2013-08-21

Co.Exist

What's Preventing Impact Investing From Moving To The Next Level?

The strategy of investing for both financial and social returns is getting more popular, but even experts have trouble agreeing on a definition. One thing is clear: Investors need to be comfortable with risk.

Impact investing--investing for both financial returns and social impact--is a popular topic these days; in one recent survey, impact investing was found to be more popular than traditional "socially responsible" investing among high net worth investors.

But there's little data on returns from this investing strategy, and the space is still so young, even the definition of the phrase isn't always clear.

Sonal Shah, a senior fellow at the Case Foundation, stands out as someone who could help carve a path for the impact investing space as it continues to grow. Before joining the Case Foundation to work on increasing the number of impact investors and investments, Shah put in time as the first director of the White House Office of Social Innovation and Civic Participation. She has also led global development at Google.org.

I caught up with Shah at the Aspen Institute's Aspen Leaders Action Forum, a gathering of fellows from the The Aspen Global Leadership Network--a worldwide network of entrepreneurial leaders committed to taking on society's challenges. Below are excerpts from our chat.

How Do You Define Impact Investing?

According to Shah, it's a spectrum. She usually first wants to determine the investor's goals: are they in it to build the ecosystem, to get a return of capital, or for profit? "I personally think that, from an investor perspective, it's at minimum return of capital but really looking for how do we actually create a system that allows for money to be made in this space," she says. "Measuring for impact, but also measuring for profit. Right now, we measure for profit but we're not making the trade-off between profit and impact and saying, 'What's the right amount of profit for the impact?' Intent matters a lot when defining impact investing, she says: "It can't just be any business. It's got to be the ones with intent."

On Moving From The White House To The Case Foundation

At the White House, Shah was more focused on social innovation policy--things like examining the government's role in impact investing and identifying the policy barriers to its growth. These days, Shah is examining many of these same general issues, but from a different perspective (i.e. why impact investors themselves aren't putting more money into businesses that do social good and make money, and what's stopping the sector from growing).

Creating A Market For Impact Investing

"It's happening. There are lots of people doing it, lots of people experimenting in it," says Shah. "There's Method, there's Revolution Food, you can name a few of them. There are investors doing it at small scale, but the question is...how come we're not getting to the next level of players? What is that's keeping people from taking the risk to create a new market?"

So what's preventing the market from scaling up? Shah believes there are three main factors.

First, she says, "It's the taxonomy. Depending on who you talk to, sometimes you're talking for-profit, and sometimes you're talking nonprofit. I think investors don't know yet how to divide up where are you in the spectrum and where do you want to be and then where's the opportunity. I think the industry needs to figure out the taxonomy, so when a person comes to see it for the first time, they know which category they fit into."

The second issue: The need to understand what the returns on investment have actually been. "We have a lot of stories, but we don't actually know the data. You might get 50% of your capital back, you might get 75%, we just don't know those answers yet, " she says. The Case Foundation and others are working on ways to collect that data, but it will take some time.

The final hurdle: "I think people just aren't willing to take risk. Everybody is looking for calculated risks, and this is just risk. You've got to be willing to create the market that doesn't yet exist, and that's going to be somewhat challenging," she says.

[Image: Abstract via Shutterstock]

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6 Comments

  • Kevindoylejones

    "You may get 75% of your capital back, you may get 55%?" If you don't have returns to cite, why make up such terrible ones? We at Good Capital, http://www.goodcap.net just sent our limited partner investors a check for all their capital in one deal plus a 13% IRR in three years on our growth capital investment in Root Capital, a lender to Fair Trade and small holder farmers in the developing world. 

  • Kevindoylejones

    "Maybe we get 85% of our capital back, maybe 55%?" If you don't have results, why cite such dire ones?
    We at Good Capital, http://www.goodcap.net just sent our limited partners a check for all their cash in one deal plus a 13% IRR return, for our growth capital investment in Root Capital, a non profit lender to fair trade coops and other small holder agriculture farmers in the developing world. 

  • Kevindoylejones

    "Maybe we get 85% of our capital back, maybe 50% if you don't have results, why cite such bad ones? We at Good Capital just sent a check to our limiteds with a 13% IRR for just three years, investing in a non profit, Root Capital. 

  • Anthony Reardon

    Hmmm... interesting.

    It was a little tough to chew on this. I would agree with Sang Lee here.

    Can't help but think this issue is clouded by semantics, self-serving industry norms, and ingrained assumptions. What's so hard to figure about investing?

    What do you want for your money? You want long-term or short-term profits, well the market is already geared for that. It's a simple matter of "interest" in profitability vs. risk tolerance.

    If you are going to lose money for the sake of impact, then you are not really investing according to the commonly accepted use of the word. You are paying for something.

    Now it is interesting when you talk about putting down more money than you hope to ultimately spend. Your interest is not so much in profit, but mitigating the risk of losses for what you are willing to advance on an outcome.

    You can slide this across a scale to break-even, and then you are talking more about the risk of making a loan, probably with the interest being the outcome. Probably if the enterprise has some margin of profitability, that's not on the table for you, but secures the viability of the operation so you can pull your money out.

    At the end of the day though, I think it's more of a misconception to look at a trade-off between profitability and impact. Instead, fundamentally, you probably need to take a closer look at profitability as a measure of impact. Pretty much whatever you are talking about, you can make a business model out of it, and investing for profit with impact  not only breeds healthier operational concepts, but is a sounder approach to investing.

    It's the pure profit game that represents the worst shortcomings of our economic systems. It's why people throw their money away at air, smoke, and mirrors. When you put your money into something that has real meaning, then you are investing in something that can stand the test of time and other similar attributes. Especially in this day of social authority, this can be essential to a competitive brand proposition.

    So I would not confuse this with creating an artificial polarity between standard investing and impact investing. Profit markets already have enough ambiguity and vagary. Measure of impact should be looked at as a significant indicator of sound investment practices... as the saying goes "to do it the old fashioned way- to earn it".

    Best, Anthony

  • Sang Lee

    Impact investing is becoming an increasingly more well known term encompassing the world of for profit along with social benefit.  The most interesting point in all this is that somewhere along the way we have lost this ancient and relished form of investing.  Investment used to almost be entirely about building social infrastructure, improving quality of living, bringing water and/or power to unreachable areas. When hunger and infrastructure no longer became a direct problem we started to neglect it.  The fact of the matter is that innovation is not new nor should it ever come and go.  Social innovation is a staple component that holds the fabric of our civilization together that should constantly be invested in.