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Impact investing: caught between charity and a new view on capital

September 30, 2015

A recent post by Chicago Booth asks a big question: is Impact investing more than charity? While the question is admittedly provocative, it shows the progress still needed by industry participants. A lot of energy has been dedicated to impact measurement, and there is more work needed on financial performance. A recent report by the GIIN and Cambridge Associates aims at filling the gap. To be clear, impact investing consists in the combination of financial returns and a social/environmental impact. Intentionality and measurement are commonly included in  this definition.

Early evidence shows some financial performance

The panelists in the Booth video debate the notion of concessionary capital. In plain English: are we giving away financial return to obtain some type of impact? The difficulty arises when this social/environmental impact is difficult to measure, the loss of financial returns can bring fund managers and investors to a slippery slope.

Data suggest that impact investing works: it can be profitable, and is therefore different from charity. It is not more or less important than charity, but it will attract a different pool of investors and investees. Early studies on financial performance focused on sub-segments of the impact sphere, notably micro finance. In our previous work on valuation of microfinance institutions (papers downloadable here), we showed that MFIs’ could outperform regular stocks, as measured by MSCI indices over various time periods.

A more recent paper from the GIIN (from June 2015) has shown similar conclusions with a more ample focus on the impact sphere. As noted in a previous blog post, the GIIN report concludes that the financial performance of Impact funds has been relatively in line with traditional private equity funds’ in 1998-2010.

The risk of over-promising

Measuring impact is a point of contention. Impact can be hard to measure, different investors have different views on what the impact should be, and importantly measurement can divert meaningful resources from the actual investing process.

In a recent interview to the GIIN, the president of OPIC Elizabeth Littlefield highlighted the risk of over-promising in Impact Investing. Impact investing consists in “changing the way the world thinks about capital”, and it will “be a broad spectrum”. Different investors, DFIs, high net worth individuals, foundations, will have different views on the concession they are willing to make in order to have an impact. Some investors will try to align interests to build their portfolio, while some will genuinely believe that companies that have a social impact can be superior investments.

At the end of the day, Impact investing doesn’t represent a new asset class, but more a new way of thinking about allocating funds. Agreeing on a common view is particularly important in countries where the Impact industry is nascent, such as Brazil.

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