Mike McCreless

Finding the Efficient Frontier of Financial and Social Returns

Finding (and Transcending) the Efficient Frontier of Financial and Social Returns:
A report from the Harvard Social Enterprise Conference, Sunday, February 26, 2010

One of the most heavily-attended panels at the Harvard Social Enterprise Conference this year was titled “Social Impact Investing: Putting Your Dollar to Work in the Developing World.” With students and practitioners perched on every flat surface of the room, Moderator Amit Bouri of the Global Impact Investing Network opened with a question for the audience: “How many of you believe that to increase social impact, financial investors have to sacrifice some financial returns?” Roughly a third of the audience raised their hands. “And conversely, how many believe that to generate higher financial returns, social investors have to give up some social impact?” Again, less than half of the audience raised their hands.

As the panel progressed, many of the panelists’ comments touched upon the idea, implicit in Bouri’s question, of an efficient frontier of financial and social returns. In this framework, financial returns and social impact are orthogonal to one another. Along the frontier, an investor cannot increase financial returns without decreasing social impact, and vice versa. Some panelists used the framework to contextualize their organizations as more financially- or socially-driven.

The panelists did indeed represent a tremendous diversity of approaches: Michael Chu of Harvard Business School and the IGNIA Fund, Michael Hokenson of Minlam Asset Management, Vidar Jorgenson of Grameen America, and Jayant Sinha of the Omidyar Network. All of them seek to maximize social impact given their targeted financial rate of return (for instance, at Grameen America, a non-profit microfinance institution), or to maximize their financial rate of return given their social impact (for instance, at Minlam Asset Management, a for-profit investment fund that provides local currency financing to microfinance institutions).

While a tradeoff may exist between financial and social returns in some situations, there may be projects that offer more of both. One could equally well say that such investments shift the efficient frontier outward, or that they bring us closer to a pre-existing efficient frontier. However, without information on the costs, profits, and social impacts of a large set of projects, I would argue that we simply have no idea where the efficient frontier of financial returns and social impact is, or what it might look like if we found it.

Jayant Sinha observed that this discussion cannot progress far without a more precise conception of social impact, grounded in an understanding of market failures. Is there a positive or negative externality, or perhaps a missing market? If so, what sort of organization can remedy the market failure most effectively? And finally, what forms of financing will this organization need? Only at this granular a level can we identify a set of possible interventions and compare their relative costs, expected financial and social returns, and risks. We can use this information to identify an ’efficient frontier’ for the provision of a particular good or service, in a particular place, at a particular time.

At higher levels of generality, the efficient frontier of financial returns and social impact may not be a constructive concept. After all, most social investors argue that they generate more social impact per dollar spent than traditional philanthropy and aid. They do not argue that they generate less social impact than traditional philanthropy, but higher financial returns. Moreover, to the extent that the efficient frontier exists, practitioners seek to puncture or transcend it, rather than simply find their niche along it. This is implicitly the approach taken by those in the audience who did not raise their hand to Bouri’s question. Vidar Jorgenson put it best when he observed “There is no one best approach-we need all of them in there.