The Impact Space — a spoonful of complexity at last.

Rethinking the impact continuum can change the way we perceive socially meaningful investments

by Marco Sebastianelli, Filippo Addarii, Fiorenza Lipparini (PlusValue)

How is impact investing any different from marketing techniques based on wrapping nice words and imagery around business as usual? This is a question we get asked frequently when we pitch our vision to all type of audiences, from policy makers to financial institutions, from managers and entrepreneurs to the cheap chats during flights and train rides. It is a simple question, but one which eludes simple answers.

At its very core it is all about having a positive impact, but there is more than just that. In fact, impact investing is often delimited by not only its positive social and environmental consequences, but also the fact that such consequences are both intentional and measurable — or as Mario Calderini (TIRESIA — University Polytechnic of Milan) summed up with his clever neologism, “intentionable”. As helpful as this definition may be in providing some starting reference points, though, it often leaves inexperienced publics with little more practical understanding of the topic and a vague taste of academicism in their mouths.

The Continuum

As it is often the case, also in the realm of impact investing classifying instances is an excellent companion to attempts at defining a topic more stringently. One of the most successful taxonomical efforts in the field of social finance is the impact continuum — or, as it is sometimes termed, impact spectrum: a comprehensive list (a straight line, in its common visual representation) of financial vehicles ordered according to their focus on social impact or profit. The impact continuum, pioneered by Bridges Ventures (one of the very first Private Equity impact Funds) through their Spectrum of Capital (see figure below), helps us putting into context the many instruments designed to fund social innovation which have emerged after the financial crisis took its toll on traditional welfare systems. At one end of the spectrum we find traditional finance, with its focus on monetary returns, while at the other we typically find all charitable funding schemes that do not imply any strictly financial return (see The Bridges Spectrum of Capital)

The Bridges Spectrum of Capital

Although the impact continuum has quickly gained traction and become a cornerstone of the analysis of the impact investing market, there is something to it that does not quite do justice to the debate surrounding the place of social innovation in our world. The problem here lies in the oversimplification of complex matters. With its linear representation, the traditional continuum essentially squeezes two factors — profit and impact — on a single dimensional space, a feat that might have more perilous consequences than one would intuitively imagine. From a cultural point of view, in fact, social finance often falls trap of the trade-off fallacy, which is the often-implicit argument stating that endeavours pursuing economic objectives will have to relinquish their social aspirations to some extent — and vice-versa. Not only this is ontologically incorrect, as proved by the soaring economic value of real estate properties that undergo processes of social upgrade and the broadening markets for goods produced according to high social and environmental standards, but also it should be our collective responsibility to disprove it.

Our version of the impact continuum, which we like to call the Impact Space, and which was introduced in this report on Social Impact Bonds and impact investing produced in collaboration with the Valle d’Aosta regional administration, takes a different approach and exposes all degrees of complexity inherent in the relationship between profit and social purpose. It does so by displaying the focus on financial returns and impact on separate axes, thus revealing a bidimensional space of classification. The result, we believe, stimulates a reflection around how social purpose can be profitable, and most importantly, how all business activities should generate value which is to some extent social. Moreover, it discreetly sheds a light on the trade-off fallacy by showing how unrelated impact and financial returns can be. This becomes apparent when looking at the disorderly positioning on the Impact Space of the different financial instruments, which would otherwise be all sitting precisely on top of the blue line connecting full focus on financial return and impact. And most importantly, it finds solace in the daily experience of a multitude of actors who took on the challenge of making social outcomes sustainable in a market economy.

The Impact Space

By choosing to present the profit and impact elements of financial vehicles separately, we deliberately increase the complexity of the traditional impact continuum: a burden which we are convinced is largely offset by its benefits. In particular through this revised interpretation the Impact Space will not limit its function to mere introductory and taxonomical tool — instead it will serve as the groundwork for a wide array of contingent considerations on the role and efficiency of impact investing in funding social innovation. A spoonful of complexity won’t hurt us after all.