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A Critique of Impact Investing

Published on August 6, 2012 by in Philanthropy

I’ve spent much of my career exploring how we might improve the social and environmental impact of business and other economic enterprises.  And much of that time has focused on the challenge of investing charitable assets for both social and economic returns, which for many is the very definition of “impact investing.”

So, this is a fairly loving critique.  In fact, it won’t really be a critique of impact investing at all, but instead a critique of Impact Investing (note the change in capitalization).  That is, this is not intended to be a criticism of the activity or intention of investing for social benefit — which is a central issue of our time — but rather a concern that by treating it as a field we may inadvertently marginalize and minimize its potential.


Investing is something that investors do, and there’s a well-established framework for how it is done.  This may seem innocuous at first, even beneficial, but it tends to bias the conversation:

  • There’s a natural tendency to focus on the needs and concerns of the investor over those of the enterprise – Yes, the investor must be satisfied with the deal before money changes hands, which the goal of the exercise.  But from the impact standpoint, that transaction is of secondary importance.  Value, both social and financial, is created through the enterprise’s business model and operations.  Investment is done once; enterprise is done continuously.
  • Social goals are not amenable to single, simple measures the way that financial goals are – There are infinitely more valid social and environmental goals than valid financial goals, and these social goals are not usually comparable, let alone fungible.  Measuring impact is by its nature crude and arbitrary, meaningful only to those who construct and value the specific measure.  Clusters of investors might agree on the value of a specific measure — making pooling of resources possible — but universal acceptance of a measure is a distant and unlikely outcome.  There will always be a need for multiple measures, each of which will satisfy only a subset of impact investors.
  • The deep, underlying structures of modern corporate enterprises (ownership, governance, legal rights and obligations) create an unintended barrier to integrating concerns about people and planet with the profit-making motive, and current capital markets (both primary and secondary) and investment practices strongly amplify rather than mitigate this tendency – There is no easy, short-term fix to this problem.  Novel corporate structures are possible, certainly.  I’ve spent much of the last decade helping people develop them.  But novel is, well, novel.  There is no place for them to fit into existing capital markets, except at the fringe.  It doesn’t have to stay this way, of course.  But defining a “box” the fringe that only interests a small subset of investors may not be the best strategy to mainstream the underlying notions.

Investors will play their role in mainstreaming enterprises with high social benefits, but they will probably follow rather than lead in most cases.

What about “Impact Enterprises”

Over the last decade or so, there has been a lot of interest and focus on “social entrepreneurs” and the nonprofit, governmental, commercial and hybrid enterprises that they have founded.  Having a primarily social purpose, as oppose to financial gain, is usually a defining characteristic.  I believe that these kinds of efforts will play an increasingly important role in advancing civil society, but limiting one’s impact investing focus to these kinds of enterprises has its own inherent limitations:

  • The differentiation between impact enterprises and conventional enterprises is tricky in practice – In poor or vulnerable communities, almost any reasonably well-run enterprise brings significant social benefits.  (This was the observation that allowed Ford to get charitable credit for some of its investments, which launched the program-related investments (PRI) field.)  Some environmentally important industries, such as energy efficiency, are relatively mature, and most innovation can be funded internally or in debt markets that don’t need special “impact” designation and may not actually involve the whole enterprise.  What do you do about the “impact” division of a fossil fuel company?
  • No enterprise that is reasonably integrated into the global economy has only positive impacts – An enterprise that is focused, for example, on sustainably produced coffee will still find its beans transported via fossil fuel powered ships to fill cups in Paris.  Every enterprise inherits the failures of the economic system in which it is embedded.  Every enterprise has a profile of positive and negative impacts, if its products and services are thoughtfully analyzed cradle-to-cradle.  While there are a few clear saints and lots of clear sinners, most enterprises, even “impact” enterprises, fall somewhere in between.
  • The impact of a single enterprise, even lots of single enterprises, is often negligible in the face of broader economic forces – All enterprises are parts of systems — local, regional and global.  For a beneficial intervention to have a lasting impact, it must be part of systems at all those scales that reinforce and exploit that benefit.  As noted above, an enterprise cannot be evaluated in isolation.  And the flip of this is that for any enterprise to make its unique contribution, a thousand other contributions need to be made first.  Allocating “credit” for any specific beneficial impact is like unscrambling an egg.

Meeting Investing Where It’s At

The vast majority of private investment is not undertaken by people we call “investors.”  It is done by people we call “managers.”  Retained earnings, i.e., profits, are the primary source of invested financial capital in the economy.  The choices about where and how to deploy those resources are nearly entirely determined by managers within existing companies.

The real opportunity — no, the prerequisite — for broad improvement in the socio-economic performance of the economy lies with existing companies and their investment  choices.

Might existing managers be inspired by the efforts of social entrepreneurs?  Sure.  But they are even more likely to be inspired by the efforts of their peers.  And not their wishful thinking, but their concrete actions that improve both their company’s social performance and its financial performance.

This is already starting to happen in business, of course, but it’s usually not high on the agenda of those that describe themselves as “impact investors.”

Back to Philanthropy

So, what would I recommend to foundations and others who wish to use strong social benefit criteria in their investment decisions, i.e., current impact investors?  I would start out by suggesting:

  • Less concern whether the social innovations are taking place within existing firms or special purpose enterprises.  Both have their place, and there are different avenues for supporting each.
  • Acceptance that everyday business people are peers in this work, with no presumption that you’re standing on higher moral ground.
  • More attention to whether the innovations give rise to or are part of economically viable systems, and where the investment helps improve the performance of those systems in multiple dimensions.
  • Dual focus on both practical transitional strategies for existing firms and pure strategies for new enterprises.
  • Work toward socializing the economic innovation and learning process, ensuring that it is global scale, cross-sector and values led.

Of course, suggestions are easy; making it real is hard.  This is still pioneering work with few clear guideposts.

What I am confident of is that progress will be faster if we think of it as impact investing and not rush into Impact Investing.

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