With the Right Mission, Impact Investing’s ‘Flaws’ Shrink
Impact Investing is a relatively young field. Having been conceptualized within the last decade — and having broken into the mainstream even more recently — there’s much about the practice that’s still up for discussion. Objections and the need for clarity are par for the course, even around the more theoretical elements of impact investing, to say nothing of its concrete application (a process still in its early years).
Needless to say, among practitioners and detractors alike, there’s plenty of room for a lively discussion. Assertions have been made that impact investing as a field is bad business, bad philanthropy, and even a bad mix of both. These are all complaints that, while certainly not toothless, can each be addressed in their own way with some simple clarifications. Impact investing needs improvement, but it certainly isn’t bunk altogether. What’s missing from most discussion of impact investing, especially of its pitfalls, is the how and why of incorporating affected communities into the business and the work.
Of note is Nathan Schneider’s article in America Magazine, wherein he talks about the pitfalls of private philanthropy in a broad sense. His core assertion, argued through the lens of Catholic philosophy (it is, after all, a Jesuit magazine), is that the generosity of private actors isn’t a sufficient driver of real, lasting social good. He takes specific aim at Mark Zuckerberg and wife Priscilla Chan’s relatively new LLC, the Chan Zuckerberg Initiative (CZI), for mixing supposedly dubious pretensions at helping people with a structure that forgoes “even the tax code’s spacious definition of philanthropy,” and “would remain chiefly accountable to profit-seeking investors.”
Noting CZI’s congruity and connection to the impact investing world is not a wholly original observation, but it’s certainly key here. The central dynamic is a very similar one, in which goals for positive impact are married with goals for positive returns. In itself, that concept is much too broad to dismiss outright, and Schneider stops short of going so far. Theoretically, impact investing’s focus on mutual benefit could produce a more lasting kind of good than a one-time act of charity, but the devil is in the details.
Schneider raises the issue of accountability, very importantly drawing attention to how there is little public input on what is essentially a project for public enrichment. “There is as yet little reason [that Zuckerberg] and his wife should be entrusted with the sway over our systems of health and public education that they are in the process of claiming,” he explains, terming the actions of Zuckerberg and many in his position “self-canonization and attempted do-gooding.”
Schneider’s moral incredulity here is commendable, and this is undoubtedly a pitfall of private philanthropy done wrong. There is always the risk of falling out of touch or otherwise losing sight of the spirit of a project’s goals in any philanthropic undertaking or impact investment. However, Schneider also manages to find a philosophical answer to his issues with CZI: democratization. He cites a number of tech startups that provide of models for expanding democratic control of various ventures, but as a core tenet he identifies the much more basic idea that making sure affected communities get a proper voice in decision-making is paramount. To Schneider, anything else as a starting point is on the wrong path. That is, in fact, the key component to a better kind mission-driven work. Empowerment and an increase in community vitality can only be assured by giving those affected as strong a voice in philanthropic work as possible.
That need for maintaining voices is also glaringly missing in impact investing’s negative appraisals from some in the more traditional investment world like Phil DeMuth. Several years ago DeMuth penned a dismissive op-ed for Forbes on the burgeoning field. His decision about impact investing is as negative as it is snide and disingenuous. His main contention is that impact investing is a business idea made of fluffy nothing, a fiscally ill-advised medium between philosophically pleasing charity and the lucrative world of traditional investment.
“It sounds like mush,” he says of impact investing, relying on Adam Smith to do his heavy lifting, “surely impact investing is precisely ‘affecting to trade for the public good.’ It’s not as easy as it sounds. Dollars send price signals. If you pay someone to dig a hole and pretend this is a job, you create a distortion in the economy. [But if] hole-diggers added utility, the economy already would have found employment for them with no extra push from people bent on doing good.”
