A Difficult Balancing Act

> Posted by Elisabeth Rhyne
investing-for-social-and-environ-impactI just read an excellent new report by the Monitor Institute, commissioned by the Rockefeller Foundation, on impact investing. What a pleasure to read. The report focuses on the range of investment activities that have emerged to channel investments into activities combining social/environmental and financial returns. Impact investing supports microfinance, community development, social enterprise and all kinds of renewable energy. The concept is to bring all these different investment types together under a common umbrella with a recognized place in the world of investing. A recognized framework for impact investing will allow more capital to flow in. The authors envision impact investing becoming a major force for social and environmental change. Such a concept has already been put forward by Prof. Mohammad Yunus in his book, Creating a World Without Poverty].
I find a key problem with impact investing is that investors have many minds when it comes to the balance between social and financial returns. Yunus favors a zero financial return (maintenance of original capital only): he believes any profit exploits the poor. At the other extreme are investors who seek socially beneficial activities that require little or no sacrifice in financial returns. Some of these investors, especially the big institutional kind, operate under rules that make it difficult to sacrifice financial return. The report claims that different preferences can be handled through what it calls “Yin-Yang deals” that blend investors from multiple points along the spectrum. We saw a lot of these deals when microfinance funds were busy creating collateralized debt organizations with stratified risk tranches.
I don’t think this challenge is so easily solved, because aligning investor preferences requires a continuous balancing act. A couple of recent conversations brought this home to me. I talked with a couple of mainstream investors who got into microfinance and to my surprise, were now backing away from microfinance because it had become too profit oriented. They cited microfinance institution leaders who, spotting profit potential, had tossed social goals into the back seat.
This change of heart highlighted the precariousness of the impact investing balancing act. An investor and investee who seemed like a good match found themselves with irreconcilable differences a couple of years later. This tension will always be there in the impact investing world, especially as entry and exit becomes easier and more frequent. A continual balancing act is infinitely more difficult to manage than a fixed position at one or the other end (non-profit or profit maximizer). I hope this balancing difficulty will not constrain the growth of impact investing, which has so much promise.