of the investment. What matters more is whether change happens and whether it reaches transformational scale. If those positive changes happen to benefit from the tailwinds of market forces, and if the investments were made in the company of non-impact-minded investors who are primarily interested in financial returns, then so be it. If it is good to fuel the growth of a company that creates critically needed jobs, reduces carbon emissions, or improves community resilience, then isn’t it better if we can harness more capital to help that company grow faster and replicate more broadly?
Grants, PRIs, and concessionary investments play a critical role in fueling social innovation. The goal of impact investing isn’t to substitute for those vital grants or PRIs but rather to tap into the much larger pools of pensions, endowments, and other fiduciary and commercial capital that can complement and augment the grants and concessionary capital. Our role as field-builders in impact investing, then, should be to create as many broad and inclusive on-ramps as possible for investors with many different appetites in order to attract as much capital as possible for investment in opportunities that drive, support, and accelerate positive change.
For the growing number of mainstream investors beginning to contemplate impact investing as an additional tool in their portfolios, the first question should perhaps be “How can my investment dollars be directed in ways that provide positive social impact as well as satisfy my economic requirements?” To be sure, a decision to invest with impact may not have as dramatic a social-impact multiplier effect as a highly intentional, impact-first investment. But one cannot say that no positive benefits accrue from decisions by mainstream investors to direct their funds away from investments that have negative or neutral social impact and toward ones that have positive impact.
Brest and Born suggest that in market-rate opportunities impact investors don’t actually have much impact, because those businesses already have access to more than enough commercial capital. But economically sensible investments do not necessarily get ample funding automatically. If they did, there would be no need for the venture capital industry, which specializes in identifying and funding businesses that it believes have the capability to deliver outsized returns but that have been overlooked by traditional capital. By seeking out and seeding investments that have the ability to achieve both market-rate returns and high social impact, impact investors can introduce those enterprises to conventional capital and thereby broaden the scope of possible impact.
As proponents of impact investing, we are best served when investor—impact or otherwise—are clear about their goals, expectations, risk tolerances, return requirements, and desired impact outcomes. In assessing how well a particular investment fits an investor’s needs, “actual impact” as outlined by Brest and Born is an important analytic tool—as is the recognition that appropriate risk-adjusted market-rate returns aren’t necessarily at odds with impact, especially if they help deliver impact more quickly and more broadly.