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

Tuesday, February 24, 2015

Impact investing is hot right now. The meteoric rise of social enterprise is shaking the foundations of the nonprofit sector, and traditional investors are starting to pay attention. There are more than $46 billion worth of impact investments currently under management, and a total projected market potential of up to $45 trillion. Though we’re not yet mainstream, we are on way.

This is great news and yet… There’s something tugging at the heart of this grizzled old nonprofit professional. Any time a new development in our sector garners this much sudden attention, I can’t help but worry about the downside. And with the rush of enthusiasm for impact investing, I’m worried that we’re setting ourselves up for trouble.

Let me explain: My concern is that the conversation about social enterprise—revenue-generating ventures designed for positive social impact—is overtaking the conversation about social change. As a rush of investors and an emerging generation of social entrepreneurs “catch the bug,” we are in danger of reframing the entire social change conversation within a market context. For this reason, I think it’s worth reminding ourselves of a few critical things:

1. Not all social change can be achieved through the market. Not all social change comes in the form of a salable product or service, and not all challenges can be addressed at the level of individual enterprises. Capitalism has lifted millions out of poverty and has proven to be a powerful social and economic organizing system. But it’s not the solution for all challenges. It will be awfully hard to squeeze a profit out of disaster relief or programs that address human right abuses. For effective social change we need to support policy change, new regulations, collaborative organizing models, and social movements. We also need good old-fashioned philanthropy to support nonprofit organizations that will fill the inevitable gaps in the marketplace.
2. We must measure impact, not just profit. It is too easy to use profitability as the measure of a successful impact investment—after all, it’s all there in dollars in cents. But we cannot use profit as our sole measure of success. Impact investors must look at both sides of the coin and those who are championing the sector must emphasize the social results. An impact investment that generates meager returns and incredible social value deserves celebration. Let’s emphasize the impact side of the equation and support effective social impact measurement so we can really build the field.
3. Impact investors should embrace a spectrum of tools. There are too many voices positioning impact investing as if it’s the same as traditional investing—but with a percent or two taken off the returns. Sure, a careful investor may be able to generate great financial returns. But think of the social good that could be achieved with more modest expectations. We don’t just need investors who tolerate a moderately lower rate of return. We need investors who deploy a spectrum of financial tools in the search for social impact. Adopting a fluid approach—one that tolerates risk, lower rates of return, and even ocassional losses—will allows us to truly capitalize on the link between mission and market.