The problem with impact investing
Impact investing is still very much misunderstood.
I've been in conversations where I mention the word "impact", and it's assumed that it means foregoing financial return in order to "make a difference". Because of this perception, it's sometimes seen as not a legitimate sector of investing, more akin to non-profit than actual venture capital.
I recently wrote about my angel investment thesis but I didn't mention that I do tend to apply an "impact" lense to the companies I evaluate, albeit not strictly. And part of the reason is because of the misconception of the term. It can mean different things to different people.
When I represented my MBA school INSEAD at the Turner MBA Impact Investing Network & Training competition last year, we learned of this definition of impact investing by the Global Impact Investing Network:
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
While I think this does do a good job of encapsulating the core of impact investing - especially that impact is meant to co-exist alongside a financial return - I can see why it can lead to some misunderstandings.
Because firstly, it is sort of possible to apply this definition to almost any business. As long as it isn't one doing obvious harm, it can be argued that most businesses generate a positive and measurable social and/or environmental impact.
And then there is the interplay of this definition of impact with certain geographies. Some make the argument that any business operating in a developing economy is itself impact because it by definition serves an underserved population and has a positive impact on the developing economy.
So, as someone like myself investing in emerging markets like Africa, am I, by default, an impact investor? My answer to this is of course no.
There is a concept called the "ABC of impact", which classifies an impact an organisation can have as either:
Avoiding harm
Benefiting stakeholders
Contributing to solutions
Impact investors strive towards supporting companies that work more towards C. So, it's not only about serving an underserved population and happening to benefit certain stakeholders. It's also about changing something to make that population less underserved in the long run. Addressing the underlying structures that cause the social or environmental issues in the first place.
If you operate in this space, would love to hear your thoughts. Do you consider impact in your investment thesis? And, if so, how do you define it?
📸 Me representing INSEAD at the Turner MBA Impact Investing Network & Training competition in Wharton last year
