Impact Investing, How We Can Make It the Best Way Forward

Impact Investing both has been lauded as a targeted, positive way to channel financial capital into social impact and has been challenged as “just the next trend by smart do-gooders”. Regardless of which perspective you espouse, impact investing is becoming the focal point of many conversations in the sector.

As the SOCAP 2011 conference kicks off, MIT Innovations released a special edition focused on impact investing. The Schwab Foundation contributed two articles encouraging realistic expectations. The first article, “Unlocking the Mystery”, focuses on the social entrepreneur perspective for productive, mutually beneficial investor relationships. The second article, “Taking a Realistic Approach”, presents the findings of year-long discussions of the World Economic Forum Global Agenda Council on Social Innovation on the current challenges and future hurdles for impact investing.

The Unlocking the Mystery article builds upon the “Social Investment Manual” which was soft-launched at SOCAP Europe, in June 2011. It is co-authored by the Schwab Foundation and the Technical University of Munich (TUM), and was spearheaded by the Social Investment taskforce of the Schwab Community.

This Manual has been significantly revised with additional content (DOWNLOAD the final version). We have been told it is now the most comprehensive resource on impact investment for investees. Of particular value:

• Profiles of nearly 100 investors and intermediaries (see appendix, pages 28 – 61)
• Analytical frameworks and decision criteria for choosing the right investor and the best investment vehicle given the investee`s needs (see pages 9-12, page 22)
• Due Diligence Tools for investees, including an NDA template (see pages 25 – 27), how to prepare for investor conversations (page 14) and a list of the most common investor questions (page 15)
• Explanation of the criteria for negotiating with investors (pages 16-17), how to create a productive working relationship during the investment (pages 18), and how to exit successfully (page 21)

We see this manual for social entrepreneurs as advancing the field, but by no means a self-contained offering. Rather, we must together build the ecosystem so impact investment succeeds in the way it was intentioned and how we envision change in the world. A few ways that we can continue this work:

• First, we need a threshold of investors who understand the field and commit capital to impact investing. While first movers like the Calvert Foundation have been in the field since 1995, and the Acumen Fund since 2001 infusing patient capital into emerging markets, many potential investors are still sitting on the sidelines. We will not be able to reach the potential of impact investing without them. Organizations like TONIIC, Investors Circle , and Mission Markets are beginning to reconcile this, but it is only a start.
• Second, we need commonly agreed upon metrics and standards that allow investors to compare across prospective social investees and to track the investment over time. The GIIN`s IRIS taxonomy and B-Lab`s GIIRS are instrumental in creating the quantitative toolsets and benchmarking criteria which will simplify investment decisions. However, many investors and investees are still using their own preferred and unique metrics, which confuses the investment search and screening process. It also reduces transparency when measuring returns over time. Without common metrics and standards, the impact investing field will remain fragmented.
• Third, we need policies and regulations that can advance the field of impact investment. For example, the B-Corp status, which recognizes a company`s obligation to shareholders to fulfill both a social return and financial return, has achieved legal standing by several state governments. Organizations like ANDE and the GIIN are pushing forward this dialogue, in the US and internationally. However, more players in the field of impact investing need to advocate for the advancement of the field.

Impact Investment is by no means a silver bullet, but it offers us the best way forward. Realistic expectations are important. But beyond realistic mindsets, we must advance the field together.

This increased focus on Impact Investment is about helping shape a field that has enormous potential to reconcile what we see as wrong with markets as they function now, and how we can contribute to a greater social good.

Abigail Noble

 

Editor's note
Abigail Noble, Head, Latin America and Africa, Schwab Foundation for Social Entrepreneurship