Impact investing has a straightforward premise: you invest money to improve the world while making a profit. The concept is really as simple as that. Why didn’t we come up with this decades ago?
Well, decades ago, we didn’t feel the pressure from our shareholders, customers and employees to do so. Decades ago, the ethical concerns in our own minds were easier to dismiss.
Today, the world has changed, and so impact investing is an increasingly hot topic among investors. Many predict its imminent exponential growth.
Your first question will be, “How can you tell that you’re really improving the world?” Good question. It’s very difficult. Depending on how much this bothers you, and how broad your perspective is, this fact can lead you to embrace impact investing as the engine of social change or dismiss it as a sham.
The transactional nature of impact investing
There’s a level at which impact investing can be without any doubt a successful investment strategy. We call this the “transactional” level. It’s the level that ignores the big picture.
At the transactional level, I invest in an agency that helps people in Uganda find employment at the local KFC. People secure jobs, KFC gets employees, I make a profit, everyone is happy.
At the transactional level, I invest in an enterprise that builds homes 50% more quickly and 20% more cheaply and environmentally-friendly. People who couldn’t afford a home before can now have one. The social enterprise makes a profit, I get a cut, everyone is happy.
The benefits of this approach are widely documented, real, and not at all to be underestimated. These approaches have helped many institutional investors create good outcomes around the world, deploying money which otherwise would not have been available. Hundreds of billions of dollars are invested this way each year.
Criticism of impact investing
Let’s now look at the extreme opposite position. To the critic, impact investing is a sham. Why? Well, the most cynical line is as follows. Investors prioritize profit. Profit at all cost means low wages, pollution, tax evasion and similar bad practices. Society begins to notice and complain. Investors defend themselves with corporate social responsibility (CSR) brochures and extensive lobbying. But at some point even these can no longer keep the critics at bay.
And so the wealthy pull out the card of impact investing. They like it because they get to self-report their metrics. They effectively control the organizations which define impact criteria, ensuring that any investment can be reshuffled to look like an impact one. In addition, they get to keep the perspective low-level and transactional. Elsewhere, these same investors merrily evade taxes and destroy the environment up and down their supply chains. This is how Goldman Sachs coolly claims to be a sustainability champion while paying huge financial malpractice fines.
The polarizing factors
At the Altruist League, we certainly don’t subscribe to the hyper-critical view. Many investors out there would really like their money to improve society. A lot of them are obliged to seek a profit since, most often, it’s not their own money they’re investing. And it’s a difficult job. To measure the results of impact investing is difficult enough, how on earth is one to understand, let alone measure, the esoteric issues of social change on top of that? Asking a finance professional for a social change model is like asking a chef to derive the Lorentz transformation – essentially unfair.
Meanwhile, the peer pressure is immense. Everyone seems to be on the impact investing bandwagon. The fear of missing out is strong. The different consultancies and research providers sell impact investing with remarkable matter-of-fact certainty. They have a horse in the race. Incidentally, the same is true of many of the critics on the other side, polarizing the discussion so as to sell their books, often “good hate-reads” for their tribe.
Beyond impact investing and towards real change
To the independent researchers, impact investing data is still flimsy. Much of it is self-reported via investor surveys and circumstantial case studies. You see the same publications quoted over and over again, publications themselves with many methodological problems. (Incidentally, the same is true of ESG practice).
The “independent” consultancies usually frame the discussion the wrong way – they focus on whether market-rate returns can be had. This is not the real problem, as we’ll see below. Showing great returns has never been a problem to money managers – just ask the private equity folks doing IRR calculations.
The Altruist League is somewhere in the middle of it all. We have tried to find a workable mechanism to bring together a broad coalition of stakeholders and deploy capital for real change. And this remains an everyday challenge. It took us five years just to begin to wrap our minds around the problem. It took hiring analysts in 90+ different local contexts, people living the problems impact investing is trying to solve. It took a fundamentally diverse team, with differences of background and opinion. It took a thorough understanding of societal problems and the grassroots organizations fighting to solve them.
Moreover, it took a social change model that goes far beyond the others, developed in collaboration with a dozen research institutes and universities worldwide. It took an AI-driven tech platform and a deep understanding of how the new generation of philanthropists think about their legacy.
My point is: real change is hard. There are so many moving parts and action takes place at a number of different levels. We can in no way cracked the problem, but we have learned this: the transactional model of impact investing won’t get us there on its own.
The missing piece 1: a systemic approach
The first missing piece is a systemic approach to change. If you want to change a society then you need to act along the value chain of change: support the civil society, empower women, promote economic opportunity, protect democracy, foster racial justice. Very few such investments return a profit.
Impact investing to help the hungry won’t bring about democracy, the lack of which might be the ultimate cause of their hunger. Impact investing to build green houses won’t make decisive climate action at the global level, much more needed, any more likely. Impact investing into creating a few jobs for the minorities won’t change the laws that make them systematically persecuted and incarcerated. There are no impact investing schemes that defend free speech in courts or support independent media.
The missing piece 2: the philosophy
There, we reach the deeper problem of impact investing: its implied philosophy. That philosophy holds that the current world is more or less fair. The distribution of wealth and power is fair. The way the capital was accumulated in the first place is fair. The market is fair. Capitalism is fair. Or, if they are not exactly fair, then at least not much can be done about them, other than impact investing. Higher taxes for the wealthy are a no-no. Any proposed regulation will be fought tooth and nail. The role of the government is often minimized in the process – investors feel like they should be the ones deciding what problems are solved, when and how.
This philosophy, far from being consciously shared by all impact investors, is nonetheless implicitly embedded in the practice. It leads to a third problem, that of credibility.
The credibility problem: on the ground, with the elites, among the consumers
The relatively theoretical musings above have one grave practical implication: impact investing is being rejected by the people on the ground. The Altruist League recently did a study of global activist perceptions. It revealed something very telling: just over 20 percent of people actively working to improve the world feel that impact investing can contribute to solving systemic problems of our time. This mistrust has one reason – impact investing doesn’t involve any transfer of power.
Now, people on the ground complaining isn’t new or disconcerting to the financial elite. What’s more worrying is that the elite itself is beginning to fracture on the issue. Remember Peter Buffett’s letter from a few years ago, pointing to the hypocrisy of world-problem-solvers who create the very problems they are trying to solve? At the League, we’re seeing a whole new generation inheriting wealth which sees matters this way. They are belief-driven. They are unhappy with the shortage of will, and sometimes of courage, that they see in those who came before them.
Even among the non-wealthy young people, the same sentiments prevail, leading them to be much more political than the previous generation. Many new platforms out there offer this crowd responsible investment products, promising peace of mind and the feeling of “doing their bit.” This kind of thinking convinced their parents to blame themselves, and not the companies, for plastic pollution, and so they tried to save the planet through recycling. The young folks of our time are a bit more alert than that.
The solution: an integrated approach to social change
The solution is not a surprise: impact investment must be mixed with other tools for change. The Altruist League helps investors do so. Often, the way to proceed is to combine impact investing products with systemic philanthropy, in particular investment in grassroots movements and civil society. Then there are blended finance models and other complementary approaches that cover most of the aspects of real change.
Investors must be prepared to be clear about where they stand on the biggest problems facing our civilization and show in practice how they are helping to fix them, through everything that they do.
In practical terms, not all investors are ready for this, just yet. For example, the racial justice protests that shook the United States in 2020 caused a flurry of press releases urging that “something must be done.” But most organizations stopped at that.
We help those willing to take the extra step put their money where their mouth is.