Should impact investing be harder than traditional investing?
Mark Harwood, ygap CEO
Upon the conclusion of the recent Impact Investment Summit in Sydney, an organiser who I didn’t know asked me casually at the water cooler: “So how have you found the summit?”. I provided some context that I’d been trying to develop and bring impact investments to market from the implementing side for over a decade to preface my response (deals that had significant impact upside as they were enabling women-led local businesses to scale across rural Kenya, Mexico, Myanmar, South Africa and Sri Lanka): And went onto explain that I was exhausted from hearing investors over many years say in the same breath that they required: market-rate returns; amazing impact with detailed reporting based on a robust theory of change; minimal internal overheads; and that they were frustrated that there was still a lack of pipeline… (and yes I know we are trying to mainstream impact investing as per the theme of the conference to achieve scale) yet I told him cheekily that given the demands of these ‘impact investors’, we’d actually rather work with non-impact investors who only sought market-rate returns without all the other demands (if somehow we were able to bring such high-impact deals to the table as our deals were certainly below ‘market-rate returns’) — I think he was a little shocked by my response :-)
Which is why this SSIR article resonated so strongly with me: “Impact Investing Should be Hard” by Maoz Brown, May 2024.
A multifaceted survey asked over 200 fund managers globally (most in private equity and venture capital) to report whether they found impact investing more difficult than traditional investing based on the financial returns they were seeking. The researchers were surprised by the results which initially seemed counterintuitive, as those impact investors seeking market-rate returns, reported lower levels of difficulty than impact investors who were targeting lower financial returns. Let me repeat that: impact investors seeking market-rate returns + impact were finding it easier than those who were seeking below market-returns + impact. This outcome seemed at odds with the previous thinking that additional effort must be invested into understanding the social and environmental impact of investments and that ensuring impact would go against existing financial market incentives.
The researchers asked whether something was amiss if most market-rate impact investors do not find added difficulty in pursuing impact as compared to traditional non-impact investments? In the current age of washing, albeit impact-, green- or pink-, threatening the credibility of impact investing, they identified through an additional 135 interviews that market-rate impact investors in the sample group often overlooked the complexity of impact by assuming it is embedded in the business performance of their investees and therefore apply conventional investing practices focused on financial performance when assessing impact investments (thereby adding minimal additional difficulty). Yet according to the criterion of ‘additionality’ termed by Paul Brest and Kelly Born, an impact investment must increase the quantity or quality of the social and/or environmental outcome beyond what would have otherwise occurred — “After all, if it’s a good investment, one would expect socially-neutral investors to be in it as well.” Brown goes on to challenge market-rate impact investors as to whether they are achieving additionality, unique to impact investments, or merely displacing more traditional investment, and to ensure they are helping impact investing to go beyond “traditional investing with an impact report”.
Brown concludes by stating that the role of impact investing should be to address the current gaps in the capital markets in order to respond to the global challenges of today by helping their investees centre positive impact into their growth strategies, even if it won’t help boost financial performance. And to specifically find the missing/under-represented/under-estimated entrepreneurs from non-traditional backgrounds currently being overlooked to ensure impact investments are truly catalytic. Yes this is hard and it may hurt the bottom line leading to below ‘market-rate returns’ initially, but disruption isn’t meant to be easy and “if it is to be done well, impact investing should be hard.” (Brown, 2024). After-all, the current microfinance sector took decades to become established and profitable on the back of philanthropy and Government grants. So please do take the time to reflect on how difficult your past impact investments have been; how have you considered and measured impact and compensated for this; and what impact investments did you not invest in because they were too difficult and is it possible to revisit them through a different lens?
This is why ygap has recently launched yCapital, a product utilising venture philanthropy, to provide 0% loans to early-stage women entrepreneurs across Kenya and South Africa who have graduated from ygap’s accelerator programs, helping them build a credit-history and track-record in order to crowd-in future investment as they scale their impact businesses — all of which addresses a significant gap in the current capital market. Our goal is that yCapital will help these amazing women entrepreneurs to grow their businesses to become investable in the future and hopefully make impact investing a little easier in the future for everyone.
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