What Counts as Impact?

Giving Compass’ Take:

• Vineet Rai explores what impact investing is, and how it has the potential to fight economic inequality and empower the disenfranchised.

• How can funders focus on stakeholder interest in order to create impact? What does impact look like to you?

• Learn about three ways to engage in impact investing.

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At the turn of the century, some of us set out to find an alternate way to look at development. Capitalist principles had brought about steep economic growth; however, this had come with gaping economic disparity. We wanted to understand: could one tame capitalism and steer it to bring positive change in the lives of those who had hitherto been ignored in capitalist systems?

The quest for answers to these questions in India, USA, Europe, and Africa, led to the birth of impact investing.

Given that most investments, at first sight, make impact, it may seem that there is a significant similarity between a commercial investor and an impact investor. Both need to find entrepreneurs, evaluate business plans, help attract new talent and capital to scale, and back ideas or enterprises that take risks and generate returns.

The difference is that for the impact investor, it is imperative that the business passes the impact screen before even conducting diligence on its return potential, whilst for the conventional investor, maximising returns is the sole objective.

The other critical difference is that the impact investor is seeking a profitable solution to a complex social problem, most likely in a broken ecosystem.  A venture investor, on the other hand, is creating value by filling a ‘want’ gap in an evolved ecosystem to achieve a disproportionate return.

The impact investor’s role in creating impact is limited to the strategy of finding the most impactful idea and channelling capital to it. Hence, the right impact metrics for a fund to report would be its contribution in identifying the complex social problem; the number of entrepreneurs it supported to solve the problem; the governance and diversity it promoted; the initiatives the fund took to reach new or challenging geographies that do not usually attract commercial capital; the kind of commercial capital that was attracted by the fund; and the value added by it in furthering the thesis of impact.

Impact investing brings together different stakeholders—the limited partner, the impact investor, the entrepreneur, the community on the ground—to achieve a complex goal. All these stakeholders come from different cultural contexts and values, and one person’s definition of impact may not align with the other’s. For an impact investor, navigating these differences can be difficult but is paramount to create real on-ground impact.

Read the full article about what counts as impact by Vineet Rai at India Development Review.