At this year’s opening keynote at the SOCAP conference, Katherine Fulton, President of the Monitor Institute, discussed the evolution of the impact investing sector since her last SOCAP keynote in 2007. If five years ago the sector was all promise and possibility, now Katherine worries that we may be on the verge of a significant downturn.
Katherine reminded the audience that in 2007, the year the term “impact investing” was coined, one of the main questions we were asking ourselves as impact investors was how we would balance financial returns and social impact. In Monitor’s analysis, while there was the possibility of high financial returns and high social impact in some areas, by and large impact investing funds would have to decide whether they aimed primarily for social impact with a minimum financial hurdle or primarily for financial return with a minimum social impact hurdle.
Instead what happened over the last five years was that we mostly opted out of the heavy conceptual and analytical lifting to figure out how best to balance financial and social returns. Instead, we spent five years pounding the table saying “WE ARE A SECTOR!! NOTICE US!!” and in order to get noticed we told ourselves and the world a story about high financial returns and few tradeoffs.
Not surprising that we got what we wanted: our sector grew, more funds started flowing in, in 2010 JP Morgan wrote a report claiming that impact investing had $1 trillion in potential, and things kept on accelerating. In the last few years impact investing has gotten noticed not only by the major development institutions but also the biggest banks in the world and even the world’s billionaires.
Katherine’s worry, which I share, is that we could be on the verge of a downturn. Not surprisingly, financial returns are hard to come by, the risks we need to take as investors in this space are high, and lofty expectations are crashing against the realities of what it really takes to build businesses in some of the toughest places on earth serving customers who earn just a few dollars a day.
Borrowing from the work of Charles Handy, Katherine suggested that our sector may be riding a sigmoid curve. (note: here’s a great post that explains sigmoid curves in much more detail)
We’re on the upswing now, are building momentum and things feel pretty good compared to where we started, but a downturn may be just over the horizon thanks to unrealized expectations – either lower financial returns or, more troubling, social impact not being realized as quickly or easily as the glossy headlines suggested. Without reinvention our sector runs the risk of not living up to its promise.
The potential we have as a sector is to jumpstart a second sigmoid curve, building on what we have learned so far. This begins with the recognition that what we set out to create in the first place was large-scale social transformation using the tools of business (which is NOT the same thing as creating an asset class).
Drawing this new curve means more, not less, transparency – acknowledging that this is hard and messy work, that we don’t have all the answers, that we are still figuring out how and where financial and social returns are complementary and where there are real tradeoffs. That’s why the new (dashed) curve slopes downward at first – because the new path is beset with uncertainty and the path we’re on feels safe and familiar. It’s hard while the music is still playing to ask tough questions, to demand to look at the data early, to ask, when most new funds have been investing for two or three years, why opportunities are hard to come by and ask if investors are willing to take on enough risk to achieve real social impact.
I agree with Katherine that we have the chance to draw a new curve if we’re willing to look hard at the data. The Blueprint to Scale report co-authored by Monitor Inclusive Markets and Acumen starts to do this by analyzing what it takes to build large-scale businesses that serve the poor – concluding that most impact investors are unwilling to take early bets on risky new ventures and arguing that we need much more philanthropy if we are going to build out the supply chains and supporting infrastructure these ventures need to succeed.
What struck me at SOCAP is that our sector is actually willing to have this conversation, but these conversations are nascent. I’m finding more and more people saying out loud that impact-first funding is incredibly hard to come by, more and more people asking if we need to do much more than tweak around the edges, more and more people saying that if we want radically new solutions then we can’t keep pretending that we are private equity investors with the same old, broken fund structures and the wrong metrics for success.
The difficult bit is that this conversation is just starting to unfold just at the moment when real money (big banks and pension funds) are knocking on our doors, asking if they can make asset allocations to impact investing at exactly the moment when we’re starting to realize that, by and large, this is not an asset allocation, this is a social change movement. Or, to put a finer point on things, that there may be sub-sectors where the economics really work and the social impact is significant, but “impact investing” writ large is a very broad space where the risks are high and the timelines are long – and why would we expect otherwise if we’re in this business of helping tackle some of the world’s toughest problems?
In many ways these potential investors are starting to walk the first sigmoid curve just when we’re trying to draw the second one. They want to hear about unbridled enthusiasm and no tradeoffs just at the moment when we are collectively realizing that free lunches are hard to come by. Yes, there may well be some big problems that you can solve while also getting big financial returns, but those aren’t most of the opportunities our sector has found. If anything we’ve discovered that this is nuanced work, that the companies we are funding are first movers operating in environments where almost no supporting infrastructure exists, and that to get this right we are going to have to roll up our sleeves and get our hands really dirty. There may be some big financial wins on some distant horizon, but that’s not what we should expect in the next five or ten years.
And why should it be surprising that solving problems of poverty, of lack of access to energy or water or sanitation, of providing healthcare and safe clean and affordable places to live is never going to be quick or easy or – gasp – particularly lucrative?