Impact Investing, Worth the Hype?

Impact Investing generates a lot of excitement within many sectors. Everyone from financial advisers and investors to community foundations, to philanthropists seem to me talking about it. JP Morgan estimates the potential of impact investing to be $400 billion to $1 trillion of the next ten years.[1] That represents a lot of unlocked capital for a sector that usually lacks access to capital markets. Given the size of the opportunity and the potential for true impact excitement is certainly warranted. Impact investing offers a new tool for investors and philanthropists alike to both yield a return and have a measurable social impact, but in order to truly harness its power, it is important to understand the two equally important sides of impact investing—the financial and social.

Two Sides of the Same Coin

Impact investing has a lot of definitions and it means a lot of different things to different people.  The Global Impact Investing Network (GIIN), which is a field leading organization for the sector, defines impact investing as the following:

Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.

Financial return AND social return—often thought of as opposing forces, and yet with impact investing they are both definitional, like two sides of the same coin. You can’t do impact investing without pursuing both opportunities, yet sometimes I hear people focused too much on one side or the other. Investors often get excited because impact investing sounds an awful lot like what they already do but with the added bonus of a double bottom line. They understand the financial investment and carefully measure the return on that investment, but then they sometimes hold up their hands and say that the social impact is there, but it’s just too hard to measure. Despite being challenging, it’s not enough to say there is a social impact; impact investing must have a measured social outcome or impact. In the business world, metrics play a critical role in helping companies understand their performance, the same is true for the social sector—you can’t manage what you don’t measure. How else can we understand the true return of an investment and then make future investment decisions if half the return is unmeasured? And, how else will we know if progress towards social goals is being made? Progress has been made in thinking about social measurement, a good place to start learning about social metrics is on GIIN’s website. Also, Stanford Social Innovation review also has a helpful blog post highlighting some key measurement tools for the industry.

On the other hand, philanthropists can get caught up in the ideas or the potential for social change and forget that they are actually making an investment rather than a donation. There must be the expectation of a financial return whether that be at or below market rates thereby separating impact investing from grantmaking. It’s important to remember that not all social investments are ripe for impact investing and some situations are far better served by providing a grant than an investment requiring a financial return. For example, an organization may have an unproven model or approach that requires exploration and room to make mistakes, and investments that require a payback within a specific timeline may not be suitable. Or, it may be that the best solution or approach to a particular social issue simply does not have a market-based solution—in the mist of a famine, when people are starving and destitute, giving them food may simply be the best and most immediate solution. Impact investors must be discerning and consider whether their investment is providing a true solution with the opportunity to yield a true return. In this sense impact investing is no different than any other investment and responsible investor must conduct proper due diligence on the organization, the market, and the opportunity for return must be conducted.

Whether you are an investor, a philanthropist or another participant in the social sector, if you are interested in unlocking the potential of the capital markets for social good then its imperative you understand that the coin you hold to unlock them has two equally important sides and both sides must be used. If you want to learn more about impact investing, a good way to learn is to partner with an existing well established fund with a track record for both financial and social returns before setting out on your own.

[1] Nick O’Donahoe et al, “Impact Investments: An Emerging Asset Class,” JP Morgan 2010