Impact Investing: Prioritizing Change Over Profit
This article was originally published on Thomson Reuters Foundation.
Impact investing is having a moment. Philanthropists and investors alike have embraced using market-based solutions to help the world’s poor access financial resources and essential services. But it’s no secret that many “impact investors” tout the brand without following through—they prioritize making a profit over creating lasting change. Rather than impact investing being defined by those who demand strong financial returns, those of us truly invested in impact need to set ourselves apart.
So, how do we do this? I’ve written before about “philanthrocapitalism,” an approach that draws on the energy and the savvy of investors to pursue lasting social returns. Effective philanthrocapitalism embraces this approach, while also recognizing what compromises need to be made. In volatile and relatively untested markets, it’s unreasonable to expect above-market returns without some compromise on the quality or depth of social impact. So, what should we compromise on? We need to temper the expectation of massive monetary returns, when in fact the primary goal is to do good. By taking the concrete steps necessary to align methods and outcomes with mission, impact investors can bolster institutional integrity and gain the trust of key partners in the process.
With over 30 years of experience in microfinance through FINCA International, coupled with the recent launch of our early-stage impact investing initiative, FINCA Ventures, I have learned valuable lessons about how a trusted, responsible philanthrocapitalist operates. While the following three principles are hardly comprehensive, they provide guidance on how to build trust-filled partnerships that will create substantive, enduring change in the impact investing community.
Put the customer first: It’s important to recognize that social enterprises can only be effective when working in true partnership with target communities—that is, treating poor individuals with the same respect and dignity owed to any customer. Solving unmet needs and creating effective and satisfying customer experiences are the building blocks of success. Doing so means working from the ground up, generating realistic returns around the most promising customer-driven products or services, not the other way around. The goal is to leave the fruits of your customers’ labor with them, and not strive to enrich yourself or your investors at the customers’ expense.
Plan for patience: The world’s most pressing development challenges won’t be solved in a year, no matter how appealing that might sound to those looking to make a quick profit. As impact investors, our goal is to create the preconditions for enduring change. Volatility is inevitable, and impact investors need shock absorbers to weather the storms alongside their investees, not jumping ship at any market impasse. How will you react when economic conditions deteriorate, and profits suffer or vanish in the short-term? When confronted with this “patience test,” a primarily financial return-seeking investor would demand a tradeoff, disposing of development priorities. I used to believe in the “you can have it all” world, but three-plus decades in microfinance have taught me the importance of a patient capital mindset.
Proactively monitor your mission: If you claim an “impact-first” mindset, it must be backed up by thoughtful and regular impact measurement—from the perspectives of both the end customer and the development industry. It is necessary to understand and communicate how effectively your efforts are serving the needs of the customer, advancing the commercial viability of your investee companies, and aligning with your organization’s mission and Sustainable Development Goals. This not only signals to key partners that your organization is holding itself accountable, but also conveys a willingness to share what you’ve learned to advance the industry towards more impactful, meaningful and long-lasting outcomes.
While they may seem simple, these basic steps differentiate true impact-investors from profit-seekers simply embracing the latest trend. These principles help us remain true to our own goals—creating enduring social impact, responsibly. With so many jumping on the “impact investing” bandwagon, it’s important to take a step back, evaluate and return to implementing market-based solutions with a renewed sense of direction and purpose. This renewal will help us not only to be more effective in pursuit of our missions, but also to build the trust and relationships which will carry our work far into the future.