NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, March 1, 2016

More and more people are becoming familiar with the related concepts of impact investing and social entrepreneurship. These ideas are commanding increasing attention in business, academia and government, and also among the public at large, with hundreds of articles and dozens of research studies. MBA graduates want to get in on a piece of the action. Billions of dollars have been flowing in, away from traditional NGOs, to this new model of socio-economic development that harnesses market forces. And some political leaders are also taking note, in emerging markets like India as well as developed countries like the UK and US.

But no one seems to really understand or agree on what exactly ‘impact investing’ means. Many people are confused by its overlap with other concepts like venture philanthropy, socially responsible investing (SRI), corporate social responsibility (CSR), or environmental, social and governance reporting (ESG).

A casual observer may say it has something to do with doing social good, but while making money in the process. And this raises a host of questions and contradictions, for it upends the traditional separation of business and philanthropy that is firmly rooted in the minds of most people. Is this even possible? How do you define social good? How much money can you make? The fact that self-defined impact investors themselves cannot agree on a definition does not make it any easier for those on the outside to have a clear view.

And those on the outside can be quite critical. One can hear traditional venture capitalists sneering at impact investing as a way to generate the high returns typical of the VC industry, asking questions like, “We have Facebook, Google and dozens of other success stories. Other than microfinance, what are the examples of successful (i.e. high financial return) investments made by you guys?”