People active in the impact investing ‘scene’ will have noticed that, despite the socially responsible investment industry now estimated to be a $12 trillion industry, things have slowed down a little.
John Halstead founder of the Founder’s Pledge and Hauke Hillebrandt from the Center for Global Development published an in-depth report on the state of impact investing. Their key observation/argument is that the whole concept of impact investing relies on tenuous assumptions, and that, if you intent to put your money to work to make the world a better place, we need to get to things right.
First, you need to have successfully identified a business that will make the world a better place if it succeeds. Sounds easy, yet, it’s complicated than it sounds. For example, even if you think solar panels will make the world a better place, funding a solar panel company isn’t guaranteed to do it; if the company displaces other solar panel companies and does a worse job, then its success won’t have improved anything.
“It is difficult to identify in advance which social programmes will work,” (…) “The path from action to social impact is usually not as you would expect. Socially beneficial businesses have to solve two very difficult optimisation problems simultaneously — turning a profit and having impact. Consequently, finding viable companies with enterprise impact will not be straightforward.”
Secondly, Halstead and Hillebrandt write, if you’ve found a business that is definitely having the desired impact on the world, you need what’s called “additionality” — a path by which your investment causes the business to be more successful than it would otherwise have been. That, too, is complicated. In a big stock market, there are lots of investors seeking the investment opportunities with the best-expected returns. If your opportunity has the best-expected returns, it will attract investment from those investors. That means you’re only helping if you are investing in the business when it does not have the best-expected returns.
While many impact investors don’t like to hear this, the report argues that impact investing generally does mean there is a trade-off between financial returns and social impact.
“There is a trade-off between financial returns and social impact,” the report concludes. If you’re getting market rate returns, there’s likely no “additionality.” If there’s additionality, returns will likely be below market rate.
Check out there entire report here.