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Devin D. Thorpe
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How Impact Investors Are ‘Starting In The Wrong Place’

This post was originally produced for Forbes.

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“We’re starting in the wrong place,” Mara Bolis, 45, senior advisor for market systems at Oxfam America, says of the approach most impact investors are using today.

The problem she highlights is that investors are starting with an analysis of their own requirements, which are primarily financial rather than with a deep understanding of a problem they wish to solve.

“Impact is a pretty diluted term at this point,” she adds. “We’re not doing the important upfront work to diagnose the problem.”

Watch my interview with Bolis at the top of this article.

Bolis says that Oxfam has used a different approach, beginning with a clear diagnosis leading to a specific prescription for a particular financial treatment.

Oxfam, a 70-year-old NGO that works internationally to alleviate poverty, diagnosed a problem for female entrepreneurs in Guatemala. They were being asked to put up almost twice as much collateral as men, she says. So, Oxfam and its partners developed a financial product to provide capital to female small business owners in Guatemala on appropriate terms. The loans average $17,000 and have maturities up to four years. The investment was designed for the diagnosis.

Mara Bolis, Oxfam America

Bolis authored a discussion paper for Oxfam and Sumerian Partners on impact investing. In a blog post summarizing the findings of the paper, she wrote, ” We have no problem with financial returns, but let’s not pretend that investors seeking a pure market return can tackle the most complex global challenges in high-risk markets. They cannot. Not in education. Not in health. Not in reducing child labor and forced marriage. Not in water and sanitation. “

Andrea Armeni, executive director of Transform Finance, agrees with the sentiment. “It’s fundamental in the impact space to put the primacy on the needs of whoever will be affected by the investments. If that’s not the case – if we are focusing primarily on the needs of the investors – it’s a bit disingenuous to say that we are investing in order to achieve a certain social impact.”

Bolis, who has worked in international development for 20 years, says, “Poverty alleviation should be a guiding principle” for impact investors.

It wasn’t long ago, she points out, that the only sort of philanthropic capital was a grant. As the market has evolved in recent years, a variety of forms of impact capital have been developed along with a diverse range of approaches to solving social problems, including for-profit social entrepreneurship.

Bolis worries that as impact investing goes mainstream investors who have traditionally accepted lower returns on their investments in order to achieve desired social outcomes will follow the herd toward investments with market returns offering weak social benefits. The irony of seeing the field of impact investing grow while the impact actually shrinks concerns her.

Armeni agrees that a focus on return on investment or ROI can allow for problems to flourish that impact investors seek to eliminate. “If we want a teachers’ pension fund to invest for impact, we must be mindful of its return requirements so that the pension liabilities are met. But if in order to achieve a certain ROI, other stakeholders suffer–especially those who have historically not benefited from finance–then we are not moving toward real impact, and may, in fact, be contributing to the growing wealth and opportunity gap.”

Armeni sees three “transformative finance principles” that investors should observe:

  1. deep engagement with the communities, an idea that parallels Bolis’s suggestion for a real diagnosis,
  2. “non-extractiveness,” that is, being thoughtful about “for whom value is being created”, and
  3. fair allocation of risks and returns.

Bolis has made six recommendations to correct what worries her about impact investing:

  1. Shift from focusing on the needs of investors to the needs of those combatting poverty
  2. Increase transparency of reporting both for impact and financial returns
  3. Philanthropists should continue to deploy patient capital that seeks only to achieve a return of capital rather than a return on it
  4. The industry needs more independent research to identify the investment structures that best maintain impact intentions
  5. Investors should adopt a “voluntary code of practice that enshrines” intentionality
  6. “Impact investors should adopt incentives for optimizing, measure and reporting impact”

Bolis sees these ideas critical to focusing the impact investing sector on what she sees as its core mission of helping people lift themselves out of poverty. In other words, this is how you start in the right place.

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Devin is a journalist, author and corporate social responsibility speaker who calls himself a champion of social good. With a goal to help solve some of the world’s biggest problems by 2045, he focuses on telling the stories of those who are leading the way! Learn more at DevinThorpe.com!

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