Monday, September 05, 2011

Almost everything you ever wanted to know about Impact Investing

The best teachers are those who understand their subjects so thoroughly they can focus on the learners, not on the material. When it comes to the topics of impact investing and blended value, Antony Bugg-Levine and Jed Emerson can be called good teachers.

Both men are intricately linked with this terminology - Emerson coined the term blended value. Bugg-Levine either coined, or paid for the coining of the term, Impact Investing. That they understand the material, the concepts, the opportunity and the tradeoffs is not too surprising. That they can make a book length discussion of these financial innovations engaging and humanitarian, that is a  gift we can all be thankful for. Their book is out just in time for SoCAP 11.

Readers of this blog are familiar with these terms. Many of you are smarter about these issues than I am. Others have been introduced to the concepts through the annual buzzwords lists (impact investing, B corporations, and other key terms in the book have all made the list since 2009). Most of you are professionally or voluntarily engaged in the very sectors where these innovations matter most - balancing and tinkering and experimenting with efforts to use financial capital to produce social value.

Bugg-Levine and Emerson present a history, a contemporary look, and do some promotional forecasting about impact investing. They credit, appropriately and adequately, the decades of innovation from religious endowments to teachers' pension funds the idea of mixing investing with social returns. The simultaneous pursuit of financial return and social value lie at the heart of the tools now known as impact investing and the outcomes now described as blended value. They also credit the "boundary" systems on either side of Impact Investing - philanthropy and commercial finance. In their words:
"Without philanthropy, modern microfinance would not exist. But without ... integration into the global investment system, microfinance would likely not have exceeded so spectacularly ..." (p. 46)
The closing line of the above paragraph then asks the key question for the entire book: "But at what price?" Emerson and Bugg-Levine tackle the costs and losses that have resulted from the decades of experiments that bring impact investing to this moment. Money has been lost, reputations ruined, lives taken. It has not been a straight line to success and the way forward presents no guarantees. Like any good financial discussion, previous outcomes are no guarantee of future results.

The book comes at in important time for impact investors (and for Emerson and Bugg-Levine themselves, both of whom have just taken on new jobs). SoCAP 11, the fourth annual conference that has become almost synonymous with Impact Investing opens this week in San Francisco. The first SoCAP conference launched one month to the day after the 158 year old Lehman Brothers investment bank went bankrupt. The disarray, panic, and anger from that scary time have raised and ruined political careers, redrawn the global map of economic powerbases, and given rise to bestselling books and award winning movies. They've also opened wider the window of opportunity for new concepts of capitalism, new measures of profit, and more widespread conversations about sustainable enterprise.

Bugg-Levine and Emerson tell this story from the inside. Bugg-Levine led a grantmaking portfolio at The Rockefeller Foundation for several years that poured tens of millions of dollars into the infrastructure of impact investing. Emerson has staffed and consulted to several investor-side enterprises over the years. They present the historical roots of the ideas and give numerous examples from across the globe of the roles and permutations of development finance, microfinance, socially responsible investing and philanthropy that merge, as streams into a river and then as rivers into the sea (a favorite metaphor of theirs). Their direct involvement in building and promoting these tools and values are strong credentials for the two authors - and they tell a good story. There is (thankfully) no glorifying or covering up - people they know made mistakes and experiments went wrong. The authors are emphatic to this point, impact investing is not a silver bullet.

For my purposes, the more interesting section of the book comes in part two - what will the future hold? They address this in two ways - the practical and the predictive. They identify several sectors where impact investing opportunities are likely to grow and offer guidance for interested investors to pursue such opportunities.

Sadly, this section lacks some of the critical reflection of the previous sections - especially in their positing of an assumed positive growth future for impact investing. What is their argument for this assured growth? Because everywhere you look there are failed states, philanthropy can't solve the problem of the failed state, and thus we need market based offerings. My problem with this equation, and it extends far beyond Bugg-Levine's and Emerson's presentation of it, is that it asks us to overlook BOTH the failures of markets and financial systems (which have been as critical in shaping world history since 2008 as have state failures) AND the role of markets in creating some of the underlying inequities. As they turn their attention to the growth opportunities for impact investing, the authors sadly silence their nuanced presentations of public, independent, and market intersections and become pragmatic promoters.

This continues as they address the critical issues of policies for impact investing. I am relieved, thankful, and intrigued by their policy proposals. Relieved because they realize the key role that policy frames and regulations play in how this industry, as all industries, works now and will work in the future. Thankful, because too many authors on financial issues or the social sector cringe from the role that regulation plays and end up either ignoring the subject all together or damning all regulation as bad. And I'm intrigued by their proposals because these two authors have thought as hard about the regulatory barriers and opportunities for impact investing as anyone (at least in America) and we need these kinds of ideas being discussed and debated.

