There is an emerging consensus that relying on the invisible hand of markets to create societal value is not good enough. Evolving societal norms and regulatory pressures have rendered deliberate consideration of societal impact a necessity for business. Investors’ own genuine desire to not just do well but also do good is leading them to increasingly consider and manage the impact of their investment choices.
The investment spectrum
Yet different investors incorporate impact into their strategies in different ways. When considering the range of such blended investment approaches, I find it useful to distinguish among three generic models that lie along a spectrum between traditional investing and traditional philanthropy: sustainable/responsible investing, impact investing and venture philanthropy (analogous to a similar spectrum of different kinds of businesses that I discuss in a recent podcast and article).
Unlike traditional investing, which focuses only on financial data, sustainable investing also considers and manages environmental, social and governance (ESG) metrics in order to generate long-term value and reduce risk. It has rapidly grown to become the most prominent segment within “responsible investing” (which includes other approaches like positive or negative screening at the sector level). However, as financial returns continue to be investors’ dominant focus, even sustainable investing is often not well-suited to support cutting-edge solutions for society’s most neglected issues and segments. This is the gap impact investing and venture philanthropy try to fill. They go much further in terms of defining, measuring and managing the precise societal impact investors seek while, in the case of impact investing, striving to preserve and generate some financial returns.
However, ideological differences remain in terms of whether and how much financial compromise might be acceptable. For example, pioneering impact investor Acumen accepts significant trade-offs in supporting high-potential social enterprises. But Credit Suisse focuses its impact investing efforts only on “win-win” opportunities that it expects to generate competitive returns.
Venture philanthropists go even further than impact investors in prioritising impact, accepting negative expected financial returns for the right impact. Examples include the Bill & Melinda Gates Foundation investing in financial inclusion venture bKash at an early stage, and online lending platform Kiva’s initiative to invest in impactful social enterprises that other investors view as too risky. Investments thus chiefly serve as a means of making philanthropy more effective than for making money; investing in social enterprises with an earned revenue model can achieve greater impact per dollar than giving the equivalent amount as a grant.
Concessionary vs. non-concessionary investing
Together, venture philanthropy and impact investing comprise a broader category called “concessionary investing”. Given the inherent financial compromise, this approach is only practical for impact-first investors, often high-net-worth individuals, foundations or development agencies. Bono, the celebrity-turned-activist, went as far as to dub concessionary investing as “bad deals done by good people”.