Why does impact investing not (yet) work? A few reflections on a recent symposium
Impact investing is crucial to tackle some of our biggest problems. While we have seen tremendous progress in creating an early-stage impact investing market, there still are some problems that prevent the market from working properly. In this blog, Theresia Harrer and Othmar Lehner discuss insights from their symposium at this year’s Academy of Management Conference, and develop three key problem areas that need to be addressed to make impact investing work for everyone.
Blog by THERESIA HARRER and OTHMAR LEHNER
Over the weekend of July 30th and August 1st, well over 9000 management scholars came together at the 81st Academy of Management (AoM) conference to discuss the future of their field. Although the AoM is the leading research community in the field of management and its annual meeting regularly attracts its most brilliant minds (to be fair, a large part of this attraction is also due to the generous social side program that usually keeps everyone busy exploring new places in various cities), this year was different. On the one hand, of course, due to COVID-19 the conference was once again taking place online and the many great social sides were often limited to a rushed 10-minute glass of wine in between Zoom sessions. On the other hand, this year’s conference was dominated more than ever by discussions on how to tackle the imminent climate crisis and the many social inequalities that the COVID-19 pandemic had put in the spotlight.
For instance, there were discussions on how the shift to working from home might have changed employment trajectories. Other panels focussed on the causes and implications of conspiracy theories and science-denial. If there is one thing the pandemic has not failed to show us, then it is that trust in institutions is fragile and that persistent inequalities in our society are indeed a major problem.
The reason for this blog however is that, in our view, the pandemic revealed another important issue: so-called impact investing does not yet work as well as we had hoped or wished. Despite years of investment in social development programmes and environmental projects, it seems that inequalities, which these investments tried to resolve, had pertained. One example is India, which struggled to tame a devastating second COVID-19 wave and due to its underfinanced health system was not able to provide sufficient oxygen to its citizens. In other instances, where capital was mobilised quickly, to for example facilitate COVID-19 vaccinations, help was not always received as positively as expected and thus failed to serve its purpose. All of this made us wonder: have we done impact investing wrong all along? And if not, what have we missed? In this blog we reflect on a recent AoM symposium, in which we discussed why impact investing does not yet fully work and what we can do to fix it.
What is impact investing?
The literature sees impact investing as a specific investment approach that “helps to solve social or environmental problems while generating financial returns”. Impact investors are therefore willing to accept lower financial returns because their main intention is to generate high social or environmental returns. Contemporary investment approaches – even Environmental, Social and Governance (ESG) investment approaches – flip this logic. They aim to generate financial returns while also solving social or environmental problems. Impact investing should therefore be particularly well suited to tackle grand societal problems, because it focuses on long-term outcomes but does not neglect economic viability either.
The great news is, over the past few years, the impact investing market has grown substantially. A recent GIIN report estimates the market to a size of USD 715 billion. It further notes that key impact investors are foundations such as the Rockefeller or Bill & Melinda Gates Foundation, as well as dedicated impact funds such as the Acumen Fund or Sonen Capital. More recently, Goldman Sachs and other more mainstream investors have also developed impact funds.
Obviously, there is a lot to be enthusiastic about. However, as said earlier, the COVID-19 pandemic demonstrated that impact investing does not quite work yet. So, what is the problem? In the literature Ormiston and colleagues note that the term impact investing itself could be a problem, because it is fuzzy and not well defined. More recently, Jafri suggested that the structured approach of impact investing (which dictates what an impact investment is and what needs to be measured) in fact obstructs an effective impact investment.
Although helpful in identifying some problems of impact investing, what is missing in the works is an explanation of why these problems exist in the first place. Most importantly, they do not suggest what needs to be done to develop impact investing into an investment approach that works for everyone. The rest of this blog therefore attempts to give a more comprehensive answer to the question of why certain problems in impact investing exist and develops key areas that need addressing in order to fix the problems.
Paving the way for effective impact investing: three key problem areas
We draw on the ideas that emerged in a discussion in a symposium which we organised at this year’s AoM conference. Our goal was to use the insights from the pandemic as a starting point and start a dialogue that gets to the bottom of the problems of impact investing. In the symposium we were joined by four panellists and with them we developed three key problem areas which, so we believe, sit at the roots of the problems of impact investing. Here I will now briefly describe these problem areas.
