What Impact Investment is – and what it is NOT!

We’re all struggling with vocabulary and converging disciplines these days as we try to move the bar on social and environmental change. In recent weeks, I’ve found myself answering the same questions over and over again – at conferences, in interviews with journalists and doctoral students and in networking conversations with colleagues around the globe. I thought sharing those questions and answers here might provide food for thought and would love to hear how you would answer these same questions!

What is Impact Investment?

In mainstream investment, you get a single financial return, and social and environmental impacts are considered “externalities”.

Impact Investment (hereafter “ImpInv”) recognizes that social and environmental impacts are NOT externalities. They are results, aka returns on investment, sometimes positive, sometimes negative, but always something we should be taking into account. Don’t believe me? Think about what happens when those externalities come home to roost – toxic waste super funds, decreasing air quality (and increasing asthma and respiratory disease), etc.

Quantifying social and environmental impact is a nascent and complex discipline but a mandatory one given the finite nature of planetary resources. We need a few “big picture” indicators that everyone can use so that we can accumulate significant data points for investment purposes – and we should continue to explore the vast range of more detailed indicators, primarily so that we can learn continuously how to use resources more effectively and efficiently.

That said, we should all be aware that gathering data has financial and social costs that impact our investment outcomes. The social costs are where ethical issues arise. We may want a particular piece of data – are we supporting a disadvantaged ethnic minority, for example. The people who provide this information, however, may be targeted by the groups that persecute a particular minority, creating a real danger around transparency. We are often willing to ask overseas questions that are illegal in our home markets (to prevent discrimination). Why are we comfortable asking these questions in societies with less developed legal codes? The people we want to know about have the same rights to privacy that we do and we should be respectful of that fact. Bottom line – simple, comparable, cost-effective, ethical indicators are needed for investors. More detailed explorations of social change have a place as well, but not necessarily in the investment arena.

Is Impact Investment an Asset Class?

The good news is that ImpInv is NOT an asset class; it is an investment THEME offering opportunities across multiple asset classes, including real estate, savings deposits, venture capital, debt, growth capital etc. The reason this is important is that it makes ImpInv accessible to most retail and institutional investors, regardless of their risk tolerance or risk/reward preferences.

Please STOP trying to label ImpInv as an asset class. The result is that each actor argues ferociously for whatever type of ImpInv he or she supports as the exclusive definition. Instead of educating investors, these internal factions encourage them to keep sitting on the fence waiting for things to become clearer. We should be promoting broad definitions that demonstrate awareness of risk/reward profiles and urge all investors to allocate some of their resources to an impact investment in the asset class of their choice!

How is ImpInv different from ESG, SRI or CSR?

Today, the primary difference between ImpInv, ESG and SRI relates to ownership. ESG and SRI refer to screening publicly listed (exchange-traded) companies for certain types of desirable and/or undesirable behavior. ImpInv is primarily focused on privately held companies and often seeks to create or promote a desirable outcome, either social, environmental, or both. All three disciplines accept that all investment activities have social and environmental impacts in varying degrees. Furthermore, the extent to which we understand and manage those impacts can lead to better performance and sustainability.

CSR (corporate social responsibility) covers a broad range of corporate philanthropic activities ranging from PR fluff to serious community and economic development projects and many things in between. Corporate treasury departments can (and should!) adopt ESG/SRI policies for managing their own money. Some CSR departments are beginning to explore the possibilities of ImpInv alongside traditional philanthropic programs.

Was this information helpful? Are your working definitions different than mine? Please let me know what you think!

Lauren Burnhill – @LaurenOPV


9 responses to “What Impact Investment is – and what it is NOT!

  1. Lauren, thanks for the article! You beat me (or anticipate me) on a future article debating the “rightful definition” of impact investing. As I suspect, it will go the way of “social entrepreneurship” (no final agreement on definition and sort of mostly a word rallying people around various ideas).

    That said, I want to invite you to join the latest poll on my blog Good Generation where in truth we DO have a good amount of people who believe in the asset class view that you denied on this article.

    See the poll (and cast your vote and comment) here: http://t.co/AoNGX7EO

    Also, if you are part of the Linkedin Impact Investing Forum, I invite you to join latest comments on the poll there as well. It would appear most people there so far ARE on your side.

    All that to say that while I always like strong opinions, you may find it interesting to hear out the “other side” on this one and add your voice to the discussion to hopefully make us all better off as we struggle how to deal with this “impact investing beast” we all like to stroke these days.

    Looking forward to future discussions!


    • Thien,

      Thanks so much for your comments. I will go vote in your poll as soon as I finish this note! I’m delighted to hear that you also will be writing on this topic. I don’t expect any definitive conclusions on vocabulary – there are too many people who have vested interest in their particular definition – but it’s worth the effort! I think our internal industry debate and multiple definitions make it easier for investors to “sit on the fence” and that can’t be good for any of us.


  2. FYI, also happy to have added you to our blogroll (still looking for more insightful impact investing blogs).

  3. Thank you Lauren for your further clarification on Thien’s observation. It is difficult to agree on vocabulary and Impact investment should simply be taken at face value as investments that have social and environmental impact, measurable or not. If we go deeper than that, it becomes complex and we shall be lost in semantics. It is already commendable that people like Thien are doing something that makes understanding easier.

    Lauren, i like your attempt at simplicity. Please keep it right there.

