The idea behind impact investment, that you can ‘do well by doing good’, is taking hold of the philanthropic and financial worlds. It offers the attractive suggestion that the best way to support social impact causes is through loans, equity and debt, and any other approach where a financial return is expected from the investment. Maybe this is the way of the future. But despite its growth in popularity, impact investing remains beset by a number of problems and concerns over how much ‘impact’ it actually has. Before declaring traditional international development aid a thing of the past, the impact investing industry would do well to study the many lessons learnt by the aid industry on how and why some types of development interventions work and others fail to have an impact.
The main focus of impact investing literature has been on financial returns; essentially a quest to prove that market rate returns are achievable. As a result, we have more evidence of financial success than social impact success. Vague promises of ‘social good’ or ‘impact for the poor’ are not backed up by decent evidence. But the lack of evaluations and monitoring of impact investments – and the resulting dearth of evidence – has not stopped impact investors from claiming highly unrealistic achievements. The most recent survey of the Global Impact Investing Network found that 98% of respondents felt that their investments met or exceeded their expectations on impact. And the problem may get worse. The same survey found that most in the industry felt that the increasing popularity of impact investing, and the arrival of major financial firms into the fray, would likely lead to ‘mission drift’ and a dilution of impact.
This credibility problem around claiming social impact could be better addressed if the impact investing world took a leaf out of the aid business book.
Firstly, a culture of independent evaluation needs to take over. While investors are devoting more resources to impact measurement, much of this is done in-house. Investors often rely purely on self-reporting from investees. Several leading impact measurement tools measure outputs rather than outcomes or impact. A good example is the claim by TPG, a global private investment fund, that its investment in a mobile phone tower company in Myanmar created impact because greater mobile phone access ‘helped to increased transparency in a country known for tight control of its information, helping the nation take steps toward democracy’. This is using an output to claim an outcome and an impact: the relationship between mobile phone access, transparency and democratisation is assumed, not assessed. Indeed, in the case of this claim, the route from output to impact relies on so many intermediate factors that it could not be easily evaluated at all.
The international aid industry long ago started to devote proportions of individual programme budgets to independent evaluations. As a result, it gets assessments from unbiased, expert sources on whether or not its ‘investments’ have real impact, as well as advice on how to refine and improve programmes. Currently, such expert consulting advice is largely provided to impact investors on the financial front rather than the social.
A greater culture of transparency is needed to drive a culture of impact. Impact investors still display a “discomfort around transparency and disclosure”, as argued by the Case Foundation. Financial data may be reported but impact data is not. Basic information like where an investee operates and what sectors investors are investing in can be hard to come by. There are now several databases of impact investors and investments, like ImpactSpace, ImpactBase and Toniic. But these are fragmented and provide little information on what the investments aim to achieve and certainly no information on the impact that these investments have. In contrast, the International Aid Transparency Initiative (IATI) provides comprehensive data on aid initiatives globally and, crucially, has proper buy-in from almost all donors. It even reports the use of indicators of impact (although this is not used enough). Many donors publish independent evaluations and assessments of their own work. The UK Government created the Independent Commission for Aid Impact, which publishes all its, occasionally damning, reports on British aid spending.
A globally unified database of impact investments, resembling the IATI, would help. Skeptical investors and institutions could see concrete examples of what impact investments actually look like, the size and type of capital involved, and how they work. This could help drive more capital into the pot. It would also hold investors and recipients more accountable, in the same way the IATI holds donors to task. Publishing impact data, although difficult for investors and investees afraid of external scrutiny, could help drive funding towards more impactful initiatives.
Finally, more research is needed to understand which financing structures and tools are optimal to support different kinds of social interventions. Impact investors often scour the globe looking for organisations that may fit a certain kind of financial tool. The relationship needs to be the other way around. If a potentially impactful organisation is looking for financial support, investors should know what kind of financial approach might be suitable. The aid industry has invested in significant research into the suitability and effectiveness of alternative funding mechanisms for a long time. In addition to 100% non-repayable grants, new schemes such as payment-by-results and guarantees are also used, to provide the right incentive structures for the recipient.
The focus of impact investment should be to ensure that worthwhile social initiatives receive capital that will allow them to flourish, rather than (or at least alongside) the investor. To achieve this, impact investors could deploy smart subsidy, patient capital, permanent capital vehicles and evergreen funds that reflect the low and slow-returns of most enterprises chasing social impact. Adapting to the needs of the recipient, as the aid industry has done, rather than expecting the recipient to adapt to you, is key.
While impact investing comes with the gloss of the new, if it is to create positive change, it cannot avoid the same difficult choices that more established philanthropists and agencies have made to ensure impact. There are plenty of organisations willing to provide support.