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Limited Impact: Questioning Impact Investment

Last week, the Net Impact chapter at UT’s McCombs School of Business hosted a summit on “Business for Good,” with one panel devoted to social impact investing. Social impact investing is any form of investment that has positive effects for the broader community. It is hard to state a more precise definition, because “impact investing” includes corporate foundation giving, government-led investment programs, and for-profit investing.

I left the panel with considerable doubts about the capacity of impact investing to offer meaningful benefits for society. Its scale seems too small, its efforts too scattershot, its long-term viability too dubious. In this post, I identify certain positive features of impact investing, before discussing some reasons that we should be concerned and skeptical about its supposed benefits.

The speakers – Rick Edwards, partner at Third Sector Capital Partners; Joy Stoddard, Executive Director of Development and Outreach at the Whole Planet Foundation (the non-profit foundation of Whole Foods); Kevin Smith, VP in the Environmental Markets Group at Goldman Sachs; and Steve Guengerich, Executive Director at Innovation+ (now a part of Greenlights) – discussed the many forms that impact investing can take. Some are not profit-seeking, like the Whole Planet Foundation’s microfinance program. Others offer yield to investors, like the World Bank’s green bonds or Third Sector’s performance-based contracting. Through such contracts, private investors support social service programs and receive a return if those programs produce good outcomes that save money for the government.

While the sheer variety of forms can make it difficult to identify commonalities, there are certain advantages to impact investing:

Expansion of services. There is not a government or non-profit out there that would not like more resources. To the extent that social impact investment provides that, who would object?
Demonstration. This form of financing may permit the testing of new ideas. It may, for instance, permit a government program to experiment with a new approach that it could not previously get funded. Because impact investors typically ask for rigorous performance assessment, there will be evidence to support new ideas that are worthwhile, and these good ideas can be replicated elsewhere.
Fulfilling investor demand. Several panelists noted that investors wanted their money to be put to socially beneficial uses.
Positive externalities of profit-seeking. We are still only gradually recovering from the worst financial crisis in 80 years, which had terrible effects for the household wealth of many Americans. It is certainly worthwhile if the financial sector chooses investments with positive externalities, rather than negative.

However, there are also a number of concerns:

Coordination. A problem common to non-profit ventures is a lack of coordination. It often happens that efforts are duplicated in some areas, while other needs go unmet. In the absence of coordination, impact investing will likely have the same issue. Channeling investments through national or international organizations with well-established agendas can lessen this problem (e.g. the World Bank).
Sustainability. When a firm initiates an investment that supports a program or service, it is not guaranteed that the support will last. What is to stop the firm from reallocating its resources to a new project that appears more profitable? Governments should only enter partnerships that guarantee a long duration, and contracts should specify safeguards against the withdrawal of capital.
Limited applicability. One of the government’s roles is to step in where the market has failed. It is often left to the government to undertake projects that either have minimal profit opportunity (e.g. insuring the elderly; mail delivery to remote areas) or have aims that cannot be easily quantified (e.g. national security, public safety). Given this basic distinction between public and private sector activities, it is not clear just how much we can really expect from impact investing as a supplement to government activities.

Lastly, there are some reasons to be skeptical of social impact investing generally:

Tokenism. Before rushing to applaud corporations’ social investments, we should remember their limited scale. Let’s take Whole Foods and Whole Planet as an example. Whole Planet’s Form 990 for 2012 (p. 10, row 2c) shows qualifying distributions of $9.0 million in 2012. In its 2012 fiscal year, Whole Foods, Inc. had sales of $11.7 billion and net income of $465.6 million. That means its foundation’s distributions equaled one-fiftieth of net income.
PR damage control. The financial sector continues to endure scandal after scandal. Since the crash in 2008, many forms of malfeasance have come to light, far too numerous to name here. What guarantee do we have that the financial sector is committed to social impact investing for the long term, rather than just participating for the time being until its image is rehabilitated?

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