Knocking down persistent myths about impact investing
(This post originally appeared on Impact Alpha in April 2018).
The impact investing conversation is pivoting from past to future. One moment we were celebrating the 10-year anniversary of “impact investing” (though investing with values predates the term) and record levels of impact assets under management. The next, we’re paging through a new impact investing roadmap to transform global financial markets.
To achieve that ambitious goal, we have an additional task.
It’s time to update our narrative to give it its full force. And that includes dispelling a number of outdated myths about the sector.
Some of these myths still, frustratingly, merit discussion today — such as “you have to sacrifice financial returns to generate real impact” or “impact investing is just for the large, rich and wealthy.” They shouldn’t disappear from how we speak about the sector. But if we can update what we know now — and acknowledge the myths that prohibit our growth — we stand a real chance of creating a self-sustaining, thriving and inclusive financial market.
So let’s get started.
Myth #1: It’s all the same thing.
If our goal is to build a financial marketplace that embeds impact and is truly sustainable, we need to stick to some of what mainstream financial markets got right, including the concept of “choice.” Social finance strategies, including socially responsible investing, responsible investing, venture philanthropy and many others, are not all the same.
When we started talking about the field of social finance — and its sub-strategies — as a spectrum, we finally gave impact investing some legs. That spectrum doesn’t just juxtapose the risk and return profile of different approaches, it requires decision makers to think about the intentionality (and sometimes primacy) of the impact they want to have.
Talking about these strategies as one and the same, or lumping them together, ignores the very simple fact we’ve learned from decades of mainstream investing — that there is no silver bullet. Every investor should choose the approach that meets their expectations across all of their relevant dimension, and we should be careful to sidestep the trap of one size fits all solutions — or terms.
Myth #2: Measurement is too hard.
A financial marketplace inclusive of impact will need to demonstrate a close relationship between strong performance on impact measures and financial measures.
Disagreement on what it means to measure has given way to a new, unhelpful detente — “let’s just decide that there’s no good way to do it.” The complexities of measurement affect everyone from the enterprises being asked to gather data to the field-builders trying to promote simplicity. Yes, measurement is hard. It can be resource-intensive and end up amounting to a whole bunch of data points that mean little.
But while we have a lot of work to do on standardization, suggesting there is a lack of frameworks to measure at all needs to end. Here are some examples that are actively in use by a range of investors and entrepreneurs:
GIIRS’s Fund Ratings, which evaluate a fund’s impact business model, operations, and management;
The SROI framework, which uses monetary value to quantify social, environmental and governance impacts;
SASB has created accounting standards that help public corporations disclose financially material information to investors with an eye to sustainability;
And Aeris Impact Ratings have homed in on critically important CDFI loan funds, assessing the impact and performance across products.
Atop these individual frameworks is the evolving Impact Management Project, a comprehensive attempt to focus on impact management, calling into question what’s material to each of us. Yes, we need to do a better job of simplifying this integral activity, but we can’t continue to just lament a lack of tools.
Myth #3: It’s only investors — and their capital — that matter.
One of the strengths of impact investing is its focus on capital markets as a force for change. That emphasis has ensured that we bring a systems-level approach to thinking about impact. But it has also meant that we sometimes think about investment capital — the mobilization, activation and deployment of it — as a single data point for success.
That’s out of sync with the actual evolution of the field.
Much of the early bet on impact investing was made by field-builders, using a combination of grants, technical knowhow, and thought leadership to shine a light on the opportunity. In fact, we don’t have to look far back to see the benefits of these efforts. The Rockefeller Foundation helped incubate the GIIN, the industry body for the sector. The Omidyar Network, MacArthur Foundation, and Surdna Foundation still use grants to build the investible universe today (alongside investments).
Research and platforms, like the work of the Wharton Social Impact Initiative or CASE @ Duke don’t fall into the realm of investment activity, but remain central to expanding our knowledge base. And so many of the ratings systems and tools that we discussed above used grant capital and technical expertise directly from those ecosystem builders to grow. If the impact investing sector can and should be a sustainable market, then the range of tools to help build it needs to reflect not just diversity of actors but also diversity of capital.
With each passing New York Times article, Economist opinion, or Financial Times snippet, we inch closer to the end of repetitive definitional pieces and quotes from skeptical asset managers. But like all systems change, we need to make space for both incremental progress and sweeping disruption. That means creating a larger investible universe, onboarding savvy investors, championing and using strong measurement systems and finding a better way to tell the story.