- Cultural diversity & hidden power dynamics
The pandemic showed that impact investing is essential if we want to help those who need it most. It not only helps to develop long-term solutions but also to quickly mobilise resources to, for example, distribute vaccinations. However, the pandemic also showed that such help (to distribute vaccinations) was not always wanted. What was perceived as useful by the ones providing the capital, meant not much to the beneficiaries in the respective regions because they were facing bigger problems such as mass unemployment and job insecurity.
Some works in the literature show that different values are indeed a major stumbling block in impact investing. In the symposium we argued that this is because impact capital is often allocated based on an unreflective evaluation of what is done to create impact. What it misses is an appropriate consideration of whether certain actions are actually perceived as useful in the context where they should be. A project can fulfil all impact criteria for an investor, but it can be regarded as unhelpful or even inappropriate by beneficiaries.
Thus, if we keep focusing on the activities of certain actors only, we risk underestimating how values influence what impact means. Worse, by not considering values in different contexts, we even tend to accept a western-centric interpretation of impact that ignores what actually matters. Left uncontested, a western-centric impact interpretation can lead to undesired consequences and disengagement of for instance fund seekers because capital suppliers from the west are deemed illegitimate and untrustworthy.
- Goal alignment & collective action
The pandemic has also demonstrated that aligning different interests is difficult. Many countries (for example within the EU) were unable to agree on what the appropriate response strategy to the virus was. And indeed, prior studies show that it is challenging to develop a single global strategy that reflects the interests and goals of all actors; especially when the problems which the strategies are trying to address are large and long-term. When two organisations, such as impact investors and investees work together, they are confronted with similar problems.
In the symposium we therefore discussed how the impact investing market could develop a coherent, yet comprehensive agenda and how the organisations in the market can best collaborate to realise this agenda. On the geographical level the panellists argued that market intermediaries, their activities behind the scenes and the effects of these activities are currently underrecognized. That is, impact investing intermediaries such as the Acumen Fund not only deliver capital, but they also create spaces for interaction, guide the discussions on important topics such as the definition of impact itself, and help develop new solutions. If these additional services of intermediaries go unrecognised, the impact investing market risks losing sight of its own goals.
On the organisational level, the panel advocated for more attention to governance issues between impact investors and investees. The argument being that when social enterprises and impact investors work together, they need to manage diverse goals of both organisations. Thus, if we want to foster long-term collaboration and social/environmental impact, we need to consider the inter-organisational governance structures that support the co-existence and management of diverse goals. Not doing that risks sacrificing progress for fear of complexity.
- Motivations & intentions in impact measurement
Complementing the above two areas on how to organise different interests, the third problem area impact investing is impact measurement. Building on previous studies, impact can be defined as beneficial outcome resulting from pro-social/pro-environmental behaviour. The problem is that current impact measurement approaches are outcome-focussed but leave the intentions or motivations behind the behaviour unaddressed. In other words, when measuring impact we usually measure the effects of a product/service (i.e. a school was opened and more people could access education), but do not reconsider if that what is measured actually reflects the effects.
In the symposium we argued that in order to develop an efficient impact measurement approach, we need to pay closer attention to so-called materiality considerations. A material issue is an issue that is regarded as key determinant of an impact and is thus relevant for decisions on how to allocate or distribute capital. However, if materiality considerations are simply focusing on, for instance the number of schools built and the availability of education (outcomes), and other factors such as engaged teachers (pro-social behaviour) are overlooked, the material topics might be misleading at best. Consider for example if a school is built, but the teachers who are supposed to run the school never show up. In this case, an impact measurement focusing on outcomes shows positive impact although no real difference is made. Thus, if we do not take materiality considerations seriously, impact measurement can impede the development of impact investing because it focuses on the wrong issues.
Overall, we do not claim that these are the only areas to be considered when thinking about why it is so difficult to make impact investing work. Neither do we think that these areas are separate from each other. Rather, by outlining these three areas in the symposium and here in this blog, we wanted to highlight distinct, yet interlinked discussion points that can inspire future works. We believe that a strong collaboration between academia, those investing and those receiving the investment can help to develop a diverse, yet unified impact investing market that benefits all.
. . .
The symposium “Impact Investing in times of crises: rethinking the nature of logics” was organised by Theresa Harrer and Othmar Lehner and is part of the proceedings of the 81st Annual meeting of the Academy of Management. The panellists were Lisa Hehenberger (ESADE), Gorgi Krlev (Uni of Heidelberg), Fergus Lyon (CUSP & Middlesex University), Barbara Scheck (Munich Business School) and Othmar Lehner (CUSP and Hanken School of Economics). If interested in the recording of the symposium session, please do get in touch via t.x.harrer@mdx.ac.uk.
