In Impact Investing 2.0, the authors profile twelve funds that work in different sectors and pursue different investment strategies and approaches to social impact. The paper outlines four key concepts in their analysis of how these funds have achieved success. One of these is “Mission first and last”, meaning the funds and investors are clear about the mission strategy at the time of investment, allowing them to apply financial discipline and focus on the financial return throughout the investment period, secure that the mission will be achieved because the strategy was defined at inception. Then at the end of the investment period the investors and fund managers can go back and see what impact was achieved.
In microfinance, we have seen that funds can achieve their financial goals while maintaining a dedicated focus on microfinance institutions (MFIs) serving low-income people, and we have seen positive “output” data – for example, more low-income people now have access to financial services than before and sometimes percentage of clients in lesser served rural communities and/or female clients has increased. But the industry still has work to do as far as the “outcome” data – are these people better off? This is a crucial question at this stage of the microfinance industry's development. MFIs have shown they can be commercially relevant and reach more people, but to determine whether clients are better off, MFIs and the funds investing in them need more than a mission strategy that is articulated at the time of the investment and is then revisited at the end. We agree with Paul Brest and Kelly Born's views in their thoughtful piece in the Stanford Social Innovation Review (SSIR) that “in business, as in philanthropy and all other spheres of life, people are more likely to achieve results that they intentionally seek.”
Dismissing the “financial first”/ “impact first” debate leaves management, board, and investors unprepared for myriad situations that will arise during the term of an investment in the normal course of business that require a decision between maximizing profits or maximizing positive benefit to the clients, such as:
- Entering new markets that are higher cost/ lower profit but enable expanded access to the target population;
- Taking advantage of market conditions to raise interest rates to enhance profitability at the expense of client income / asset growth;
- Supporting nascent products and programs like savings linkages or low balance savings accounts which may be marginally profitable within the medium term and provide social benefits even though the immediate or medium term profitability might be limited. Health and educational services often fall into this same high social value and limited financial return bucket.
Furthermore, measuring impact in itself is costly. Methods such as randomized controlled trials or econometric analysis that are typically used by social scientists to assess outcomes are expensive and time consuming; but even quicker, less rigorous approaches to market research like client surveys require resources to implement the studies and analyze the data. While some investors and companies don’t see the need for measuring non-financial performance, these data and analysis are invaluable to enable MFIs, their boards and investors to make difficult choices like those outlined above and better informed decisions regarding allocation of capital.
Grassroots’ new "Impact First” initiative will be first and foremost financially sustainable. Our investment strategy will apply the same level of financial discipline as profit-maximizing funds while also employing an explicit impact strategy and monitoring system from the fund's inception throughout the investment period. We won't assume that impact is a foregone conclusion just because it's been defined or even agreed at the onset. Just like with financial returns, to create the social impacts that are measurable and long-lived, social performance must also be actively managed and measured throughout the investment.
