Does Every Impact Investment Need to Hit the Bullseye?

Suppose there are two investors, each with $10 million and each of whom wishes to earn a positive rate of return.

The first cares nothing about social and environmental scorecards or new impact investing approaches per se, but recognizes she will likely be helping society by investing in the social sectors, such as health or education, in poor nations.

The second investor wants profits plus quantifiable, targeted social impact through a corporate vehicle that is bound tightly, even inextricably, to its social mission. He invests his $10 million in a social enterprise that has a mission-bound charter, commitments to widely approved social impact indicators, and a mandate to incur monitoring costs, even if that means posting a loss in the early days. Perhaps it is a for-profit water distribution program at the village level.

Question: Which investor should we prefer?

I have a confession to make. I once believed that the second investor, the “impact first” investor, was the one that everyone should, and eventually could, opt to support. I deeply believed that the appetite of retail investors for such investments lay just under the surface, if only we could provide the right vehicles.

I now confess that I was wrong. We should actually focus on both types of investor.

Over the past 12 months investment banks, financial advisors, and family offices have all been coming to my agency, the Overseas Private Investment Corporation, saying that their clients want to get involved in impact investing. Finally! I thought. But, guess what? Investors have a hard time finding the pure impact investment vehicles that have the liquidity, exit mechanisms, reporting, and many of the other necessities that a seasoned investor expects.

What is capable of bridging the gap between investor appetite and viable investments? More concretely, where does a financial advisor or an investment bank turn when they want to meet the long-awaited client interest in impact investing?

One answer is sector funds: funds organized around commercial activity that is socially beneficial by definition, such as health care, education, water, microfinance and the like.

Yet is that true impact investing? Advocates have long asserted that impact investing means having the intent to generate social and financial returns and to measure them. Does the intent to generate impact at the investee level matter or is it enough that the investors have intent? If investors are rigorously measuring their impact, isn’t that more important than having intent?

Consider the case of a medical clinic CEO who is having a clear impact because he is targeting low-income families in Senegal. If he is too busy to invest in metrics, do we tell him that he’s not part of our impact investing club? Objective impact measurement systems are hard and it is also hard to prove intent.

We need to recognize that impact investing – along with its precursors, socially responsible investing, blended capital and shared value investing – has evolved to the point that we can and must embrace a wide range of approaches, priorities, target financial returns, and levels of rigor in impact measurement.

We should be mindful of the legitimate concern that if we open the field too wide, we risk a flood of greenwashed investments or “old wine in new bottles” that could undermine the whole sector. But we should also acknowledge that openness to different approaches will involve measurement by degrees, not strict categorizations.

Laurie Spengler of Enclude uses the analogy of a bullseye on a dart board. The purest impact investments will be ones that score highest on their intent to create social value, on the difficulty of the sector, and on the rigor of metrics. And they will most likely represent the smallest circle on the target in dollar terms. They hit the bullseye.

There may be other investment strategies in the concentric rings around that target, each of which has varying degrees of impact, intentionality or measurement rigor. They should be welcome and recognized as important. The farther away from the bullseye, the fewer constraints and the larger the available capital pool.

Whatever one’s strategy, the key now is to be transparent about our investment offerings, so that investors can meet their own priorities and the field can grow in diversity, inclusion, size and impact.