I appreciate Paul Brest’s and Kelly Born’s thoughtful contribution to the ongoing discussion of impact investing and the ways we can determine whether it lives up to its goal of directing private investments to superior social or environmental outcomes.
Brest and Born make an important distinction between nascent and ongoing enterprises. I think it is especially important for impact investors to distinguish those sectors that need early investment in order to reach self-sustaining scale from those that will require ongoing subsidy to achieve their social impact. One danger in the field is overreliance on a maturation metaphor—often associated with microfinance—that privileges “mainstreaming” at the expense of social benefit. Another danger, which Brest and Born also acknowledge, is assuming that market-based solutions are necessarily better than their counterparts—not everything that can be an impact investment should be. Carefully sorting out what sorts of capital a problem needs is a way to tamp down unrealistic expectations as well as to find unlikely opportunities.
I would also like to highlight the authors’ focus on nonmonetary benefits that impact investors can provide. As they point out, reducing search and transaction costs, developing standards and practices for idiosyncratic investments, signaling demand, building track records, and preserving mission are all vital functions in building an investment ecosystem. To these I would add the role of impact investors in tolerating complexity and ambiguity. Willingness to sift through nonconventional value propositions, complex deal structures that blend public, private, and philanthropic capital, or community engagement or impact measurement systems is in short supply in conventional investment markets. Impact investors can add value through their openness to this sort of work, and they may come to investments with important insight into how complex structures operate. This insight may be what makes their role in nonconcessionary investments useful, and it is a complement to the authors’ “perspicacity.”
Now the quibble. Brest and Born reject impact investing in public equities markets because those markets are “essentially perfect.” But in reality they aren’t. Leaving aside our recent five-year global demonstration project in market inefficiency, there are well-known agency and time horizon issues that lead public equity markets to favor short-term speculative strategies at the expense of long-term wealth creation. Impact investors—especially if the field engages larger institutional investors—have at least the potential to help shift the balance of investment in these markets toward the real economy. And the well-established practice of shareholder engagement has allowed even relatively smaller investors to punch above their weight, in some cases pushing publicly traded corporations toward more socially beneficial practices, creating social outcomes that otherwise would not have occurred, to apply the authors’ definition of impact. The recent uptake of “shared value” strategies, for instance, owes a significant debt to social investors’ engagement with corporations. Impact investment is a strategy that can be applied across all asset classes, and I suspect there are not yet nor ever will be any markets in which social performance could not be boosted.
This leads to a more general point about the field. We can think of impact investing as, in many ways, an inquiry into the social utility of finance. Impact investors enter the field believing that they can use their resources—financial and otherwise—to deliver better social outcomes than conventional investment; and they (sometimes implicitly) believe that we would be better off if we thought about how our investments affect the world at large rather than financial returns alone. But, too often I think, discussion of impact investment adopts language about “the market” and “efficiency” that makes it difficult to talk about how to make markets more socially useful tools.
Impact investors are well placed to develop new ways to talk about the relationship between finance and society, and to build tools that channel private capital to greater social benefit. This can mean everything from identifying or creating investable opportunities in small social enterprises to supporting intermediary structures that explicitly value social return, to rethinking the public policy mechanisms that determine how financial markets function. Brest and Born, in developing a set of criteria that help identify where investors can add social value, help point us in this direction. We should all think about how to maximize the contributions of investment to a just and sustainable world.