Impact Investing: The coming disruption

Impact investing has gained a foothold following a historic period of upheaval in the capital markets. In fact, the financial crisis of 2008 precipitated the largest impact investments of all time. Just like pioneering impact investors, governments around the world recognized the need and opportunity to go beyond making donations in their scramble to protect jobs and social stability by shoring up private companies. They invested tens of billions in loans, equity investments, and guarantees—the basic tools used by impact investors.The forces that set off the first ripples of the impact investing movement continue to grow:

  • With increasing intensity, wealthy investors and philanthropists have become impatient with old approaches in the face of intractable and increasingly visible environmental damage and poverty. Antony Bugg-Levine and Jed Emerson Impact Investing
  • A new generation of business and socially savvy entrepreneurs is launching ventures across an array of regions and sectors that creatively structure investment capital to tackle society’s challenges and pursue new market opportunities.
  • Cash-strapped governments are redefining their relationships with private business as demographic realities force a reexamination of fundamental components of the social contract.
  • The rise of online social networking platforms enables thousands of investors to talk, share, and engage with each other as they identify, vet, and invest in social entrepreneurs the world over.

These forces are finding their outlet in impact investing for blended value. Implementing this simple concept is not easy. Although impact investors see to opportunities in an integrated approach, our systems have not yet caught up, and frustration abounds as the old only grudgingly gives way to the new.

The current of impact investing is stirring the waters of a bifurcated world still organized to separate profit-making from social and environmental problem-solving.For now, this bifurcated world channels the energy of impact investors into the hidden pools and underground rivers on the margins of mainstream investment and philanthropic activity.

But, like water, impact investing has a powerful ability to reshape the world it flows through. The gathering force of impact investment activity is wearing away the bedrock of seemingly immovable institutions and investment practices. Impact investors will not long be content to force-fit their aspirations into a set of systems created to support the bifurcated vision. Therefore, these systems will inevitably change under the collective weight of a new generation of investors, entrepreneurs, and government officials coming together in the pursuit of blended value:

  • In the bifurcated world, established for-profit and nonprofit business models facilitate separate profit-maximizing investments and philanthropic contributions. In the world of blended value, a new class of social enterprises will organize to maximize the full blended value of investment.  
  • In the bifurcated world, laws and regulations clearly define and protect traditional entrepreneurs, investors, and philanthropists. They are ill suited to understand, yet alone guide, enterprises and investors seeking to maximize blended value. In the world of blended value, governments will determine how to harness impact investment to complement public resources in capitalizing solutions to society’s most pressing challenges.  
  • In the bifurcated world, we know how to measure the value of financial investments and are getting better at describing the social impact of charity. In the world of blended value, we will create a common language and measurement systems will ensure that we steer our capital and attention to the enterprises most adept at creating profit along with social value.  
  • In the bifurcated world, clear pathways exist for talented people to cultivate the necessary skills and navigate separate careers in charity or business. In the innovations / volume 6, number 3 15 16 innovations / Impact Investing world of blended value, we will need new approaches to find and develop the professionals who want to apply their business savvy to simultaneously create wealth and tackle social and environmental challenges.  
  • In the bifurcated world, a vast array of institutions constitutes the capital markets that separately facilitate exchanges between the donor and the charity and the investor and the business. In the world of blended value, these capital markets will turn to the task of connecting impact investors and social entrepreneurs.

We do not want to overstate the changes that are occurring or the challenges that arise from being able to sustain innovations that lead to blended value. The bifurcated world will certainly linger, as separating investing and charity will continue to make sense to many people. However, some established systems will inevitably adapt, while others will become increasingly isolated as they fail to evolve in response to the new conditions and are replaced by new systems that do.
 

Antony Bugg-Levine and Jed Emerson Impact Investing Transforming How We Make Money while Making a Difference innovations / volume 6, number 3