![]() ![]() ![]() From a moral point of view, one can argue that some objectives are more important than others and that some are reprehensible. In short, the range of possible objectives for impact investing is virtually as broad as the range of those in philanthropy. 9 And one investor’s valued objectives may be loathed by another while most people would celebrate a clinic providing low cost eye surgery, some would object to a clinic providing low cost abortions. Investors’ goals may sometimes compete with one another: Peter may want to create jobs in Arizona, Paul in California, and Mary in Mexico-even if building a factory in one locale takes jobs away from another. 8ĭifferent impact investors have different goals-to prevent malaria in Africa, say, or to improve children’s nutrition, foster energy efficiency, or promote community development. Within the field of impact investing, we include concessionary investments, which sacrifice some financial returns to achieve social benefits, and non-concessionary investments, which expect risk-adjusted market returns or better. This is not a judgment about their value, but rather reflects the general understanding that impact investing encompasses only affirmative investments. The adverb “actively” excludes negative investment screens. But the frictions or imperfections inherent in some smaller, private markets may offer the possibility of yielding market returns and achieving social impact for example, someone with distinctive knowledge about the risk and potential social and financial returns of a particular opportunity may make an investment that others would pass up. Under this definition, it is readily apparent that grants or concessionary investments (i.e., investments that sacrifice some financial gain to achieve a social benefit) can have impact: by hypothesis, an ordinary investor, who seeks market-rate returns, would not provide the capital on equally favorable terms, if at all.īut if an impact investor is not willing to make a financial sacrifice, what can he contribute that the market wouldn’t do anyway? We believe that in publicly traded large cap markets, the answer is nothing: even quite large individual investments will not affect the equilibrium of these essentially perfect markets. We posit that a particular investment has impact only if it increases the quantity or quality of the enterprise’s social outcomes beyond what would otherwise have occurred. 2 One recent study asserts that most of what it estimates to be a $4 billion impact investing market involves investments producing market rate returns. The most novel and intriguing question we consider is whether and when investors can expect both to receive risk-adjusted market-rate returns on their investments and to have real social or environmental impact: that is, can investors both make money and make a difference? Many impact investment funds claim their investors can. The principal contribution of this article is in setting out the concepts of investment impact and nonmonetary impact. The methods for assessing enterprise impact, which are relatively well understood 1 if erratically applied in public policy and philanthropy, are no different in impact investing. Nonmonetary impact reflects the various contributions, besides dollars, that investors, fund managers, and others may make to the enterprise’s social value. Investment impact is a particular investor’s financial contribution to the social value created by an enterprise. Enterprise impact is the social value of the goods, services, or other benefits provided by the investee enterprise. We introduce three basic parameters of impact: enterprise impact, investment impact, and nonmonetary impact. This article is addressed to impact investors who want to know whether their investments will actually contribute to achieving their social or environmental (hereafter, simply “social”) objectives. However, the rapid growth of the field of impact investing has been accompanied by questions about how to assess impact, as well as concerns about potentially unrealistic expectations that social impact and market-rate returns can be simultaneously achieved. At the same time, a growing number of investors are expressing a desire to “do good while doing well.” These are impact investors, who seek opportunities for financial investments that produce significant social or environmental benefits. There has been an increasing realization that, along with philanthropy and government aid, private enterprise can contribute to solving social and environmental problems. ![]()
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