Investing for Impact

The term impact investing has been gaining brand value over the past five years. The precursors of community investing and socially responsible investing are ironically being dropped from the conversation as if to imply that impact investing is a brand new phenomenon. While there is innovation inherent in impact investing, it is important to leverage the histories – good and bad – from community development, socially responsible investing, and venture philanthropy in order to support the success, sustainability and scale of the larger social benefit marketplace.

The wave of research and marketing for impact investing has been quite impressive, especially in light of the limited quantitative data on the impact of investments made in the space to date. The “hype” is fueling an entire ecosystem of organizations – from historical philanthropic institutions to traditional investment banks – moving at warp speed to become impact investors. These institutions, with their own business models and mission orientation, are coming together and at times colliding in attempts to figure out how we can all work together. It is “speed dating” at its finest.

The primary topic of our “first dates” is how we define “the space.” Each organization has their own definition. The Global Impact Investing Network (GIIN) defines impact investing as investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.  I define impact investing as any financial investment designed to catalyze social benefit and generate a financial return. Whether the investment has a primary purpose of social or financial return is irrelevant at this point; it just needs to generate the promised return. My focus is on the conscious effort of leveraging varied costs of capital to support a social benefit.

The next “hot topic” is how we define impact. I have paid less attention to the varied debates, as there are so many evaluation tools, metrics and platforms available. As significant resources move into defining this space, however, it is worth pointing out a few key elements that need to be incorporated into these tools that seems to be missing to date.

I believe that regardless of the tool, we must create context. No story is told in all words or all numbers. The significance of place – from NYC to Mississippi to Brazil, along with the significance of sector – from health, to education, to agriculture – cannot and should not be overlooked. It is the very impact of these factors that can make or break a business and investment.

Impact tools must balance the use of qualitative and quantitative metrics. The tools must provide necessary context to potential investors. Specifically, these tools should provide guidance on business leadership – who is running the business, their skill set and expected trajectory of success. The context should also highlight sector and geographic trends. There is no such thing as a standard or model business. Finally, the context must include an analysis on the type and amount of capital invested. Too many of the current tools do not take into account the impact of a business that has debt versus equity, as debt typically slows the growth of a business as additional capital becomes harder to acquire. They do not consider the difference between a $100,000 versus $1,000,000 investment. Please note that more money is neither better, nor guarantees greater impact. However, the time and costs associated with effectively utilizing $1M versus $100,000 is significantly longer. Therefore recognized returns on the investment may be slower and at higher risk.

As the ecosystem matures, and we all get to know each other better, I hope there is a shift from over-standardized and prescriptive measures to those that take into account the nuance of the very variables that often determine the success or failure of a business.

Moving forward, the social benefit marketplace, by leveraging a rich history, has tremendous opportunity for growth and market acceptance. In order to insure the scale of the sector, however, there are some additional “hot topics” to be considered during the courting period.

First, in light of our current economic crisis, grounded in mistrust and abuse, I have been shocked by such little discussion on the role of fiduciary responsibility for impact investors. Balancing financial and social returns is not easy and can often be in stark contrast to one another. We need to honor the healthy tension and be prepared to talk about the strategies and investment decisions that need to be made in order to balance mission and financial returns. This topic is not new as it surfaced with the sale of Ben & Jerry’s and Tom’s of Maine, raising question of how their acquisitions by mainstream companies could still produce a social good. What is required at this juncture is to re-open the conversation and create a baseline of acceptance for how to make such balancing decisions moving forward.

Second, we need to start discussing the costs of doing business. Too often we get overly enamored by the social benefit and do not acknowledge the “costs of doing good.” In order to insure the sustainability of the sector we need to openly discuss and own the related costs. For example, we continue to read about the excitement around social impact bonds. We talk about the evaluation challenges and identifying the nonprofit partners; however we do not talk about the costs of “issuance” – identifying partner organizations, creating and implementing evaluation metrics, managing course correction, etc. If we do not start tracking these costs we run the risk of bankrupting the sector with subsidies that are not sustainable over time.

