Paul Brest and Kelly Born’s article is a very helpful step toward clarifying not only the different types of impact an investor can seek, but also the current state of our ability to measure them (poor, but improving). The article’s signature contribution is to move beyond enterprise impact—the social or environmental benefit an enterprise produces through how or what it produces—to consider the investor’s impact, either through the structure and pricing of the investment or through the provision of non-financial support.
For enterprise impact, the authors make a helpful differentiation between product and operational impact, but I think further disaggregation is needed. Building off the six P’s from the investment impact section of the article, perhaps we can derive four P’s of enterprise impact from the dominant strategies of today’s leading impact investors.
The first is process, or a focus on the benefits from improved environmental, social, or governance work practices, such as those businesses that receive high GIIRS ratings for progressive workforce development or internal environmental practices. The second is place, where investors intentionally bring economic activity to underserved geographic areas, like community development financial institutions using Community Reinvestment Act (CRA) funding in low-to-moderate-income communities.
Third is product, providing and distributing socially or environmentally beneficial products, such as educational services that close the achievement gap or new clean technologies. And last, there are paradigm-shifting impact investments, such as Revolution Foods or Water Health International, companies that not only seek to deliver a beneficial product, but strive to change the system in which that product is delivered.
Much as institutional investors use the shorthand of asset classes like public equity, private equity, or fixed income to differentiate expectations for financial risk and return in a quick fashion, impact investors might need to come up with a disaggregation into comparable buckets to help communicate what enterprise impact they are striving to deliver. I doubt that we will ever have a single yardstick to measure impact across all strategies, but perhaps we can create smaller buckets within which similar strategies (for example, job creation in Detroit or education technology companies focused on improving reading proficiency) and data about their performance can be compared with their relevant peers.
The other area where I wish the article went further is the discussion of investment impact and non-monetary impact—more specifically, under what conditions they can be sustainably delivered over time, not just at the investment level, but at the investor level. For simplicity’s sake, the authors tend to default to the single investment as the unit of analysis for whether and how an investor can claim additionality through the investment’s terms or through non-monetary support.
The challenge that the field is facing is that few investors, if any, can continue to offer below-market terms, provide above-market non-monetary support, and pay for rigorous enterprise impact assessments while financially sustaining itself. Simply put, who pays for it all?
Although the authors express a healthy skepticism that investors can deliver market-rate return while investing with impact, they might have turned an equally critical eye on those that deliver below-market returns and value-added services and ask under what conditions these can be sustained. Many limited partners, whether CRA-regulated banks, foundation endowments, or family offices, are now trying to achieve market-rate returns with their impact investments. But for those willing to accept below-market returns, it is hard to make the math work when you start with a below-market return, add higher transaction costs, and then consider the costs of rigorous program evaluation.
More work needs to be done in the impact investing field to understand and communicate the costs these investors bear and the benefits they contribute to the impact investing ecosystem. We need to know how these concessionary investors and market rate investors can and should co-exist. I hope that Brest and Born will continue to use their definitional rigor and clear analysis to help answer some of these important questions for the impact investing field.