Impact Investing: the need for companies and governance to manage both bottom lines

A recent MSDF blog post examines the role of impact investing in financing lower margin businesses that generate significant social value but may be transitionally or permanently "non-commercial". We believe this is a critical issue that does not receive enough attention in discussions about impact investing. The financial characteristics of different types of initiatives are instead lumped under one broad, vague "impact investing" label rather than recognizing that some initiatives may not yield commercially attractive returns but are nonetheless essential in meeting the basic needs of the underserved.  

This topic is neglected in MFI board discussions as well, where we often see a disconnect between the MFI's stated objective or mission and what the board actually focuses on. We agree with a 2012 MSDF blog post that good governance is good governance. A MFI or any double bottom line (DBL) institution shouldn't in principle require any different governance approach than a conventional company:  the board's responsibilities are to make sure the company's objectives and strategy are clear, the right senior management is in place to undertake that strategy, and excessive risks are avoided or mitigated. 

In a DBL institution, one would expect a board to spend as much time on the social bottom line as on the financial bottom line.  But in fact, in our experience on MFI boards, that is not usually the case.  Often, the explanation is "the social bottom line is too hard or expensive to measure, so we'll just skip it and assume that an un-coerced purchase equals social benefit."  But it's hard to imagine a board accepting management's contention that market share is too hard to measure, so we'll just assume that so long as we're selling product, everything must be fine.

This neglect reflects in part the actual or presumed priorities of investors and board members and an overemphasis on the financial bottom line driven by the desire to draw in a broader range of investors over the past ten years. This effort has been quite successful, so this is a good time for a course correction:  rebalance the DBL, ensure different investors' objectives are aligned with the companies in which they invest, and direct capital to where it fits best and can do the most good. Grassroots' new "impact first" fund and governance work are doing just that by supporting "impact first" MFIs through fully aligned capital and targeted assistance to improve governance, metrics, and social programs and developing the pool of "impact first" investors.