Attracting Capital for Social Impact: The Promise and Perils of Impact Investing

By Johanna Mair*

How can investment capital be harnessed for social change? A large part of the answer lies in attracting new sources of capital to fuel the global expansion of innovations that have been proven to work. The Global Agenda Council on Social Innovation has just launched a feature article on impact investing in the Stanford Social Innovation Review to generate a much-needed debate on risk, returns and what being an investment partner to social ventures actually means.

Impact investing, or investing private capital in social enterprises that create positive social impact and, as a bonus, might also yield a small financial return is quickly moving from the fringe to the mainstream. More than 200 impact investment funds are now registered; many foundations, NGOs and mainstream financial institutions are becoming increasingly active in this area.

It is also on top of many governments’ agendas. Almost everywhere you look – from the proactive legislation introduced by the Brazilian government over the past couple of years to the very recent efforts by the European Union to launch a Social Business Initiative, the Social Innovation Fund inaugurated by US President Obama in 2009 and the new Global Impact Economy initiative run out of the US State Department – investing in social innovation seems to be one thing that unifies governments around the world.

As a Council, we are passionate about the potential of this growing industry. In a best-case scenario, we are well on our way to figuring out how to harness market forces and attract commercial capital to solve social problems. We are not there yet, but we believe we can be.

At the same time, we are starting to see worrying trends that warrant serious debate and meaningful corrective action. Are we too focused on the capital (and the financial returns to capital) rather than concentrating on why the capital is being used in the first place – as a tool to solve big social problems? Are investors and investees really speaking the same language when they talk about the “risk” involved in social innovation? Are we creating yet more hype, based on good intentions and hope?

We need a new narrative. If everyone in this sector believes, as we do, that we are witnessing the start of an industry with truly transformative potential, then we all need to do our part. Investors, foundations, governments, universities and, most importantly, social entrepreneurs need to work together to demonstrate how social capital can most effectively encourage innovation and scale it for maximum impact. What can we contribute, as individuals and collectively, to build the unprecedented engine of social change this sector could eventually become?

*Johanna Mair is Hewlett Foundation Scholar at the Stanford Center on Philanthropy and Civil Society, Associate Professor of Strategic Management at the IESE Business School, Academic Editor of the Stanford Social Innovation Review and Chair of the Global Agenda Council on Social Innovation.