By Antony Bugg-Levine and Jed Emerson
We believe today various parts of what has to date been segments of an investment spectrum are discovering a new realm of possibility.
These investors are maximizing the total value of their investments and organizations, creating a high-octane blend of economic performance and sustained environmental and social impact. Their discoveries are upending long-held and jealously guarded beliefs that profit-making and charitable activities must be kept separate in isolated silos of thinking and practice.
These are the early signs of a long-forming undercurrent that is poised to reshape how society deploys its resources and solves its problems. As Robert Kennedy famously noted, even tiny ripples can become a powerful current that sweeps aside the established order when they are multiplied and brought together. Powerful in its simplicity, the idea of impact investing for blended value—investment strategies that generate financial return while intentionally improving social and environmental conditions—is disrupting a world organized around the competing principle that for-profit investments should seek only to pursue financial return, while people who care about social problems should give away their money or wait for the government to step in. But one person’s disruption is another’s opportunity. Impact investing pioneers are jumping into these fast-flowing waters, creating new enterprises, ideas, and approaches to match the aspirations of investors and entrepreneurs eager to harness the full power of capital.
Impact Investing for Blended Value: A Definition
Impact investing recognizes investments can pursue financial returns while also intentionally addressing social and environmental challenges. Despite, or perhaps because of, this simplicity, it can seem threatening to some people. Many mainstream investors reject the idea that they should pay attention to the social impact of their investing, insisting instead that these considerations be left to governments and charities. And for their part, most traditional philanthropists and policymakers reject the idea that they should use their investments to advance their mission or businesses generating profits have a right to stand alongside philanthropy and civil society in the noble work of promoting equality and justice.
What is new is that impact investors are profoundly optimistic about the role business can play in directly advancing the common good and the leverage that social enterprises can achieve by applying financial tools. We see business practices as a powerful force that can be harnessed for good rather than a necessary evil that must be curtailed. This optimism is not ideological: we are not capitalist triumphalists, eager to spread the gospel of free market greatness to the far corners of the world. Moreover, we are not ignorant of the limits of market-based strategies for social change. But we have observed what is going on in diverse corners of an increasingly connected planet. And we cannot help but marvel at how many people in both rich and poor countries enjoy a better life because of successful profit-seeking investment.
What’s in a Name?
The term impact investing came out of a set of discussions among a group of investors and industry pioneers in 2007. They were early investors in green technology and the first institutional investors who placed equity into microfinance funds. They had launched creative loan structures for low-income housing developers in U.S. cities and were managing public equity investments on a sustainable basis. What unified all of them was an interest in assessing the potential and real performance of their capital through more than a passive financial lens. They wanted to use their capital to do something positive.
And the terms in use did not capture fully these investors’ interest in defining investing as an active verb. Socially responsible investing and ethical investing seemed burdened with moral obligation or personal, normative judgment and—despite current practices—a history of negative screening that focused on what type of firms to avoid. Sustainable finance seemed narrowly focused on environmental concerns rather than the full array of social justice and development issues and seemed also to muffle the excitement these investors felt regarding their possibilities. And although community development finance resonated with some Americans, it did not capture the breadth of global investing in which these actors engaged, did not connect with locally focused investors outside the United States, and did not reflect the premium many place on environmental issues or investment opportunities.
Impact investing, however, evoked the optimism and action orientation of this group. The term provided a broad, rhetorical umbrella under which a wide range of investors could huddle. The microfinance investor, the green-tech venture capitalist, the low-income housing lender: all could see their affinity in a broader movement and begin to collaborate to address the similar challenges they faced. With an intentional double meaning, the term has also cast a wide net. Some impact investors are content just to make investments that directly create social and environmental impact. Others want their investments ultimately to have an impact on how all investment is conducted. The term has resonated with those investors who seek to integrate investment and philanthropy but have lacked the language to articulate it.
What is an Impact Investment?
Defining exactly what is (and what is not) an impact investment has become increasingly important as the term has taken off. And, unfortunately, many people approaching this task are still locked in old language and mind-sets. They are used to orienting themselves around financial return and therefore define impact investments as below-market-rate investments that trade off financial return for social impact. Although these investments certainly form part of the impact-investing universe, the heart of the movement is the reorientation around blended value as the organizing principle of our work: using capital to maximize total, combined value with multiple aspects of performance.
For now, the industry is coalescing around a definition that focuses on intention and the attention an investor pays to blended value returns: impact investors intend to create positive impact alongside financial return, managing and measuring the blended value they create.
What does this mean in practice?
