It’s an old joke:
Question: how do you put an elephant in the fridge?
Answer: you open the fridge, you put the elephant inside, you close the fridge.
As part of our service to members, we advise on impact investing strategies. For us, impact investing is, basically, just investing. That means that your investment in any case shouldn’t have adverse effects on the people directly affected by it. That kind of thing should be socially frowned upon, or just illegal.
Your portfolio contains a company that pollutes the source that locals use for potable water? You don’t “offset” that by creating an “impact fund.” No, you cleanse your entire portfolio of such investments. Creating positive social outcomes with the capital you deploy should be the only option on the table.
Impact investing, if it makes sense to use the concept anymore at all, is always only part of a holistic strategy. Who you are as an investor, and what your impact on the world is, is best measured as sum total of all your for-profit investor activities, with all their externalities (philanthropy, lobbying, political campaign contributions, etc.) This is the thinking behind our Systemic Changemaker Score.
Insisting on seeing impact investing as the magic, all-solving market-based panacea, leaves one open to straightforward and serious criticism – think no standardized measurement, reinforcing the colonial power structures, pushing the discredited “doing well by doing good” mantra while ignoring the broader issue of social justice, etc.
The impact investing community would do well to acknowledge the criticism and propose arguments for a systemic role for impact investing in ways critics may have missed or misunderstood. This is not really happening. If anything, the impact investing crowd seems to be doubling down.
The Global Impact Investing Network (GIIN), one of the most prominent organizations in the field, recently proposed a Methodology for Standardizing and Comparing Impact Performance. The document is now open for consultation and public commenting. The draft version came out in November 2020.
As a piece of analytical thinking, the document looks excellent. The list of highly qualified contributors is long, the approach is very systematic and thought-through. The procedure is easy to follow and reads like the manual of a function in a coding tutorial. For example, when you look at impact results of an investment, you are to measure:
Just like in that elephant joke, the self-contained document makes perfect sense in one reality and none in another. Impact investing, when reduced to the notion of modeling and measurement at the micro, transactional level, becomes a matter of capturing the right data, a technocrat’s job really. This is strongly reminiscent of how we used to speak of microfinance a decade ago – doubting the Nobel Prize-winning approach was anathema; “fixing” the world was then just a matter of applying it consistently, tweaking along the way. Microfinance failed to produce meaningful change at the scale at which it’s needed.
The implied rationale that somehow impact (even real, and not magicked up through a fanciful methodology) at the transaction level trickles up to the systemic level automatically has been discredited by the example of microfinance and others, just as much as its trickle-down cousin. Turns out market-based solutions imposed by those holding all the chips are not enough. Social injustice remains. The power imbalance remains. Threats to democracy remain. Dangers for the climate remain. Policy that promotes women’s rights is enacted no more quickly.
GIIN’s methodology is not concerned about any of this, nor does it once mention the word “uncertainty.” For this, we need to look at another publication by the same institution, from September last year. Titled THE IMPACT INVESTING MARKET IN THE COVID-19 CONTEXT, the document for one mentions issues like power and justice and proposes how the impact investing community could address those.
There, however, serious problems with that publication as well. One is that it blatantly showcases examples from the organizations that sponsored it. Another is that the most poignant studies have little to do with impact investing at all – they are philanthropic in nature. A third objection is that the publication doesn’t stop to ask the question why impact investing hasn’t been contributing to justice all along, given what a panacea it is supposed to be. A final one is that it doesn’t for a second question who gets to decide what changes are needed to the investment approach, because the answer is clear – the investors themselves. If all you have is a hammer then everything looks like an opportunity for impact investors to do world-fixing.
The idea is not to bash impact investing, GIIN or anything else. People are beholden to their clients. GIIN’s KPI aren’t esoteric measurements of social change, the sentiments of social movements or the perceptions of fairness around the world. They live and die by the numbers of investors (=members) who buy the story that impact investing will save the world; their CEO clearly states that.
The League, for that matter, is in the exact same dynamic, but with a starkly different member base. If we proposed impact investing as the sole solution to the world’s problems to our members they would laugh in our face. This raises the bar, but gives one the pleasure of trying to crack the truly difficult questions of our time. Impact investors, too, should be asking themselves more difficult questions about how the world needs to change and what their role should be. Soon, those questions will be asked by their shareholders, clients and employees; bet your bottom dollar that impact investing won’t be an answer.
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