This article was originally published in the December 2014 issue of Alliance magazine.
Despite the exponential growth of impact investing and the surrounding buzz, and the billions of new investments made every year (it’s expected that the UK alone will see £1.1 billion worth of new impact investments in 2015), most philanthropic donors are still impact investment neophytes. So how best to guide a philanthropist through their first impact investment?
For the purpose of this article, we will adopt the World Economic Forum definition: ‘impact investing is an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured’. We need to find ways to bridge the gap between the efficiency and scale of business models and the social impact of pure philanthropy. Interestingly, this gap is becoming easier to bridge as the elevated level of accountability and the determination to identify best practices inherent in impact investing are increasingly resonating among philanthropists. When working with philanthropists who are new to impact investing, there are three key factors we feel are worth emphasizing.
Invest with a long view
The value of ‘patient capital’, or longer-term financial investments, backed by philanthropy, is widely acknowledged. Acumen’s approach is to invest philanthropic patient capital to discover innovative, market-disrupting business models which allow Acumen to better serve tens of millions of poor people with affordable products and services. But the reality is that there will be failures as well as successes. Patience is essential, delicately balanced with urgency, and philanthropy can play a pivotal role in delivering both.
Much has been written on the critical role that philanthropists play in taking on these risks to unleash the potential of impact investing and enable transformational social change. With the growing enthusiasm about the sector, though, donors can be over-zealous about scale when investing in businesses in developing economies. A sound understanding of business models in volatile environments with limited resources, plus active local management, is important to ensure sustainable outcomes and scalability.
Building a sustainable ecosystem
Lasting improvements in poverty reduction demand a concerted effort and coordination among many participants, including impact investing funds, impact enterprises (investment targets), governments, financial intermediaries, corporate and mainstream investors, as well as philanthropists and foundations. Beyond financial capital, there is a role for philanthropists to make a greater contribution by investing in human capital, through their leadership, management and operations expertise. Mobilizing networks to bring on board additional capital and talent, and to promote private–public partnerships, is another form of engagement for philanthropists.
Balancing input and impact
Our understanding of what impact actually means is constantly evolving. While earlier stages of impact evaluation focused on measuring outputs, such as lives affected and jobs created, the exponential growth of impact investing begs for more outcome-focused metrics. For example, Acumen recently partnered with the Grameen Foundation to better understand the depth of impact of philanthropy-backed patient capital and to identify exactly who the beneficiaries are. While previous impact measurement showed an ambulance service company in India, Ziqitza Health Care (ZHL; an Acumen investee), affecting over 20 million lives across five states in India, a more cost-efficient method of assessing poverty levels through mobile phone surveys revealed that 75 per cent of ZHL’s customers live on under $2 a day, the majority of whom are women (50 per cent are expecting mothers). Tangible data likes this helps philanthropists to gain a deeper insight into the actual impact of their investment.
In summary, there is a critical role for philanthropy to help build sustainable and scalable business models. When considering making your first impact investment, do not be swayed by scale. Focus on long-term, ‘patient capital’ investments that seek to build a sustainable ecosystem, and which intentionally seek the right type of impact. Collaboration with existing leaders who have developed the necessary local network of expertise is a sure way of guaranteeing sustainable, scalable outcomes, creating a global community of catalytic leaders who prioritize social
impact and systemic change.