Wall street investors have discovered the nonprofit world. Why are the “profit seekers” sniffing around the pressing social problems that have always been the pervue of nonprofits? Wall street calls this new investor initiative Impact Investing and reports that it is thriving. Currently impact investors have $228 billion in assets under management. “Individuals are huge drivers of the rise of impact investing,” says Amit Bouri, CEO of the Global Impact Investing Network. “They increasingly want to be a part of the solution to problems surrounding their communities and the environment. Investors pumped $35.5 billion into 11,000 deals last year, and that number is expected to grow by 8% in 2018.”
Impact investors over the last decade have largely focused on proving that impact investments could achieve a ‘market rate’ of return. A survey of 80 repeat impact investors revealed that preferred investments included financial services, energy, microfinance, food and agricultural, infrastructure, and healthcare programs. These investments enjoyed an average annual financial rate of return of 13%; certainly, good news for impact investors.
However, the elements that make something profitable often work counter to those that maximize positive social impact. The big question hanging out there in the nonprofit world now is, “How do we make sure that the blossoming impact investment movement actually leads to improvements in outcomes for the people and communities it is supposed to benefit?”
A Case Study
The Grameen Bank, originated in 1976 by Professor Muhammad Yunus, introduced the concept of microfinance and was perhaps the first impact investment the world had ever seen. Offering over 7 million poor Bangladeshi women entrepreneurs access to locally sourced tiny loans that enable them to conduct business and support their families, the bank has inspired the world. However, Morgan Simon, managing director of the Candide Group, an impact investing fund, cautions that as microfinance caught on and many more impact investors got into the act, “the microfinance industry achieved financial scale but the social impact at scale was largely left behind.”
As microfinance became the original darling of impact investors, the nonprofit world stepped in and codified principles of development practice that the leaders felt impact investors in microfinance should heed in order to produce positive social outcomes.
- Poor people need not just loans, but also savings, insurance, and money transfer services.
- Microfinance must be useful to poor households, not “credit-worthy” borrowers.
- Microfinance means integrating the financial needs of poor people into a country’s mainstream financial system.
- The job of government is to enable financial services, not to provide them.
- Donor funds should complement private capital, not compete with it.
- Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.
Balancing Returns and Outcomes
Learning from the microfinance example, the nonprofit world suggests these three simple principles to help impact investors balance above average returns against positive social outcomes.
- Engage communities in the design, governance, and ownership of enterprises.
- Ensure that those running institutions and structuring transactions add more value than they extract.
- Balance risk and return between investors, entrepreneurs, and communities so that everyone benefits.
Impact investing is a good thing when it benefits all stakeholders.