What do we mean when we say we are looking for investments with impact?

Written by Jess Daggers, Interim Impact Director, Nesta

Back in 2011, when we first started making investments from our fund, our starting point was to look for scalable business models that created what we might call direct impact. That is, there is a direct point of contact between the product or service in question (the intervention) and the people it is intended to benefit (the beneficiaries, to use an imperfect but useful term). From our portfolio, Sumdog is a great example of direct impact: Sumdog provides a gamified online maths platform (the intervention), which is used by school children, whose maths skills hopefully improve as a result.

Having started with this approach, one thing that we have learned is that opportunities to make a difference don’t always fall easily into this basket, and that models with direct impact only make up a portion of the range of possible impact investment opportunities. There are plenty of other inspiring and exciting businesses that arguably create a positive impact, but it is indirect impact. We have made some investments that move in this direction. Arbor, one of our investees, provides a management information system (MIS) for schools. The MIS is used by teachers and administrators, which ultimately allows them to do a better job than they were before, which leads to a better education for the students at the school. This is an example of indirect impact — the ultimate beneficiaries, the students, only experience the impact because their teachers, thanks to Arbor, can change aspects of the way they do their jobs.

However, there are plenty of investment opportunities that are appealing to us where the impact is even more indirect or difficult to define. This blog puts forward some ideas for moving this conversation on a step.

Why does this matter?

For our team and for Nesta, we want to ensure we are making the most of the capital we have. We do not want to be too restrictive in our criteria for impact, such that we miss opportunities to make a huge, but less easily evidenced difference, but we also do not want to open the criteria so wide that anything counts.

The implications go far beyond Nesta: this is about the risk of ‘impact washing’. The broader impact investing industry is very aware of this risk. If we are not clear and precise about what we mean by ‘impact’ then this growing market will simply be bloated by people using the language but not putting anything substantial behind their claims.

The target diagram

Originally published at https://digitalagenda.io.