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Is Impact Investing Working?

A Post from Jim Toscano

An early indicator in preliminary findings in an ongoing study from the Wharton School is demonstrating that impact investing in companies doing desirable social or environmental work does not necessarily have to compromise financial return.

The dual bottom-line goals of financial return and long-term impact seem possible. “Great Expectations: Mission Preservation and Financial Performance in Impact Investing” analyzed the performance of over 50 private equity funds focusing on impact investing. Examining more than 500 specific investments, the study found these investments had similar results as such indices as the Russell 2000.

The private equity funds chosen had market-rate returns as their objective, so it was assumed that the pressure for both social and environment impact at the same time as market return would be a great test case on whether one had to be sacrificed.

Quoting one of the authors of the study, Chris Ceczy in a University of Pennsylvania press release, the research “ fills a near-void of rigorous analysis of private investment and social impact outcomes and most importantly the link between the ideals of doing well and doing good.”

A New Question

If the results of impact investing continue to demonstrate the same results, we have both a boon to society and the environment and a need to discuss the scope for nonprofit action.

Critics of impact investing maintain that all of these for-profit efforts go after the low hanging fruit, leaving the more intractable and complex issues for nonprofits.

Maybe we should concede the point and let the foundations and others put their money into this low hanging fruit. However, in return, let us point out that the investment returns should be directly, and in full measure, focused on those very issues left to the nonprofit community.

This could be the biggest win-win of all, if the rules are followed. Let the for profit sector invest in wind and solar panel farms and then direct their returns to provide subsidized electricity from these ventures to those unable to pay market rate.

This certainly calls for a reordering of the work of the sectors, with the for-profits gaining some balance between profit maximization and social good and the nonprofits focusing increased resources on “cures” and solutions.

Might It Work?

Might it work? Not automatically. With strong leadership from the investment side and the investee side along with a strong nonprofit voice, there is a good chance of some success.

Foundations need to have policies not only about impact investing, but impact funding, including paying for measurement of impact. Grants should have more focus on these deep and serious problems that need cures, not just containment. Gates is a great example of this at the present time.

The companies in which impact investments are made themselves need to have social responsibility policies benefitting their communities. Obviously,

this might reduce “profit” but it does set a standard that is important for the business world. Investment return to charitable foundations needs to be above the societal contribution of a company doing business in a community.

Finally, the nonprofit sector must focus on new and creative efforts needed for solutions of these complex problems it confronts. New strategies need to evolve. New ways of efficiently tackling their chosen areas must be found.

Only then will this reordering of functions provide the overall societal benefit needed. Who will start the larger effort is still the question.

What do you think?

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