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

Friday, August 25, 2017

Impact investing appears to have been seduced by a convenient narrative. According to the prevailing view, the achievement of both social impact and market-rate financial returns is the norm—not the exception. Those who question the financial returns aspect of this assumption are portrayed as lacking business savvy. “If we want to change things and we want to make an impact, we can’t be hippy-ish about this,” pop singer and philanthropist Bono said at the Skoll World Forum in April. “Impact investing has really been an excuse for good people to do bad deals.”

Impact investing was originally created to improve the lives of others; that impact investing could also deliver financial returns to investors was a means to that end. But nowadays, achieving predefined financial returns has become the primary goal, with the needs of investors taking priority over the interests of the communities their funding seeks to benefit. This trend has fueled a growing mismatch between the supply of impact investment and the demand for funding from enterprises working to improve conditions for marginalized communities.

Here is the reality: The most impactful and successful of social enterprises in emerging economies—even in developed countries—are likely to generate only low-single-digit financial returns. This is hardly surprising. They bear not only the same risks faced by all startup enterprises but also the challenge of testing, adapting, and refining business models appropriate to marginalized communities—who typically have previously either lacked access to the new product or service, or had it provided for free. Furthermore, such enterprises make business decisions—on prices, wages, and hiring—in a way that maximizes long-term social benefit against short-term financial gain.

Photo courtesy of Images Money.