3 July 2018

Social finance and impact investing

Summary: Impact investing has become very popular in the last decade. To fulfill its promise, this new financial sector must be able to measure social performance against a common benchmark. Methods to achieve this are still being tested.

Impact investing refers to

an investment in a project, business or financial vehicle with the explicit intention to create a positive impact and generate a financial return. Impact investors seek to move beyond “doing no harm,” and toward intentionally deploying capital in businesses and projects that can provide solutions to social and environmental problems. (MaRS Centre for Impact Investing and Purpose Capital, 2014, p. 94)

As Florman, Klingler-Vidra and Facada humorously point out:

Even archetypal profit-focused investment banks, including Goldman Sachs and Morgan Stanley, include ESG and impact activities in their business; […] The notion of the social impact of business has become so mainstream that government at the highest levels— including G8 leaders and even the Pope—advocate the creation of institutions to give greater attention to driving social impact. (Florman et al., 2016, pp. 2‒3).  

Alix and Baudet (2015, pp. 8‒13), for their part, explain that the arrival of these new players (international finance groups, commercial banks, American foundations and actors of the new philanthropy)[1], fervent supporters of the notion of impact investing, has the effect of shaking up the social sector because this type of investment requires financial intermediaries to be able to facilitate decision-making by comparing projects and companies on the basis of a financial return–social return–risk matrix.

The main lever of action of impact investors is the prospect of opening a new market, which pushes them to:

  • homogenize the demand for funding, create a standardized demand, therefore a homogenous set of social enterprise securities (impact measurement allowing to catalyze this nascent industry),
  • clarify decision-making: an investor should be able to apply the same methodologies as elsewhere. (Alix and Baudet, 2015, p. 9, our translation)

Considering its dual objective of financial and social return, one might think that impact investing is fueled by social impact measurement, a core part of its business model. As Mortier (2014)[2] and Morley (2016)[3] indicate, the discourses on impact investing in recent years do indeed act as a driving force in the development of concerns for social impact measurement and a wealth of experience can be identified.

However, in the 2010s, no method had yet managed to establish itself as a reference in this field. Emerson (2015), a pioneer in the field, goes even further, stating “the ‘metrics challenge’ is something of a myth […] it is the Big Foot of impact investing—widely known yet seldom seen”.

To verify these claims, Best and Harji specifically investigated the issue of social impact measurement practices among impact investors in Canada. Interviews with some 20 organizations active in this field, mostly located in Ontario, revealed the use of a wide range of methods: theory of change, GIIRS, IRIS, ESG Screens, SROI, CBA, Sustainable Livelihoods, and case studies (Best and Harji, 2013, pp. 10-11). The use of these methods, however, appears to be far from systematic. Indeed, at the time of writing these lines, impact measurement is still more at a stage of discourse than actual practice and most stakeholders interviewed agreed that it is an important issue (Best and Harji, 2013, p. 8), that there is little standardization or comparability in current strategies (Best and Harji, 2013, p. 12), and that one of the greatest challenges will be to reduce the costs associated with measurement (Best and Harji, 2013, p. 18).

According to Alix and Baudet (2015, pp. 11-16), among the initiatives mentioned in the previous paragraph, it was the Impact Reporting Investment Standards (IRIS) bank of indicators, developed by the Global Impact Investing Network (GIIN), and the Global Impact Investing Reporting Standards (GIIRS), promoted by B-Lab, that were becoming leaders the field of impact investment, respectively as reporting and rating tools, although other methods were also becoming increasingly popular (SROI, avoided social costs, Social Reporting Standard in Germany).

Starting in 2017, a large consortium of mainly UK- and US-based impact investment players have come together to put forward the Impact Management Project, a coherent and unified vision of what these organizations mean by impact and its measurement (Bridges Impact, 2017). Three years later, this initiative seems to have a major structuring effect on the sector and the list of organizations that are related in one way or another to these standards only keeps growing. This type of rapid changes in the field makes the endeavour of writing about impact investing from a historical perspective quite difficult.

These publications and initiatives are part of a movement supported not only by philanthropic and financial actors but also by several public policies put in place by governments looking to support them. For example, an international initiative on social impact investment was launched by the G8 in 2013, then chaired by the United Kingdom. The following year, a very optimistic report on the transformative potential of this field was published by the Social Impact Investment Taskforce (SIIT) (2014a). A report of the task force, which focuses specifically on impact measurement, complements this document by presenting the state of the art and the way forward (Social Impact Investment Taskforce (SIIT), 2014b).

The understanding of impact measurement of this taskforce is based on the impact evaluation literature, which itself draws on work in program evaluation, as notes (1) and (2) at the bottom of the diagram indicate.

Source: Social Impact Investment Taskforce (SIIT), 2014b, p. 6

In Canada, the federal government has launched in 2019 the Investment Readiness Program (IRP), a 2-year $50 million pilot program designed to help advance Social Innovation and Social Finance (SI/SF). This type of policy is the result of both increased interest at the international level, as described in this section, and local pressure (from organizations such as the MaRS Centre for Impact Investing and the McConnell Foundation) to advance this cause.

One might get the impression that Quebec is dragging its feet in this area. Nevertheless, the province is home to a few initiatives, such as Impak Finance, a new kind of bank created in 2016, which initially attempted to launch a cryptocurrency before reorienting its activities toward impact qualification, scoring and tracking services. More importantly, we should not conclude that Quebec is lagging behind in terms of funding in support of “impact initiatives.” Quite the contrary, an entire ecosystem known as solidarity finance (organized through Cap Finance) has been solidly in place for several decades and aims to support social economy enterprises. This underscores, to return to what was mentioned in the introduction, that there is not a single culture or history of social impact measurement but many. Although the one presented in the last few pages seems to be dominated by the worlds of philanthropy and Anglo-Saxon finance, it is important to consider other initiatives in order to better understand the diversity of the field.

[1] The external nature of these players has been documented, in the case of the United Kingdom, in an article titled “Elite networks and the rise of social impact reporting in the UK social sector”: “This study reveals that the growth of professionalism played an important role in driving change in the performance reporting practice of UK social enterprises. Yet, these new professional groups did not emerge within social enterprises, but in other communities and effected change from a distance. Interview evidence and data concerning the background and affiliations of individuals who are active within the social investment community points to an elite and highly connected affiliation network of SIFIs [Social investment finance intermediaries] and think tanks” (Morley, 2016, p. 36).

[2] “Une autre source d’inspiration, plus récente, provient du monde de la philanthropie, et plus particulièrement de la venture philanthropy et de l’impact investment. Ces acteurs, a priori proches des entreprises capitalistes, ont développé des méthodes en vue de classer les différents projets qui leur sont soumis avant d’éventuellement y investir ainsi que des outils pour rendre compte et améliorer l’impact social des entreprises sociales qu’ils décident de financer” (Mortier, 2014, p. 3).

[3] “It is the influence of professionals who populate a new niche community of ‘social investors’ and ‘social investment intermediaries’ that has led to the view of social impact reporting as a general norm of best practice. This group of investment professionals use the language of investment and advocate the use of economic-style social impact reporting, in part because of their prior professional and educational experience” (Morley, 2016, p. 2–3).