May 24, 2012

Finding the Middle Ground: When Does Impact Investing Work?

The term impact investing—the practice of investing for financial return and social good—hit the mainstream press back in 2010.

By: Michael Etzel

The term impact investing—the practice of investing for financial return and social good—hit the mainstream press back in 2010. There has been significant excitement about the potential of impact investing, which some estimate to have a market size as large as $500 billion (which dwarfs traditional philanthropy’s ~$300 billion). Yet, current investments have been relatively limited, amounting to ~1% of the estimated market size. This discrepancy between enormous potential and limited investment is reflected in the portfolios of several philanthropies.

  • In one corner, the Mulago Foundation, a private foundation focused on improving the lives of the poorest people in the world, has worked to incorporate impact investing. The result? It has only been the “right answer” for 5% of its total portfolio. Kevin Starr, the foundation’s Managing Director discusses the reasons for this in “The Trouble With Impact Investing.” One reason: Very few investments that help the poor will give you a financial return on your investment, he says.
  • In the other corner, two of the staunchest champions of impact investing, Jed Emerson and Antony Bugg-Levine, suggest that “impact investing is poised to disrupt the traditional systems that organize enterprises, investment, and charity” in their book Impact Investing.

So which is it, limited or revolutionary? I believe the middle ground is worth exploring—what if impact investing is neither severely limited nor revolutionary? What if we think of impact investing as a new specialized tool in the toolbox, one that the social sector has not yet reached consensus about where or when to deploy?

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Ultimately, most commentaries do end up exploring this middle ground, but only under a headline that anchors at one of the poles. For example, Starr clarifies that much of his criticism is rooted in what he sees as a mismatch between the nature of impact investing and Mulago’s work with the extreme poor. Similarly, in a recent interview with Forbes, Bugg-Levine closes the conversation by noting impact investing’s limitations: “There are many social challenges and organizations that require donations, not investment. Remember that impact investing is an exciting tool but not a silver bullet.”

Instead of relegating the “middle ground” to the end of the conversation, let’s make this the headline and work our way out to discover impact investing’s practical limits. There’s some evidence this is happening: A new report by the Monitor Institute and the Acumen Fund suggests that impact investing alone cannot help the poorest of the poor; it must be supplemented by more traditional philanthropic contributions. For more context on impact investing, please see our latest FAQ, “What Is Impact Investing and Why Should or Shouldn’t Philanthropists Consider It?

How about you—what are your questions about impact investing? Do you see it as a viable solution to the social issues you care about solving? Where do you see it falling short and what does it need to fill the breach?

Michael Etzel is currently on leave from Bridgespan while pursuing his MBA at Harvard Business School. Follow him on Twitter @m_etzel.

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