A growing group of investors around the world are increasingly seeking to make investments that generate social and environmental value as well as financial return. Sound impossible?
Well, no actually. There is a growing recognition of the need for effective solutions to social and environmental challenges that have increasingly real threat and growing inequalities.
Impact investing or more often housed under the broader heading of “Impact Economy” is about finding the ways to combine investors, philanthropists, entrepreneurs and business executives along with governments in finding new and different ways to explore the changing economic and social landscape. Through this emerging newer type of investing there is potentially that the promise of new jobs and profits, mixed in with improved social impact, can be derived from new innovation activities. It needs this convergence and seems to be gathing in pace and broader recognition.
Scaling up needs capital and different business models
In one of my recent blogs I spoke of the issues of the difficulties of scaling up within social innovation projects (http://bit.ly/qLPJHe). I raised the question “how do you scale up a highly fragmented set of solutions when we lack more often than not the developed networks and the intermediaries that can assist?” It is the ability to certainly raise the capital that often constrains this. I have to also say, it is the business social model that often can’t scale equally due to a failure to recognize the mechanisms or levers to achieve that. Scale suffers if these are not recognized and in place and great ‘local’ ideas just simply stay local.
The Impact Economy
“The act of sense making is discovering the new terrain as you are inventing it.”—Brian Arthur
The Impact Economy is about using profit-seeking investment to generate social and environmental good by placing capital into businesses and funds that can provide solutions to scale, that often the philanthropic organization is not able to do due to its limited funds or covenant.
Recently the White House hosted a meeting of all the different interested parties around this Impact Economy (June 22, 2011). In collaboration with the Aspen Institute it was bringing together the Impact Economy Initiative, a project of the Philanthropy and Social Innovation (PSI) program, and working directly with the Office of Social Innovation and Civic Participation at the White House to enable this event and explore ways to take this further. A report about the outcome recommendation comes out later this summer.
So far in a report completed earlier it has been identified than $50 billion of assets under management are associated with impact investments. The predictions are this can rise rapidly to $500 billion, even talk of $1 trillion in the year’s ahead if this momentum moves from a present uncoordinated set of innovation activities into a new domain, a major complementary force for providing capital, the talent and creativity needed to address pressing social and environmental challenges.
The ability to address global challenges at scale would be dramatic.
The combination of a number of ultra- wealthy investors, high net-worth individuals, corporations and foundations all seeking to diversify, to leverage investment as a tool to drive social change can realize this ‘scale’ promise.
They are still looking for returns, perhaps less market-rate returns but where their capital is catalyzing impact. This means they are getting more interested in the pull of growing emerging economies, the more value-driven behaviours of consumers that is emerging post recent crisis and the need for relating and contributing to finding effective solutions to social and environmental challenges across all societies. Part of the aim also is to recalibrate supply and demand that looks harder at social impact.
There is also talk of a social contract that may develop into Social Impact Bonds- investors provide capital to fund community-based programmes whose successful implementation lessens long-term public expenditure and improves society outcomes. Clearly this emerging concept will not be easy but it does bring together all parties to attempt to drive impact and innovate in different fields where we have bigger social challenges. The key is it does need to generate shared value for all and that is going to be a hard road to travel.
Let’s look at some of the critical success factors for this to succeed.
The Monitor Institute wrote a report, released in 2009 (http://bit.ly/eH5UQ) on impact investing, and it provides an excellent overview of what needs to happen. Their list of critical success factors was to view this from different parties’ perspectives but let me provide the list of significant issues to be resolved:
- Developing a range of different but creative packaging instruments that make it possible to gain sufficient returns and bring the different parties together in this project.
- Most probably have some infrastructure specially suited to manage opportunities (separate stock exchanges, intermediaries and specialists)
- Form a clear network/ community to enable linkages between investors and explore common goals.
- Encourage sufficient commercial capital to participate in joint deals by involving all possible investors that see this as critical to contribute funds too.
- Build sufficient submarket funds or grant capital that might have different investment rates so a more ‘blended’ rate is attractive and resolves different ‘benefit’ criteria between parties.
- Achieve a common approach for assessing social/ environmental elements of investment from research and valuation aspects.
- Structure a viable market for investment opportunities where competitive returns can be demonstrated that
- Impact rating systems can be developed that offer acceptable minimum standards to certify companies and verification and are not actually equally destructive.
- Achieve a growing standard of metrics that set out goals of achieving social or environmental objectives
- A real push will be needed for more product innovation that meets the challenges, is able to be scaled up and overcomes potential (parts of) society’s objection or concerns with accepting the changes it might bring.
This is an evolutionary path.
The view is this is going to be a ‘messy’ transition in the evolution of the activity surronding this. The fact that it is bringing together significant parties at the White House recently does indicate that this is getting a level of ‘traction’ and serious policy attention.
There is certainly growing interest along with real social pressure on the recognition for finding new innovative solutions to social and environmental challenges that reduce these pressing issues and become catalysts for new job opportunities and provide positive impact for societies.
We do need to explore new ways to resolve difficult issues. It is worth exploring and watching this Impact Economy movement as this can lead to that necessary combination of capital, talent and social challenge resolve that can partly help move us forward in new innovating ways that can hopefully engage all parts of society.
We do need some positive movement in this and if there is real convergence that solves societal problems through new innovation then we should all take note.