What to Expect When Impact Investing (by Paul DiLeo)

This past Thursday, September 5, I attended a panel discussion on Impact Investing organized by CGAP in Paris.  Unfortunately, I arrived late, left early, and didn't catch all the discussion in French. With those caveats, though, I did find a few interesting themes in the discussion I did catch.

At various points during the discussion, the moderator posed questions that attendees could vote on using individual clickers that had been distributed.  In response to one question, 67% of participants either agreed or strongly agreed that “expectations for impact in impact investing are too high.”

While there was no opportunity for respondents to specify how exactly their expectations had been disappointed, one reasonable inference in light of critiques of recent years is that the ability of impact investing to achieve impact had been oversold and it was necessary for us to moderate our expectations with respect to possible impact on poverty, gender equality, and other social ills.

If correct, this conclusion would seem to raise an obvious question:  why would we not have high and indeed, rising expectations for impact investing?  In other businesses we expect continuous quality improvement.  Road builders need to build safer, more durable roads; appliance makers more efficient, useful appliances.  Why for a business where “impact” is the product do we seem to be lowering rather than continuously raising expectations?


In support of these diminishing ambitions, three arguments are usually trotted out, and they all made an appearance during Thursday’s discussion:  burden, cost and causality:

• Measuring and demonstrating impact is too distracting and burdensome and diverts management, staff and other resources.  But from what?  An impact business is presumably in business to generate impact.  So long as they can stay in business, what more pressing tasks does management have?  Perhaps more relevant from a management standpoint, if the product is impact one would expect practical – as distinct from academic – market research and data on how the product is being received and how well it achieves its purpose would be integral to the conduct of the business, rather than a superfluous and burdensome add-on.
• Closely related, it is claimed that credibly demonstrating impact is too costly and threatens to sink low margin businesses.  But in no other industry do we require each and every business to individually demonstrate that what they are doing is effective.  In conventional businesses, management does away with cubicles, mandates paperless offices, changes product design and adds or drops product features without in each and every case being expected to prove that they increase profitability.  Instead at best, management reads journals, consults the latest research, hires consultants and benefits from the experience of others rather than being expected to prove over and over that some result will follow some intervention.
• Causality cannot be conclusively demonstrated between microfinance and client benefit so we should limit our measurement efforts to outputs where a causal link can easily be demonstrated, like accounts opened, loans extended or the proportion of the “banked” population.  But there are many initiatives in business, public policy, and even science where causality is difficult to fully demonstrate and yet we reasonably consider substantive evidence that implies such causality even if imperfect.  Few argue that these imperfect indicators are so inadequate that all efforts should be halted until there is universally recognized and irrefutable proof that these interventions are solely responsible for the desired change.  Rather we do the best we can based on the available research and hope that we will keep learning and getting better.

We seem inclined to hold impact investing to a higher standard than conventional business, and so we are – unsurprisingly – disappointed when we “fail”.  Burden, cost and causality are widely considered compelling reasons to force a lowering of expectations and ambitions for impact. Randomized Control Trials (RCTs)’ inconclusive results on poverty reduction or women’s empowerment are taken as reasons to back away from poverty and gender and focus instead on reducing the unbanked population and increasing financial literacy.  Unquestionably these are worthy goals in many circumstances, but the primary advantage seems to be that they are easily measured and fit comfortably into prevailing theories of economic development and eliminate the need to deal with cost, burden or proof or progress on impact.

We at Grassroots feel it’s important to support those institutions that do the hard work to prioritize impact, even if the results cannot be conclusively demonstrated at this time.  While more conventional institutions have a major role to play, we believe such “Impact First” institutions that see impact as their product are uniquely positioned to engage the intractable social challenges we face, and we need to respond to their shortfalls and setbacks not by backing away but by improving our product design and delivery, marshaling the appropriate resources, and trying again.

by Paul DiLeo, Founder and Managing Partner of Grassroots Capital Management, PBC