There has been an enormous amount of content created in the last six months related to the many components of the burgeoning field of impact investing. While the coverage serves as a poignant signal of the traction the newly defined asset class has achieved, the disparate views and myriad of perspectives can often lead to confusion and controversy. The premise itself is simple: making investments into companies, organizations, and funds with the intention of generating both measurable social and environmental impact along with a financial return. The implementation, however, is where things get complicated. This week we hope to break through the clutter and define a few of the more prevalent (and consistent) challenges that face market players. Next week we will surface potential solutions to overcome these daunting challenges. As always, we welcome your feedback as Social TrendSpotters.
- Challenge #1: Fragmentation – Even a decade after the RISE Research Initiative on Social Entrepreneurship was published, the struggles to define the field of impact investing, provide meaningful labels, and segment market players continue. Social ventures operate in all regions of the country and span diverse sectors of the economy, ranging from consumer products and healthcare to education and energy. Ventures are (at this point in time) very focused in their services provided, whether it is a socially aligned product or simply socially responsible employment, sourcing, or operations. But with the broad range of socially minded services and populations served, investment solutions inevitably target individual ventures, individual impact entrepreneurs, and individual issues. In other words, without agreed upon segmentation, it becomes extremely difficult to provide scalable investment solutions.
- Challenge #2: High Touch Culture – With more than financial returns on the line, investors often seek face to face interaction to better understand a social enterprise’s model for generating positive change. Additionally, social entrepreneurs want to be sure that an investor’s values are aligned with those of their company. And finally, with positive change as a critical goal of social entrepreneurs, an entrepreneur’s financial literacy and understanding of capital markets is not always guaranteed. All of these factors equate to more time and often more diligence per investment.
- Challenge #3: Diversity of Need – Just as the businesses they are intended to serve, the funds and fund structures themselves are extremely diverse. Impact entrepreneurs are in desperate need of not only capital, but of financial innovation. And given the fragmentation described above, the actual capital need can take on a myriad of forms. For example, Calvert Foundation may combine philanthropic capital with subordinated debt in one investment. And given the wide variety of needs, an impact investment portfolio may include community development financial institutions, microfinance loans, affordable housing loans, and equity investments. The diverse needs again require substantial time and effort to define and set-up. And when the ultimate capital need is relatively small and extremely customized, the list of interested investors quickly narrows.
The good news: Research has just been completed that shows us a path forward. As with any new movement, limitations of experience and gaps of support services are inevitable. In our next edition, we will cover three actionable solutions that social entrepreneurs can take to increase their attractiveness to impact investors and bring the movement mainstream.
Special thanks to fellow colleague and TrendSpotter, Matthew Allen, for sharing this information with our readers.