The question every impact investor should aim to answer

The aim of Nesta Impact Investments is to scale high impact solutions addressing our target outcomes, and to make a financial return for our investors.  This double bottom line approach to investment is challenging.  The impact investment market is still a nascent market, and we still don’t really understand the interplay between risk, impact and financial returns in such investments.

Given our dual aim; one question which I seem to be asked quite often in the market is “are you finance first or impact first?” I find this polarised statement quite unhelpful in defining how we approach impact investment, aren’t all impact investors chasing a blend of both? Or else we wouldn’t be impact investors.  This view seems to take us back to the idea that organisations are either about making profit or about changing the world, and I thought the very idea of impact investment was trying to bring the two together.

A more important question, and one which we should aim to answer is “what is the trade-off between impact and financial returns?” Unsurprisingly no one quite knows the answer to this question yet, and we are probably a long way off.

One of the key factors hindering the development of the impact investment market is the lack of evidence to be able to demonstrate the spectrum of impact and financial returns that can be achieved through impact investing, and where the trade-offs lie.  Once we can evidence this and showcase examples of successes (and failures), then we will be in a position to attract more capital and highly skilled entrepreneurs to the sector.

The aim of the impact investment market over the next 5-10 years should be to start to demonstrate this.  It will take time – there is no short-cut for creating a track record.

The formation of venture capital in the 1960’s pioneered a new approach to funding innovations in the private sector.  At the time this was a bold move which required a new form of capital, a new way of doing business, and the backing of patient risk takers.   Venture capital went on to change the way we do business and the way we invest, and is behind some of the great innovations of our time: Google, Apple, Intel to name just a few.

The emergence of microfinance in the 1970’s pioneered an innovative approach to poverty alleviation through funding small scale enterprise in the world’s poorest regions.  Initially many saw it as a utopian idea.  Today microfinance is a recognised asset class estimated to be worth over $30bn and reaching over 200 million of the world’s poorest people globally.

Both of these markets took time to formulate successful practices that worked and that led to their success.  The Impact Investing market will get there by doing, learning, being patient and being transparent. 

Katie Mountain – June 2013