After a long march toward mainstream acceptance, many in impact investing are claiming victory. The industry is garnering attention at major publications like The Economist, and recently celebrated the emergence of a star-studded $2 billion fund. Meanwhile, studies have proliferated supporting the idea that you can earn market rate returns while making a meaningful difference in the world, and investors have taken note: The GIIN’s 2016 Annual Impact Investor Survey states that 84 percent of survey respondents were targeting risk-adjusted market rate returns or close to market rate returns.
However, if your focus is emerging markets enterprises that can have an impact on people living in poverty, a recent blog by Ceniarth Capital said it best: “Those of us actively allocating capital to fragile enterprises in developing markets recognize that those people who promise comfortable market rate returns while solving global poverty are the equivalent of diet gurus promising that one can lose weight while eating limitless amounts of chocolate cake.”
In a report launched by Oxfam and Sumerian Partners today, we argue that it’s time to look at impact investing differently; to start with a focus on the needs of the businesses working to make a meaningful impact on poverty reduction, rather than on the investors who stand to benefit from their work. Enterprises working in this space are in new territory – continually adapting their business models, earning low and slow returns and operating in markets that are subject to considerable exogenous shocks (e.g., economic instability, weak infrastructure, extreme weather events and poorly developed value chains). These firms will make decisions that can seem irrational if your focus is market return. They may seek out “at risk” populations, such as single moms balancing the demands of work and family, as employees. They may share ownership and decision-making with their workers. They may pay their suppliers not the price that is commonly expected in the market, but a higher price the firm sees as “fair.” The businesses themselves, and the funds that put their money into these firms, organize around the intention to generate a measurable, beneficial social or environmental impact alongside a financial return – and that prioritization is reflected in their structures, processes and activities.
However, to meet the return expectations that have been established by the sector’s push toward the larger mainstream market, we increasingly see conventional emerging markets investments being reclassified as “impact investing.” Arguably, it’s this trend that has transformed TPG’s investment in Apollo Tower, a cellphone tower company in Myanmar, from a standard emerging market foreign direct investment into an impact investment. The impact statement claimed by supporters is that cellphone access has “helped to increase transparency in a country known for tight control of its information, helping the nation take steps toward democracy.” Hmmm. Really? A cell phone company is actually a democracy and governance project in disguise? Seems a bit of a stretch.
As we write in our report, it should not be assumed that an investment in a cell tower, or a wind farm, or any other enterprise in the global south, is inherently socially positive. Rather, it should be incumbent upon the fund to demonstrate how these enterprises are intentionally structured to optimize impact and benefit poor and marginalized groups – rather than only providing implied, incidental or indirect benefits. They should be able to show what difference the fund’s provision of capital and support and engagement has made. Any self-identifying impact investor should be able to demonstrate a clear intentionality to achieve impact.
Furthermore, the research that has set the prevailing “have your cake and eat it too”-sized return expectations has its limitations. Take, for example, the very same GIIN/Cambridge associates “benchmark” report, which included no commentary on the associated impacts achieved and instead used a self-reported intention to generate social impact as the only impact-related criteria for inclusion in the benchmark. The data included a high proportion of funds focused on the theme of financial inclusion, an industry that has depended on decades of subsidies. Finally, the “benchmark” setting was drawn from a small pool of funds, all of which were targeting market rate returns.