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Can We Believe the Hype about Impact Investing?

Note: This post is authored by John Simon, author of the new report from the Center for Global Development, More than Money: Impact Investing for Development. The report is being released today, December 13, 2010 and the Center for Global Development will hold a live webcast of the launch event online from 4-5:30 PM EDT.

For those who count themselves members of the Impact Investment community, it has been a busy Fall.  September began with Take Action! Boston – dedicated to Impact Investing.  Then came October, with the Aspen Network for Development Entrepreneurs (ANDE) annual meeting in Long Island, immediately followed by the Social Capital Markets Conference in San Francisco, and then the Opportunity Collaborative in Mexico.  The last week in November/First week in December produced three events in one week, the Impact Investing Conference in London November 30-1, the International Impact Investing Summit in New York December 2-3, and the release of JP Morgan & Rockefeller’s impact investing report December 2 in New York  – followed by its London release December 6.  Now there will be the Center for Global Development’s release of its report on the sector – More than Money: Impact Investing and Development (authored by myself and Julia Barmeier) – December 13.

We certainly know how to talk about this subject, and we can even throw some good parties, but will we be able to turn all this conferencing into the asset class JP Morgan and the Rockefeller Foundation described in their report?  Can we live up to our name and have a real impact?  Julia and I note there is a real danger of over-hyping the sector.

The consequence would not just be that we are wasting our collective breaths.  Failure to produce performing investments with quantifiable results could create a backlash damaging the brand for years to come.  It can also lead to some bad results on the ground or, worse, lowering our standards for impact to the point where the distinguishing feature of impact investments is that they cannot attract commercial capital.

My concern is more than academic – as a founder of Total Impact Advisors, I have spent the last year and a half working with several exciting, highly developmental enterprises seeking to access capital in the impact investment marketplace.  It is usually difficult to raise capital for new ventures, and it should never be easy (see the dot com sector in the late 1990s), but both the data and my personal experience indicate a significant gap between the amount of talking we are doing about impact investing and the amount of impact investing we are actually doing.  This is particularly true for early stage companies.

Of course, I would not be dedicating the next stage of my career to this sector if I believed any of the scenarios above were likely, but this is all the more reason for my concern and desire that the impact investing community take concrete steps to avoid them.  The greatest antidote to hype is cold, hard data.  Right now there is too little of it on both the returns impact investments achieve and the social benefits they are creating.  Therefore, as our report recommends, those active in the sector need to find mechanisms to share these results in a way that does not harm the competitiveness of the firms receiving impact investment money.  Invariably, the data will not meet the most exaggerated expectations.  An informal survey of the few impact investment funds with long enough histories to show some preliminary return results indicates returns in the high single digits, low double digits.  Hardly earth shattering, but given the places and sectors these funds are reaching and their own learning processes that they must go through, certainly respectable.

Similarly, we need to ensure the social impact of these investments are quantified and disseminated, beyond simply anecdotes.  For good reason, this is a major project of the GIIN, with IRIS, Pulse, and GIIRS seeking to create standards, systems, and ratings to track results.  The challenge is to ensure these systems capture meaningful, as well measurable, data – no easy task given the myriad of models for achieving impact through enterprise.  I would argue we should insist on a very high standard for rigor in measurement – is the measurement system capable of capturing what it purports to and is that something that really means a positive impact is occurring? – but  allow flexibility with regard the exact measures.  Over time an iterative process building on data actually being used in the field can standardize metrics for each sector.

Focusing on building the pipeline of impact investments is also critical.  There is no shortage of social entrepreneurs with interesting ideas on how to use investment capital to change the world.  The number of proposals that have the key elements to justify investment, including an experienced management team, a compelling business case, requisite analyses of the market, the wherewithal to implement, etc. – are, as most funders will tell you, few and far between.  Mechanisms to support the most promising of early stage impact investments with technical assistance and seed funding are also few and far between, but without them there is no way we will have nearly enough product for flood of capital  – $120 billion, $500 billion, more – that is predicted to be coming into the sector by the various new reports.

Finally, we need to think hard about linkages between the impact investment sector and other sectors – both the purely social/ philanthropic and the purely commercial.   The former can help fund some of the activities required in this sector to build the pipeline; the latter can keep us honest with regard to financial viability.  Models that blend participants from different sectors will broaden the pool of doable deals and allow us to achieve scale more quickly.  Ideally, the best impact investments of today will be the mainstream blue chips of tomorrow (ok, maybe the day after) enhancing our social and economic well-being.

I am an optimist about what I hope to one day call our industry – even more so now that one of the companies Total Impact Advisors works with just managed to raise $4.7 million (Integrated Resource Recovering, a company with a new clean technology to turn discarded tires into energy, steal, and carbon black).   As our report indicates, Impact Investment goes to places and into businesses where commercial investors are scarce.  It has the potential to be a major source of finance to address some of the world’s most difficult problems.  But we need to stop saying this, and really start doing it.

John Simon is a visiting Fellow at the Center for Global Development, founder of Total Impact Advisors, and co-author of the new report, More than Money: Impact Investing for Development.

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