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impact investing, part 1

08 Mar

So what’s all the fuss about impact investing anyways? Well, as I see it, there are a few different ways to cut it, but the umbrella definition is as simple as something like “the use of for profit investments to address social and environmental challenges.” [www.new-ventures.org/glossary]

Like any industry, its full of its own jargon and acronyms. Major players (& their lexical equivalents) in the game include: the Global Impact Investing Network (the GIIN), Duke’s Center for the Advancement of Social Entrepreneurship (CASE) housed in their Fuqua School of Business, Jed Emerson (who is credited with coining the term ‘blended value’, to describe the output of impact investing), SOCAP (major gathering of the minds in this space), Antony Bugg-Levine (former Managing Director of the Rockefeller Foundation) among many, many others.

Impact investments span a wiiiiide range, and most of my experience is with entrepreneurs. (Even here, the definitions are hazy. Some ‘impact investors’ only invest in ‘social entrepreneurs’, but some invest in any entrepreneurs in the developing world, citing job creation and growth as a social good.)

If you want to read some comprehensive, recent publications include this (by the CEO of the GIIN), this, and of course, this. And of course this. And #impinv. And cool stuff happening, like this.

Here’s where I currently stand (most of the time):

One, its a no-brainer. Why wouldn’t we use our capital in innovative ways to stimulate growth and new ideas – new ways to offer services, or new products for healthier, better living. Capitalism has lead to growth, and growth has led to opportunity creation, which is pretty much the root of my ambition.

To me, it comes back to the issue of long-term vs short term problem solving. One could argue that short term problem solving isn’t problem solving at all.  Real problem solving addresses foundational, structural, systemic inefficiencies. This dynamic is familiar to me from my work in politics, where even those who outlasted my commitment to that arena voice frustrations with the inherent short-term thinking of electoral politics. (Full disclosure: This is another personal draw for me. I love problem solving, and thinking of new ways to use capital and finding new ways to stimulate growth really gets me going.)

Many see the field as a spectrum, from philanthropy (money granted to 501c3’s) to traditional investment; and many of these folks see impact investing as a very diverse field encompassing almost all of the space in-between. So there’s one conceptualization. (I know, I’m totally missing out on an opportunity for another one of my ever-popular info graphics. Sigh.)

However, I hope that this isn’t always the case. I don’t understand this as in contrast to traditional financing structures, but rather as a mindset that will hopefully permeate the majority of people. Why can’t capitalism operate under the assumption that we’re more alike than we are different? And encompasses the idea of broader awareness and the importance of context? Left and right, business school students and faculty are realizing the need to incorporate these issues into their training of future business leaders and decision makers. Why can’t just one person in the room raise the issue of “what this business might do 10 years down the line”. (I’m almost ok if everyone ignores it, as long as someone says it. We gotta start somewhere, right?) (And while I’m on it, why doesn’t all med school education incorporate preventative, public health curriculum into their requirements?)

I’m not (completely) naive (hey, it can be an asset too). I know that for many people, investments and financial services are intended to make money (with good reason – we’re living longer, you know!), and without secondary markets and exit strategies for some of these below-market-but-socially-oriented investments, we have issues. I don’t think that banking is bad. I think that financial services have provided amazing opportunity for growth and innovation.

So on one hand, I fully embrace the term ‘impact investing’. Not as an exclusive brand, but as an indication of a new way of thinking about outputs and the effects of our actions, even though my long-term interests are more about a cultural shift around how we think about making money and relating to each other.

There is one more conceptualization of impact investing I want to put on the table: that ‘success’ to an impact investor hinges on the success of the ventures receiving investment. This is the space that accelerators like VilCap and Agora are filling, offering services to support the growth and success of innovative entrepreneurs, including investment readiness, as well as trainings like financial literacy, social media, etc. More on this later.

In summary, I’m going to draw from the equally-nebulous and equally-contentious idea of ‘sustainability’:

“Sustainability is not an exact science, but it is a strategic decision.” – Jeanne von Zastrow, senior director of industry relations and sustainability at the Food Marketing Institute (FMI).

Though there are many that are trying to develop metrics and regulations around this field, impact investing may not be an exact science, but it is certainly a strategic & responsible decision.

Before you dismiss my inclinations as the ramblings of an idealistic, social science-y perma-student, please check out this study from McKinsey (summary below):

This paper argues that the time is right for banks to step up their efforts to serve micro-, small and medium-sized enterprises (MSMEs) in emerging markets. There are three reasons for our optimism. First, an estimated 60 percent of global banking revenue growth over the next decade will lie in emerging markets. Second, more and more banks in emerging markets are finding ways to overcome the difficulties of serving the important MSME segment. Third, innovations in technology, risk assessment and business models are increasingly facilitating their effort.

It is not just banks in emerging markets that should grab the opportunity. Western banks will find innovative practices that they can use to refresh and adapt their traditional banking models back home.

This is pretty hazy, mostly because there’s lots more to say about all this, but I shall stop here for now.

Thoughts?

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Posted by on March 8, 2012 in Uncategorized

 

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