Third, we need to discuss the role of government and policy. One of the critical success factors of community investing – the original impact strategy – was the existence of the Community Reinvestment Act (CRA). CRA served as a catalyst for investors to enter the space with a “carrot” from the government. In its simplest terms, the review process and point system associated with CRA strongly encouraged traditional institutions to enter neighborhoods they would ordinarily not go into and see that investments can both thrive and survive in low income, marginalized communities. This transformative legislation is at risk of obsolescence. Without such “carrots” in the investing space, how can we insure the democratization of impact investing and that all communities, not just some, can realize a financial and social benefit from local businesses? With many states shifting to a “new majority,” it is important that mechanics are in place to support fairness and equality – core social goods – at the forefront of investment decisions and the placement of capital.

As a serial entrepreneur and longstanding social investor, I remain optimistic about the opportunities of impact investing. The potential for new market entrants, innovation and increased capital is very exciting. As a participant in similar earlier movements, however, I worry about the “hype” not transferring to reality and the hopes of dreams of social entrepreneurs, communities in need, and novice investors being dashed.

As we move forward we need to de-prioritize branding the movement and focus on building and sustaining the movement. With the impending fiscal cliff and deteriorating safety nets, our social ills and needs continue to outpace solutions and resources. There is a real need and moral imperative to develop and sustain innovative solutions that generate a social benefit and can sustain themselves over time. We owe it to the ultimate recipients of impact investments, the clients – mentally ill, physically challenged, formerly incarcerated, those in poverty – to have hard conversations, raise the bar on our own accountability and build an ecosystem that is more than a temporary solution to long term problems.

Melissa Bradley is a Global Social Enterprise Initiative Executive-in-Residence, and CEO of Tides.

  • Jan Piercy

    This is an important, apt observation about impact investment I've already forwarded to many. As an "alum" of ShoreBank, I especially, fervently, appreciate the first para recognition that community investing and SRI were forerunners of Impact Investment that laid the rails.

    I also agree that we should not get so hung up on how we define the space: a broad tent serves us best. I also strongly concur that assessing impact must consider place and sector; in other words, must be sensitive to dynamics of individual investment goals and characteristics.

    At risk of beginning to sound like an Amen Chorus at this point, I also want to affirm the importance of fully counting start-up and ramp-up costs of impact investing, lest the sector lend itself to non-profit tee-ups and for-proft investment reaping scale-up financial returns.

    And citing CRA as a policy tool that catalyzed millions in investment in the U.S. is a very important shout-out to positive role well-conceived public policy can have in attracting investment for positive social impact.

    Most of all, I want to endorse strongly Melissa's conclusion that we'e got to focus on developing and sustaining "innoveative solutions that generate a social benefit and can sustain themselves over time".

    Jan Piercy
    Executive Vice President, SBI (ShoreBank International)

  • http://twitter.com/tidesgal melissa l. bradley

    Thank you, Jan, for your comments and kind words. Allow me to thank you and ShoreBank for their efforts and leadership in this space. Your words have reinforced the need for more open and honest conversations to insure the effectiveness, scalability and success of the field. If we do not own our history (good, bad and ugly) and hold ourselves to high standards and continuous questioning and problem solving we will have let down the constituents that are counting on us and have so long counted on leaders like you and institutions like ShoreBank. Thank you.

  • http://www.facebook.com/profile.php?id=763953853 Georgette Wong

    Hi Melissa, Great post. As Jan and you believe, we are best served by a big tent and by incorporating the lessons of SRI/ESG as well as traditional finance into impact investing. My research "Insights and Innovations: Impact Investing + Institutional Investors" (www.impactinvestingconference.com/news) that we released at the State Department's April 2012 Global Impact Economy Forum pointed to keeping a bigger tent. There are a huge variety of motives and needs to be met, and being prescriptive at this time runs the risk of limiting the field.

    I couldn't agree more about fiduciary responsibility. Fiduciary responsibility is important to bring in larger dollars and to show that these are truly investments. At present, "impact investing" is a mysterious blend of philanthropy and traditional investing. For some, this is fine and the innovation is exciting. For others, it connotes novice investing - Davos put out a piece that stated that impact investing meant sub-market rate returns. Not great if one is trying to get larger dollars to come in.

    I also agree about the context. What ultimately are we trying to solve, affect, impact? And in what time frame? That is the biggest question to be asked, and then use the proper tool (e.g., philanthropic, strategic, catalytic, investment) to address it. With a hammer in one's hand, it is easy to see everything as a nail. It is far more difficult to develop a coordinated approach that has the right blend of philanthropic capital that stimulates and grows the market for the long-term.

    I look forward to seeing all the innovation that develops over the next few years/decades and how we can work together and share learnings.