DeMuth’s argument is simple: investments and enterprises cannot promote social good and still be profitable, or they would already exist. Of course, this view ignores the structural realities that have historically kept many interests from wielding the influence the market would otherwise have provided them. Markets don’t exist in a vacuum, and they aren’t immune to the structures of racism and sexism. There is no way to separate markets from the communities, cultures, and policy landscapes responsible for their existence. As cities across America very clearly illustrate, markets are in fact often the medium through which the issues and injustices already present in society make themselves tangible. In situations of unjust denial of resources and untapped potential for growth, corrective investment is usually a necessary step.
But DeMuth misses a point even more essential to impact investing (or rather, the smartest way to practice it). In the boldest statement of his oversight, he encourages his readers to “invest in companies to make money, not to feel virtuous,” as if investing is necessarily a choice between the two with no other factors involved. Considering his line of work — he’s an investment advisor, so lucrativity is all he needs to worry about — , it could be forgiven, if not totally empathized with, that DeMuth seemingly hasn’t thought of investment as something greater than a personal choice. The issue with his forceful dismissal of impact investing is that a broader mindset is exactly what’s required to make the practice work, nevermind the fact impact investments often outperform traditional investments.
What DeMuth’s approach to investment misses (or intentionally looks past) is the idea of economies as symbiotically connected to the communities that they have the power to affect. Only with that kind of sense of community and a commitment to input from affected populations can impact investments be grounded and contextualized in the ways that maximize positive results in society. Although to see it, one will need to look past strategizing to build their own wealth, which seems not to be something DeMuth and his crowd care much to do. However, there are many interested parties that don’t share his priorities, but do share his business sense, and their concerns about impact investing are compelling as well.
In perhaps the least moralistic and most measured objection to impact investing, Larry Kramer of the William and Flora Hewlett Foundation carefully breaks down why he believes impact investments are a poor choice for foundations. He explains that there are two different kinds of impact investments — concessionary (meaning they only promise below-market returns), and non-concessionary (meaning they are more lucrative) — with which he’s concerned, each carrying different expectations and desired outcomes. Ultimately, the concerns he raises for both concessionary and non-concessionary impact investments find their way back to the idea that the market for them is too crowded, and foundations ought not to waste precious resources on them.
“A large proportion of new and emerging philanthropists seem interested chiefly in market-based solutions and show little or no interest in supporting traditional nonprofits,” intones Kramer, questioning if it’s right for traditional foundations to muscle their way into the field, “there is considerably more money looking for concessionary impact investments than there are such investments.” On non-concessionary investments, his mood is equally incredulous. “We can expect ordinary investors to put resources into these precisely because they generate market returns, which makes foundation support unnecessary. Actually, make that inappropriate.” To say nothing of how dismissing impact investing offhand as ‘inappropriate’ squanders a huge opportunity to reaffirm foundations’ missions inside their untapped 95, there are shadows of something bigger. With Kramer’s argument there is again an oversight of that same, very necessary element to good impact investing. He has not factored in how a community-based mindset, rather than the macro-thinking of foundation dollars, can make some of the issues he raises moot.
It’s crucial to understand that while the market for impact investments generally could definitely be seen as oversaturated, the current landscape of firms doing mission-driven work is hardly a reflection of all communities in need of greater investment. Region by region, a deeper, more robust connection between communities and capital can lead to the right kind of investments being made, and it behooves foundations to become a part of such an ecosystem of virtue.
Many naysayers touch on valid misgivings, and some raise genuinely troubling issues with impact investing, but they all, similarly to impact investing’s proponents, seek to define the field categorically on their own terms. This is the step that must be separated from the others. The ideal kind of impact investing must be made distinct from the form built solely on the top-down dictates that Schneider shows concern about, the unserious fluff that DeMuth imagines, or the misguided money choices of which Kramer is wary.
In all of those instances, we find the answer lies in two things: purpose and people. This very necessary work has to be rooted in the communities it aims to serve, not the whims of disconnected do-gooding mega-rich or the ploys to stay marketable from the unconcerned. A community-based approach to impact investing has the potential to marry the positives of the business and philanthropy worlds, while eliminating the supposed drawbacks of diluting either one with the other.
