Impact investing seems to combine the best of both the philanthropic and the traditional financial worlds. However, there has been a great deal of skepticism and precautionary warnings about this new and growing field. The most common criticisms include:
1. Youth. Everything about the industry is young. The first impact investment fund, Acumen Fund, is just reaching the decade mark. The majority of social enterprises invested in are in early-stages, translating to high-risk investments. In addition, according to the Skoll World Forum on Social Entrepreneurship “a typical investment associate is in her late 20s, still learning the ropes on the investor’s dime.”
2. Transparency. Due to its youth, the impact investing sector lacks a widely agreed upon and transparent definition and set of metrics. “An internet search for ‘social enterprise’ is as likely to lead to a non-profit urban garden in London as it is to an African mobile payments scheme, and little consensus exists on how investors and companies should balance social impact and financial return.”
3. Returns. Again, due to the youthful nature of the industry, few impact investors have have achieved full ROI (return on investment). As a result of this limited track record of success, it is difficult to convince the world that it is possible to “do good” and make money. In addition, profit margins are often very small (or even negative) in the early stages of most social businesses.
4. Opportunity. Impact investors struggle to find the “right” companies in which to invest. Investors look for a social enterprise’s ability to reach its target population, capacity to scale, financial sustainability, impact metrics, ect. It is rare to find an early-stage enterprise with all, or even some, of these aspects. In addition, most investors are based in the developed world while the majority of social enterprises emerge in the developing world. This makes it very difficult and expensive to find early-stage companies (preferably with the traits mentioned above) and even more costly to preform the necessary due diligence on a company located half-way across the world.
5. Balance. It is very difficult to balance profit and impact. The visions and goals of social entrepreneurs don’t always match up with those of impact investors, creating a challenging environment in which to make deals. The investor should not ask an entrepreneur to compromise his/her social mission but the investor must be conscious of the enterprise’s ability to return the investment.
6. Uncertainty and Risk. The portfolio director at the Mulago Foundation writes about impact investing, “Cash flow projections are wildly unrealistic, management teams untested, and market failures unacknowledged. There’s 10 times the risk profile of a standard US venture deal without the same potential upside.” There is a lot of trust involved in impact investing since the social entrepreneur usually knows much more about his/her target population and market and often can’t afford extensive market testing.
Despite the warnings and skepticism, I am a firm believer in the potential of impact investing to help solve some of the worlds greatest social and environmental issues. The critiques mentioned above stem from the youthful nature of the industry. We must be patient and give the industry time to develop. However, the critics play an important role in the development of the industry because they bring to focus issues at a very early stage, allowing them to be addressed in an effort to create a stronger industry.
There are a number of organizations and networks that have already emerged to address many of these issues. GIIN (global impact investing network) was created to increase the efficiency, effectiveness, and scale of impact investing. Its website provides impact investor resources including up-to-date research, news, events, publications, profiles, investor spotlights, useful links, and a career center. GIIN also created an investors council, ImpactBase (an online global directory of impact investment vehicles), and the Impact Reporting and Investment Standards (IRIS) (set of metrics used to measure and describe an organization’s social, environmental and financial performance). Another useful tool is the Global Impact Investing Rating System (GIIRS), ” a comprehensive and transparent system for assessing the social and environmental impact of companies and funds.” Companies such as Mission Measurement have also emerged with similar goals to help companies measure the impact of social projects.
Impact accelerators and major conferences are also playing a role in overcoming the challenges and criticism associated with impact investing. Agora Partnerships dramatically reduces the cost to investors as well as the risk involved by doing the scouting themselves, hosting an extensive business development program, and matching their entrepreneurs with an Agora employee to preform due diligence and create an investor-ready business plan. Major conferences focused on social entrepreneurship and impact investing have sprung up all over the world to bring people together, share ideas, and address common problems in the emerging sector. SOCAP (social capital markets) is one of the biggest and most popular of these conferences. It was held earlier this month in San Francisco and attracted more than 2,000 people from 50 countries. The conference highlighted accomplishments, addressed mistakes, and discussed the future of impact investing and social entrepreneurship.
The bottom line is patience. It is important to address the challenges and weaknesses of impact investing but it is just as crucial to stay positive and be patient. As the industry develops, the kinks will work themselves out. Impact investing is about deploying capital in creative manners to solve social and environmental problems. I am confident that this very same creativity will be utilized to overcome the barriers that currently face the young, emerging industry. We are all still learning and it is way too soon to cast a shadow of skepticism over impact investing and its tremendous potential.