Who Pays for the ‘Social Impact’ in Impact Investing?
Mainstream impact investment models can reinforce inequality in the pursuit of social impact and market rate returns.
Impact investing has a business model problem.
There is no shortage of well-intentioned practitioners. However, who actually pays for the social impact in impact investing?
The current impact investing framework relies on wealth inequities in order to exist and we must re-examine the business model.
The traditional sources of impact capital — foundations and accredited investors seeking to “do well by doing good” — expect positive financial and social returns without regard for how their wealth has been created, multiplied, and contributes to growing income and wealth inequality. Two hundred fifty years of slavery, ninety years of Jim Crow, sixty years of separate but equal, and thirty-five years of racist housing policy have led to investment criteria and practices that inherently exclude and price out entrepreneurs and communities impact investors hope to support.
The capital intermediaries — who provide the pipeline of impact investments — are incentivized to make “safe” investments that will produce enough returns to sustain themselves and repay investors with market rate returns, all while reinforcing the narrative of doing well by doing good. This may help investors sleep at night, but it doesn’t change free market investing dynamics. I have witnessed high impact deals get passed over because they do not meet the criteria or the entrepreneurs simply cannot afford the higher cost of capital applied because they are considered high risk by traditional measures. Intermediaries that avoid “riskier deals” but maintain positive return records are rewarded with additional capital and resources, further reinforcing structural inequality.
Ultimately, the cost of impact is passed onto the entrepreneur. Entrepreneurs who have not historically benefited from systems of power, privilege, and wealth (such as friends and family funding, access to networks, secondary sources of income while bootstrapping growth), are expected to produce financial and impact returns at the same rate as entrepreneurs who have benefited from these privileges. It is the entrepreneur who spends her extra time to train and employ youth, hire and promote the formerly incarcerated, and create inclusionary workplaces that accommodate the challenges that low income, communities of color face. These heroic entrepreneurs do this while operating and growing undercapitalized businesses, and without compensation for the barriers faced when starting, scaling, and funding their businesses.
In order to break the cycle of inequity, we need to create new impact investment models that prioritize non-extractive venture capital that build equitable economies. We need to establish startup venture capital for entrepreneurs of color to test, fail, and succeed at solving big social problems. We need to apply a racial equity lens to the due diligence process and identify the ways in which investment policies exclude communities that historically lack access.
We need impact investors willing to fund impact innovation and be willing to accept lower returns as an investment in shared prosperity and equity.
What if we reframe giving back (i.e. concessionary returns, grant capital) as investments into social progress, and leverage the power of “free markets” to produce regenerative solutions that yield shared prosperity such as living wage jobs, social capital, and wealth creation in communities of color?
What would it take for impact investors to roll up their sleeves and truly partner with impactful entrepreneurs to enable their success rather than wait for deals to be “investment ready?”
What if we invested in community-driven impact investment solutions led by people of color, such as The Runway Project, Devlabs, or the Entrepreneur of Color Fund at ICA Fund Good Jobs?
What if we invest in and leverage emerging and non-traditional impact investment leaders such as the Integrated Capital Fellows at RSF Social Finance, who are grappling with these questions and proposing new solutions.
Let’s redefine profit as progress and calculate and capture the true cost of “impact” within impact investing.
Given the rise of impact investment into the mainstream, we have the opportunity to listen, iterate, and redefine traditional metrics of success. In the words of Morgan Simon in Real Impact, impact investors should “add more value than you extract.”
A true 21st century Gospel of Wealth would enable impact investments that level the playing field, put social returns ahead of financial returns, and result in economic prosperity for all.
