I’ve talked about impact investing and its baseline principles in a previous blog post. Now, I’m going to dive into what programs make good investment opportunities for impact investing.
For large dollar donors and foundations, this strategy could be game-changing; instead of making grants out of their endowment dollars and seeing little return, they could invest equity in social enterprises doing work, for example, on solar energy. Through dollars there, they could reduce carbon emissions but retain their endowment to put toward other goals, thus doubling the impact of the same dollars.
They could make a loan to a startup that sells wood-burning stoves in low-income countries. Through that effort, they’d likely see a repayment of that loan (with a return) plus a reduction in pneumonia for children in homes transitioning to their stoves and a similar reduction in the amount of wood needed for cooking in these households. Sounds like a win-win for the investor, right?
A word of caution, however, is that impact investing does not and cannot replace traditional giving. The primary reason for this is that not all worthy causes have a financial return component.
Let’s look at an example of a cause that might be worth funding but not suitable for impact investing: preschool. We know high quality preschool has a measurable return on child educational outcomes like achieving grade-level standards. Some preschool programs are even tied to outcomes later in life like higher educational attainment and reduced rates of crime.
For these positive, measurable outcomes, a financial investment is certainly merited, but there isn’t necessarily a financial return tied to all preschool programs. To remedy this, I suppose we could privatize preschool, as we often do already. We could create a financial return by operating with a fee-for-service model. But do we really want to privatize this public service?
The effect of this tuition- or fee-based model is that it creates barriers to access, as is true with any private education system. If we funded this preschool model through an impact investment strategy, it’s possible only the wealthier children would be able to access our services. Those children might also be more likely to have higher educational attainment in the first place. Our preschool program might be objectively good for these students too, but they also might be able to access a different preschool.
Also, because of the other factors in their lives, any preschool would have more impact on the other children, those from less wealthy backgrounds. Thus, our project overall could have more impact if we’d been able to include those students from less wealthy backgrounds.
Of course, there are all kinds of blended models to address this challenge, including scholarships and financial aid, but I’m simplifying here to make a point. It’s easy with a model that asks for a financial return combined with a purely quantitative social return to serve only the easiest to serve.
Now, I’m not saying impact investing isn’t an objectively positive tool to have at our disposal. If impact investing or socially responsible investing (I touched on this in my previous post) replace traditional investing, they can have a positive impact on the kinds of businesses, startups, and social programs that get funded in this country. What I am saying is:
- There are certain types of programs that aren’t a perfect alignment for impact investing, but that doesn’t mean they’re not worth funding.
If we narrow our focus to just programs with a financial return and exclusively measure quantitative outputs, we’ll miss out on the opportunity to have the most impact for those who need services the most.
- If you’re going to fund programs with a social or environmental return, make sure you serve the right people.
Even if 600 children graduate from your preschool program and all of them go on to be Rhodes scholars, it doesn’t mean your preschool is the one that made the difference. Make sure your programs aren’t only serving the easiest beneficiaries and that you understand what of the outcomes were a result of your program rather than the trajectory your participants were headed down regardless.
It’s not that you can’t serve the right constituencies and measure impact appropriately through impact investing, but it’s easy when you’re focused on quantitative measures to look at the numbers alone, rather than understanding the nuances that underlie those metrics.
This could mean choosing a program where you don’t have to be as judicious about your participants. Maybe if your goal is to decrease carbon emissions, you don’t care who buys solar panels. Or it could mean once you’ve chosen your program, you’ll have to be more thoughtful about participant selection. Perhaps you should work with school leaders to make sure the program doesn’t serve only the easiest participants. And it certainly means more rigorous monitoring and evaluation efforts (a blog I’ll get to soon).
The bottom line with impact investing, as with many other forms of social programming, is that if you’re going to do it, make sure you’re doing it right. Impact investing may very well be a mechanism to maximize your available social or environmental good dollars, but don’t let this fancy new tool bias which programs you’ll consider and who you’ll serve.
Rebecca TeKolste, visiting research associate, focuses on quantitative research in social impact. She is a proud Returned Peace Corps Volunteer, where she served in public health in Guatemala.