To be fair, the book is about impact investing and the policy issues and ideas that the authors promote are intended to facilitate and assist the industry in growing. However, do not equate that with facilitating and assisting our societies to solve our shared social and environmental problems.

Impact investing - as the authors emphasize in the beginning but slow slip away from over the course of the book - is one ingredient in a mixture of public money, private capital, and philanthropy that fund social value. It is one type of river running into their metaphorical ocean. It is impossible to believe that one can focus on changing the rules for one part of this mix - that we can reroute one river - and not disrupt the delta and thus the ocean with both good and bad effects. Many of the regulations and ideas that the authors promote, from tax breaks for impact investments to new forms of corporate enterprise are already in place. We can already point to their intended benefits and some of their unintended consequences. The book would benefit from more than the consideration of how these new innovations and policy proposals bridge "the bifurcated systems" of old, but for what they will do to contribute, along with existing tools and rules, to solving our shared problems.

Finally, let me state for the record my one continued gripe with promoters of impact investing and my only real disappointment in this book. Impact investors lead their movement with an emphasis on return, measurement, and accountability. They aim to bring the best of financial practice to bear on the toughest of shared social problems. So far, so good. But why, why, can't they tell us how big they are? How much money is available for impact investing? How much of it is new money that otherwise would not have been available to produce social outcomes and how much of it is being directed from existing resources for social good? I wanted, really wanted, this book to tell me one thing: How big is impact investing? I wanted a sentence, a paragraph, a few tables a chart and some footnotes to tell me, "Impact investing, defined as XX, had $YY billions in assets under management in 2010 and has been growing at/is projected to grow at ZZ% per year." The two studies of this question that I know of - both of which are referenced by the authors - provide a possible range that is itself billions of dollars in scope.That's a bit too wide to be useful. It may not be the authors' job to pinpoint the market size but they need to at least acknowledge this glaring gap in what we know.

Without such a benchmark, with all its necessary caveats, it's hard to know how much these tools and ideas matter. The authors do an important and credible job of telling the history, envisioning the potential, and preparing the steps for the field and future enterprises and investors. But the greatest promise of impact investing, in my mind, is its potential to draw in actual new money for social problem solving. If it does this, impact investing will be transformational. If billions of dollars that would not otherwise have been available for social value production are brought to bear on our shared social issues, that will matter. It would be the first financial innovation in a century, since the creation of the modern foundation, to attract game changing quantities of private resources to public problem solving.

Without those market measures we simply don't know if this is happening. From a policy point of view, from a public incentive perspective, what we need to know about impact investing is this, "Is it really drawing in new capital to solve social problems, and if so, how much?"

It''s not simply a matter of bigger will be better. And it is to the credit of impact investors that they are hard at work answering other critical questions such as does impact investing work? When and under what circumstances? What does it really do better than philanthropy and better than the public sector? - in a policy shifting way. These questions of evidence and impact are key - and the book does a good job of telling us how the industry is making progress toward answering them.

The book is the best overview of impact investing that exists and you should read it. And then you should join me in demanding, or perhaps you could even help to create, measures of the impact investing market.


Lucy Bernholz said...

I received the following email from Antony Bugg Levine:

"Thanks for the thoughtful review. I am especially heartened that you recognize the balanced approach we have taken and our recognition of the decades long history of innovation from which impact investing emerges. Agree that it would be great to size the market rather than assert its
importance--just not sure how to do that at this point without making spurious assumptions that create a number for people to over-promote but without real substance behind it. My hope is that with IRIS and GIIRS beginning to aggregate information we will be able to create increasingly comprehensive bottoms-up measures over time.

On the broader point about our failure to connect the impact investing story to a broader discussion of the need to transform our systems of government, civil society and markets--I agree that would be a useful step forward for the conversation. Perhaps that's the next book, a few years from now, once impact investing has put real money to work and we can start to think about what this means beyond saying it will be disruptive."

Antony makes an important point - sizing the market, which I think is key, needs to be done carefully and well. Certainly this can be done. And there is concern that some will make more (or less) of the size analysis than is warranted. I remain convinced that we need to know how the current and potential size of the impact investing market as we consider the policies that might expand it. Thanks, Antony, for writing in.

Bopreneur said...

Lucy- if you want a sizing of the market, there are several studies. Not sure they convinced me, but take a look at JP Morgan report from Nov 2010 for the most widely cited.
Also, I'd encourage you to look at the Innovations Journal from SoCap... in particular the article from Milligan and Schoning from Schwab Foundation "... the hype is obvious. The (social capital) market is not ready to absorb commercial capital on anything close to the order of magnitude being talked about...." As Antony points out, there is some danger in putting unrealistic expectations on this emergent field.
Paul (Bopreneur blog)