All investments are capable of generating positive social impact, but some are closer to the action than others. Public equity investors can generate impact, for example, through a shareholder advocacy campaign and investors pursuing this approach have had meaningful impact upon some corporate practices. Indeed, virtually all the impact investors we know place a portion of their portfolio in impact-oriented public equity SRI funds. In this way, impact investing is a strategy across all asset classes. But the shortest line we can draw between our investment choices and their social impact is to place capital directly into companies and projects and make loans and private equity investments as the vehicles to do so. Therefore, the impact investing movement tends to focus on private equity and direct lending because of the unmatched power of these investments to generate social impact.
Of course, not all venture or private equity investments are impact investments, even when they seem to focus on high-potential sectors or geographies. Simply putting capital to work in a poor country does not qualify an investor as an impact investor. Funds and firms earning a seat at the impact investment table focus on strategies that intentionally seek to uplift rather than exploit poor customers and treat impact measurement as a central business management practice—not an afterthought for external reporting and marketing. Similarly, a clean energy investment that inadvertently destroys critical habitat could destroy rather than create value. These distinctions matter to impact investors who are developing strategies to allocate capital where it can generate integrated, blended value.
What is Blended Value?
If impact investing is what we do, blended value is what we produce. Value is what gets created when investors invest and organizations act to pursue their mission. All organizations, for-profit and nonprofit alike, create value that consists of economic, social, and environmental components. All investors, whether market rate, charitable, or some mix of the two, generate all three forms of value. But somehow this fundamental truth has been lost to a world that sees value as being only economic (created by for-profit companies) or social (created by nonprofit organizations or government). And most business managers, as well as investors, miss out on the opportunity to capture their total value potential by not managing for blended value on an intentional strategic basis.
The concept of blended value reintegrates our understanding of value as a non-divisible combination of these three elements. Blended value is its own distinct force to be understood, measured, and sought. It is not something we can achieve by adding up its component parts because it is more than the sum of the parts of a triple-bottom-line analysis. At the same time, blended value does not mean one loses the distinct taste and flavors of the component ingredients of value creation. It is not a blurring of these components, and the components do not lose their unique attributes and characteristics. It is not a weaving together of separate parts, but rather a recombining of core elements that, through their natural integration, transform into a new, stronger, and more nuanced organizational and capital structure. Blended value is the recognition that capital, community, and commerce can create more than their sum and is less a math exercise of zero-sum pluses and minuses than a physics equation of an expanding universe of investments in organizations, people and planet.
Devastation or Renewal?
First taking shape out of the sustainable investing and divestment campaigns of the 1970s and 1980s, the waves of socially responsible investing have begun to alter how executives in many industries engage with customers, regulators, and society. Impact investing grew out of the conditions these waves created and has the potential to be even more disruptive. Currents can create devastation when they wash ashore, but they can also be forces for renewal. The annual flooding of the Nile Delta has brought sustenance to millions of people for centuries. And the pioneers of wave energy are turning ocean currents into a sustainable source of renewable power.
What will result from the current of impact investing? Will it undermine support for philanthropy and draw resources away from more productive investment? Will it bring the renewal and energy that enable us to tackle the seemingly impossible challenges we face? Or will it just fade as so many other currents have in the past before making much difference at all?
The answer will come from how we direct the current and prepare to harness its power. We will need to see the ripples for the mighty current they can become. Actors on both sides of the checkbook—investors and those receiving investment—need to recognize we are all part of something potentially more powerful than we can be alone. This is easy to affirm but difficult to put into practice. Many individual participants are only beginning to understand the full extent to which they share a basic set of approaches and values that unite them in this newly emerging capital market. We will be called on to take the leap of faith that supporting this new industry will serve us and the rest of the world better than preserving our small niches. We must also collectively resist the danger that impact investing will become merely a marketing tool. The resonance of the term is its greatest threat. Tempted by the good intentions of clients, institutional asset managers may co-opt the spirit of impact investing by structuring investment product that appears to create value but avoids the hard work required to generate more than just nice stories with pictures.
Ultimately, impact investing for blended value offers an integrated system of thinking and practice, springing forth in a world where a different system dominates. When systems clash, opportunities and frustrations abound. But once we realize that impact investing is a systems-building task, we can draw on the lessons from history and theory about what it has taken to secure similar change in the past. These lessons tell us that great change is possible when people unused to working together collaborate to combine existing ideas into new possibilities. They teach us we cannot change a system with persuasive analysis alone but must apply the full range of our emotional and spiritual intelligence. These lessons remind us to recognize the power systems have to mold all of us—as well as the power we each have to participate in changing them.
Impact Investing is not about bumper sticker solutions to feeding the billions or saving the planet. But you are not a passive observer of this new system. By choosing to jump in or stand back, you influence the system in which we all live. The question is not, “How can I influence the system?” The question is, “What direction will my influence take?” We all have a role to play.
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