Why Social Impact Investing Is Legit

Why Impact Investing is Legit header

In her recent Fast Company blog Why Social Impact Investing Is A Crock, Anya Kemenetz questions the validity of impact investing based on the lack of rigorous data collection and analysis, and the high costs of supporting evaluation systems.  While she makes some legitimate arguments about the need for investors to adopt more accurate and substantive metrics, dismissing the field as a whole seems short-sighted and unjustified.

Although impact investing is not new and many of the major proponents are well-established foundations, the more recent strategic initiatives in the field are still in the early stages of development.  In essence, these efforts are more akin to business start-ups that merit a different set of standards and expectations.  Start-ups require significant initial investments in research and development, product prototyping, and systems development; investors provide this capital knowing that these factors are core to the nature of innovation.  Thus, funding an impact assessment system should be considered the R&D cost-equivalent of building a smart, effective investment product and organization.

The 33% of investments stated in the blog may seem high (and may not accurately reflect a field average), but consider that Merck, one of the largest pharmaceutical companies in the world forecast a 2011 R&D budget of $8-$8.4 billion (17.4% - 18.3% of 2010 revenue) and paid $4.9 billion to users and $12.2 million to shareholders in Vioxx-related lawsuits in 2007 and 2010, respectively.  In that light, there seems to be great wisdom in putting the necessary money into evaluating whether impact investing products are providing the intended social returns, as opposed to doing harm at everyone’s expense.

Greater investments in assessment would enable the field to move more fully from “monitoring exercises” towards rigorous analysis, a direction the field clearly demonstrates willingness and desire to do.  However, it should be clear that impact investors are not doing so to model themselves after the business sector, which is dominated by the singular pursuit of financial gains (even corporate social responsibility and greening efforts only represent a tiny fraction of business).  Businesses tend to measure success by market penetration and sales, but do not necessarily follow up with evaluating the quality of use of or interaction with the product by consumers, a standard that impact investing aspires to.  For instance, energy companies monitor consumer usage to bill for, but most do not track what people are using that energy for or if they are using energy most efficiently for the good of the users.  The companies rely on the consumer to track and adapt their behavior based on their usage and bills.  Some companies have been expanding into consumer education, but, again, the onus is on the consumer to initiate change – a burden that impact investors are rightfully assuming themselves.

While no one should pride themselves solely on having good intentions, there is great societal value to work that strives to be accountable to the community, not just stakeholders and people of wealth, and to initiatives that are not undertaken to superficially build an eco-friendlier brand or to mitigate some kind of harm or injury perpetrated by the same entity, but to make meaningful net positive impact.  In recognition of this, we need to see investing in impact evaluation systems as the cost of doing truly good business.

Update 9/1/2011: To see The Nonprofit Quarterly's analysis of this debate, click here.

Learn More about Impact Investing

As a values-based platform, Tides plays a unique role in researching, convening, and implementing innovative approaches to advancing positive social change across the nonprofit, corporate, and philanthropic sectors.  We are pleased to share two new publications that examine the growing field of Impact Investing and methods for measuring the success of diverse programs:


Image by blprnt_van via Flickr, used under Creative Commons license.

  • Irene Kao

    In response to a Twitter comment:

    http://twitter.com/JRandomF/status/106233126828785664

    @JRandomF Our money's where our mouth is. Tides is very engaged in investing in impact assessment R&D, as well as supporting our partners in building their capacity to measure and evaluate, as well. We are dedicated to strategic design and implementation that captures true and meaningful impact in the field, and see this as an ongoing process we will continue to undertake.

  • http://www.socialentrepreneurguide.com/social-finance-round-up-four-new-social-impact-bonds-planned-in-uk Social Finance Round Up: Four New Social Impact Bonds Planned in UK | Social Entrepreneur Guide

    [...] Kao says that impact investing is legit, not a crock – and investing in impact measurement is really just the cost of doing good [...]

  • http://www.justmeans.com/editorial/?p=49979 Deep Impact: Driving Social Change Through Impact Investing and Impact Assessment | Sustainable Finance