    • John – Your kind words are much appreciated! Like you, I believe that social and environmental impact — both positive and negative — exist whether or not they are measurable. Nevertheless, there seem to be a lot of investors who believe that having a positive social or environmental impact must, de facto, imply a sub-market financial return. People like Luther Ragin, CEO of the GIIN, perpetuate this notion by showing graphics in which ALL impact investment is “below market financial return”. Personally speaking, I have never set out to achieve a sub-market return and I never will. I can appreciate, however, that traditional investors, upon hearing that their financial return will be sub-market, feel that measurable social and environmental returns should be offered in compensation. My hope is that simple, practical, straightforward ‘talk’ might move us closer to a world in which ALL investment has an acknowledged triple bottom line!

      • Thank you for contributing to the impact investing conversation and, in particular, for advocating the importance of social and environmental performance measurement and transparency.

        I am chiming in here to respond specifically to a mischaracterization of Luther Ragin, Jr.’s Impact Investing Continuum graphic (previously referred to as the Mission-Related Investing Continuum). In fact, the Impact Investing Continuum, which can be seen here: http://bit.ly/7IRwId, illustrates that impact investments may be below-market (left side of continuum) OR market rate (right side of continuum) with respect to financial return, and represent a range of asset classes.

        At the GIIN, where I oversee communications and where Luther Ragin, Jr. is CEO, we work to demonstrate that impact investments can be made at both ends of the financial returns spectrum, and that impact investors have interests in opportunities all along the continuum. One example of an institution making investments with a range of financial return expectations is the FB Heron Foundation, where, prior to joining the GIIN, Luther Ragin, Jr. built an impact investment portfolio that was nearly 80% market rate and 20% below-market rate (in the form of Program-Related Investments), during his decade-long tenure as Chief Investment Officer.

      • Melody,

        I appreciate your taking the time to respond to my post, but first and foremost I don’t believe that using a “continuum” that was appropriate for a foundation makes sense for the head of an organization focused on encouraging investment. “Below market rate” is a term of art that — until recently — was the best way a Foundation could engage in impact investment without endangering it’s tax exempt status. It is not, however, a concept that resonates with for-profit investors. Growing the pool of funds available for sustainable and social investments means using language and setting targets that will appeal to for-profit investors, not just philanthropists. Secondarily, I don’t think this graphic accurately presents a continuum. The right hand side is populated with traditional asset classes (that we would access via some type of ESG filters), while the left hand side describes specific instruments/products offered in the impact investment community. Some of those instruments do set a non-commercial price or rate of return as part of their social values/social returns profile, but many do not.

        I’m happy to know that the CEO of the GIIN was successful in managing a multi-return portfolio in his previous position. I hope that in his current position, he will keep an eye on the shifting spectrum and update his graphics accordingly. Here are three key reasons why I believe that the “Impact Investment Continuum” is inaccurate and misleading:

        (i) “Market rate” and “below market rate” can truly be determined only ex-post facto. To label a financial instrument ex-ante “below market rate” implies a willingness to accept a sub-optimal financial return. If we’re aiming to optimize across financial, social and environmental returns, there is no reason to assume that our financial metrics will be worse than anyone else’s. In fact, as people’s sustainability awareness grows, triple bottom-line investments are likely to merit a premium compared to a mono-line competitor. Furthermore, telling a fund manager that its ok to produce sub-market results is rarely a good way to generate high value-added performance.

        (ii) The policies that were appropriate for Mr. Ragin as head of the FB Heron Foundation, a tax-exempt entity, are not appropriate for for-profit or hybrid investors in general. Undoubtedly, labeling impact investment instruments “below market rate” prevented problems with the IRS. Protecting tax exempt status is considered critically important for most non-profit philanthropic organizations. This does not, however, mean that it is accurate to categorize all impact investment instruments – the left side of Mr. Ragin’s so-called spectrum – as “below market rate”. Indeed, I would argue that this harms rather than helps the efforts of those who labor to build a sustainable impact investment marketplace.

        (iii) The policies Mr. Ragin used at FB Heron Foundation may no longer be necessary even for the FB Heron Foundation or other 501c3s, given recent changes in PRI legislation. Foundations will increasingly want to use PRIs to support responsible social and environmental investments that otherwise won’t get off the ground. Donor Assisted Funds should prove another growth area as Foundations look to maximize their catalytic impact. The chart presented at the IDB-GIIN Impact Investment event was out of date and not forward-looking in any way. At minimum, you might want to add a footnote that recognizes that the PRI Examples rule change and several provisions of the JOBS Act could have an impact on product offerings along the “continuum”.

        As long as Mr. Ragin promotes a “continuum” based on tax language applicable to non-profits and fails to flag a major change in the laws governing their behavior, I will continue to feel that he does a disservice to the Impact Investment community. I’ll be keeping an eye out for an update!

  4. Lauren, just saw your last post and thought of you as I was going through the (long) thread of the asset class debate. If you’re interested, I gave a personal take after administering the poll for the past few weeks and reading through everyone’s (including yours of course) responses and insights.

    From Value to Worth – Why The Impact Investing “Asset Class” Debate Matters http://wp.me/p24jhN-xm

    Feel free to weigh in if interested, as always!


  5. Thien,

    I think you did a great job collecting and analyzing the very heated opinions (including my own) expressed in response to your poll in the LinkedIn Impact Investment group. Although I think you make many good points, the one that really strikes me is how much we need (as a society, not just impact investment as an industry) to spend more time discussing, dissecting and understanding our values and how we want to express them through the things we do.

    Markets may be powerful economic forces, but they lack a moral compass. When we only seek financial returns, we’re in some ways saying that greed is our only value. Impact investment is a way of saying that we can bring other values to the forefront. If we can do this – harness the power of the markets to value social and environmental returns alongside monetary returns – I won’t care what we call it!


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