Three elephants in the impact investing room
By: Gorgi Krlev
Tags: Development, Finance, Impact Investing, Social Innovation, Social Impact

By Gorgi Krlev | @gorgikrlev

This article was first published on Pioneers Post.

Ever more funders are venturing into impact investing: globally, the number of impact investors rose from fewer than 50 pre-1997 to well over 200 in 2017, according to the Global Impact Investing Network. But for all its potential benefits, major questions remain unresolved. Gorgi Krlev, a researcher at the University of Heidelberg’s Centre for Social Investment, reflects on some of the more heated discussions at the OECD’s Private Finance for Sustainable Development (PF4SD) Week earlier this year.

Controversy #1: The crowding out of Official Development Assistance (ODA)

Impact investing looks like the new salvation. The hope is that tapping into finance from corporations, venture capital, wealth funds and other non-state investors will increase the amount of resources available to meet the Sustainable Development Goals from ‘billions to trillions’ of dollars.

This vision is appealing, and there is much promising activity in this field. But there is also a danger of limiting ourselves to this vision, since it suggests (falsely) that private finance can fill the gaps that public finance has left unaddressed, as several speakers at PF4SD Week in January warned.

Samantha Attridge from the Overseas Development Institute, for example, presented research showing that success in mobilising private finance was much lower in countries with low credit ratings — precisely where the money is most needed. In a similar vein, OECD policy analyst Irene Basile outlined that private finance tends not to get invested in fragile states.

“Success in mobilising private finance is much lower in countries with low credit ratings — precisely where the money is most needed”

Others warned against what they saw as the increasing ‘commercialisation’ of the international development space. Pierre Habbard from the OECD’s Trade Union Advisory Committee said: “Development projects should not be seen as an asset class, but as public goods.” Many of the SDGs require action that is risky while offering low or no financial returns, Debapriya Battacharya, chair of Southern Voice, pointed out, making such actions highly unattractive for investors. Impact investing and blended finance should be an add-on, not a replacement for ODA, he argued.

C ontroversy #2: We only talk about the supply side and forget the demand side

Participants from around the world — from Australia to South Korea to South Africa — gave updates at PF4SD Week on national strategies for impact investing. Most notable was Le French Impact initiative, launched more than a year ago: within five years it plans to channel €1bn into social entrepreneurship, the social economy, social innovation, and impact investing.

Hearing about such new initiatives was fascinating. But it became clear that those at the table mainly spoke for and about investors — the supply side. The demand side, namely the potential investees or the people they are serving, were not represented. Cliff Prior, CEO of Big Society Capital, made a bold statement about the need to involve these target groups, and to steer investment decisions based on evidence of social impact and social values, and not merely on financial figures. His words earned him a round of spontaneous applause.

Priscilla Boiardi from the European Venture Philanthropy Association (EVPA) and Karim Harji from Oxford University’s Said Business School underscored the need for dialogue between the two sides — otherwise we risk excluding (the most) important voices.

C ontroversy #3: We still know too little about the impact of impact investing

Gabriella Ilian Ramos, OECD’s head of staff, said impact assessment should be extended into thus-far neglected areas, saying we need to “measure what we treasure, and not treasure what we measure.” Could we, she wondered, one day have stock exchanges that react to the social impact created by companies, not just their financial value? This echoed Sir Ronald Cohen’s vision of an “invisible heart” to guide “the invisible hand” of the market towards serving people and planet.

“Could we one day have stock exchanges that react to the social impact created by companies, not just their financial value?”

Many in this sector warn of impact-washing — the risk of organisations claiming positive effects without evidence. Jorge Moreira da Silva, head of OECD’s development division, said it was the responsibility of policy to prevent misconduct: OECD’s new Social Impact Investment report offers guidance on governance standards.

Emmanuel Faber, CEO of Danone — which has pledged to have all its subsidiary companies B-Corp certified by 2030 — called on others to look more deeply at impact measurement, and not to be put off by the task ahead, saying: “The devil is not in the details, the solution is in the details!”

Finding appropriate metrics is in some areas extremely difficult, as Tim Mohin, CEO of the Global Reporting Initiative pointed out, such as protecting human rights, or promoting participation in society. But even in more tangible areas, it’s not always clear which way to go. Asked by CDC Group how exactly they assessed the impact of their investments, representatives from the Private Infrastructure Development Group, OPIC, BNP Paribas and Intellecap all said they had major difficulties in doing this for a substantial share of their activities.

Some potential solutions

So what do we do about all this? While each controversy above is distinct, the three seem to have one common root cause: namely that for the large part we don’t know whether social value is effectively created — never mind how it can be accelerated.

This impact challenge is widespread, and not limited to financial investment. It was, for instance, one of the main reasons leading the ITSSOIN project [in which CSI is a project partner] to assess the third sector’s ability to producesocial innovation as a source of economic, social, cultural and political development in Europe, instead of measuring the sector’s social impact directly. (More information on this approach can be found in our open access book, Social Innovation — Comparative Perspectives.)

Identifying impact is less challenging when it comes to individual organisations, programmes, projects or interventions. In my dissertation, I have developed an approach that rests on two principles. First, focus on the core value added by the organisation for the target group. And second, if this added value is non-financial, fuzzy and hard to grasp, use research from social psychology, sociology or behavioral economics on the measurement of social, political and cultural capital for example, to design instruments capable of capturing those values.

With this strategy, we would be able to reliably measure how interventions contribute to the formation of social networks or a sense of belonging (see here), how they fortify solidarity and pro-social values (here), or how they spur political engagement (here). Measuring capitals was highlighted as a possible solution at PF4SD Week too, by UN DESA chief economist Elliott Harris.

It is clear that the impact (measurement) challenge is far from resolved, and will take time and considerable resources. But given the amount of finance we’re talking about, it seems fair to dedicate a portion of investments into learning where and how we can create the greatest value. It would help organisations make better strategic decisions in programme design, investors to better allocate their money, and governments to control for desired effects.

Promoting impact measurement needs to go in hand with addressing the demands, needs, competencies and wishes of target groups. We also need to embrace the fact that we will require mixed sources of finance, just as we will require mixed models of intervention (some more, others less economically self-sufficient) to address the grand challenges of our time, which include problems so deep-seated that they have persisted for decades.

Watch a brief Oxford University talk by Gorgi Krlev on this subject here. Follow Gorgi on Twitter @gorgikrlev.