On Monday I had the chance to speak at the iiSummit on Impact Investing, organized by Kellogg and the Chicago Booth School. It is exciting to see the level of interest in impact investing growing everywhere (beyond the obvious hotbeds of New York, San Francisco, and Washington, DC). The goal of the conference was to explore how the tools of impact investing could be applied in the Midwest.
During one of the conference breaks, I had a conversation with a student who wanted my take on whether Bank Rakyat Indonesia, the Indonesian microfinance bank where I worked a decade ago, is an impact investor.
I was and continue to be stumped by the question, and I think the question sheds light on a worrisome trend in our space.
Let me explain.
What the question seemed to be about was whether BRI aims to have social impact, specifically because the interest rates are “high” (~25% p.a.); because it does collateralized lending (as opposed to group lending); and because, it was implied, BRI is highly profit-seeking.
My take on BRI is a little different: 25% p.a. interest rates are in line with global microfinance interest rates (so I have trouble arguing that they should be lower); limiting itself to collateralized lending does mean that BRI is likely serving the better-off segment of low-income customers, but these customers still clearly have a need for these services; and, at least when I was there, BRI had a 4:1 ratio of savings to lending – which is only possible because it is a regulated financial institution. Since I personally think that savings might be more powerful to the poor than lending as a tool to smooth consumption and have capital available for big expenditures (which is really what a lot of microlending is all about), I think this a really big deal. So, in sum, I’m a fan of BRI from what I saw when I worked there.
But I digress.
What the question got me thinking about was that, rather than asking, “Do you think that BRI is having significant, positive social impact?” the question was “Is BRI an impact investor?”
The implication seemed to be that “impact investing,” as the coolest, hottest trend in our space, is a proxy phrase for doing good work, a notion that was reinforced by the numerous speakers who qualified lots of worthwhile, not-so-new activities (negative screen, public market investing first pioneered by Domini; positive screen, public market investing best represented by Generation Investment Management; CRA lending everywhere; everything that OPIC has done for the last few decades) as “impact investing.”
Personally, I don’t care what is or is not “impact investing.” What I care about is whether we are creating positive social change.
Impact investing, to me, is nothing more and nothing less than the use of investment tools for social ends. Our collective “aha moment” was the realization that investors can strike a deal with sources of capital whereby social impact goals are made explicit. This allows investors (stewards of others’ capital) to pursue social goals without shirking their fiduciary responsibility to maximize profits. Volia, we have more tools (not just grants) that we can use to pursue social impact.
This is simple enough and hard to disagree with.
But from this perspective, I find myself discouraged by the “finance first” and “impact first” terminology that’s become popular in our space. It feels trite. Isn’t the whole point of “impact investing” the “impact” piece? Without that you have investing – which can create all sorts of impacts (positive and negative; financial and social). But either you set out to create positive social change or you don’t. The idea that you’d set out to create only a little positive social change…what exactly does that mean?
I don’t want to know whether you or I or anyone else is an impact investor. I want to know how much social impact you and I are creating with a dollar (or a euro, or a rupee, or a shilling, or whatever). Everything else, to me, is just old wine in new bottles.
I think the “impact first” vs.” finance first” dichotomy is useful for two reasons: 1) it helps distinguish the stakeholders in the space by making explicit the motivations behind their participation; and 2) by virtue of doing so, it helps maps the space by exposing the places where impact investing and “regular” investing overlap and diverge. I would guess that both are important from a sector-building, intermediation-facilitating point of view. But then again, as Debra Schwartz indicated in her remarks, those looking for the “bright lines” are likely to be disappointed.
Surely, defining impact investing by its ability to produce superior returns in terms of social impact is a compelling proposition. This is partly because a lot of what impact investing is (news to me until recently), is old wine in new bottles. Pushing boundaries should be the name of the game.
Thanks for this thoughtful post and for addressing this important question. Along the lines of the comment by Tayo Akinyemi, I agree in the value of better explaining, defining, perhaps even categorizing different types of impact investors but at the same time find the diversity of the sector elusive of neat labels and I’m happy that it is; in attempting to understand this space it’s important that we don’t categorize away the diversity and nuance of it.
In reference to the mention of interest rates in microfinance, I would recommend the data and educational materials at http://www.mftransparency.org. Full disclosure, I work for MicroFinance Transparency, and also think the information on our site adds an interesting dimension to this discussion.
Jordan thanks for this, I wasn’t aware of the site. Agree you guys are adding a great dimension to this discussion. Thanks!