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In a recent article Diane Isenberg, founder and owner of Family Office Ceniarth investments, describes her intention to convert all Ceniarth’s investments to impact first investments. (1)  In doing so she is living up to a philosophy she and co-author Neil Neichin expressed in an article a year prior

those people who promise comfortable market-rate returns while solving global poverty are the equivalent of diet gurus promising that one can lose weight while eating limitless amounts of chocolate cake.

In my view Isenberg is naming an issue that is essential to how we understand impact investing. I am sure I am going further than she would in suggesting that there is a kind of unconscious market fundamentalism that has taken hold of large parts of the impact investing world.  I use the term fundamentalism quite intentionally.  It indicates:

i. A belief that the problems of poverty primarily affect those who “the market has left behind” (a term Isenberg herself uses) and that the solution to this market failure, is to take the markets to the poor.  This is obviously a huge task - described in a Rockefeller Foundation supported report as “the necessary next step towards filling the estimated $2.5 trillion funding gap needed to achieve the SDGs by 2030”. And

ii.            a belief that modern capitalism is so resourceful and meritorious that it can solve enormous global problems while making market related returns for its investors.   It is just a matter of convincing the capital markets that this is in fact true.

Many who lived through the birth of the impact investing movement, read with enthusiasm an article by Prahalad and Hart: “The Fortune at the Bottom of the Pyramid.” (Strategy and Business Q1 2002 ) The title, with a modern lens, is rather grotesque.  Very few people today would want to be trumpeting the virtue of making a fortune out of the poorest people in the world. 

Another interesting thing about the article (and a book of the same name) is that it suggests that it is the world’s largest corporations (in the days before Facebook, Alphabet and Amazon of course) that were the appropriate actors for this noble (and self-enriching) task – because they had the deep pockets, the infrastructure and the access that would make this ambitious goal possible.

In almost every other respect, the article reads remarkably like something out of the modern impact investors’ playbook.  It sings the praises of micro-finance and financial inclusion, talks about developing local supply chains using vendors rooted in the community, and value chains that benefit small farmers, emphasises the transformative potential of technology and points to the need for off-grid, distributed clean energy solutions.  (That was nearly seventeen years ago.)

Its almost as if Prahalad’s multinationals stepped off the stage, and impact investing has entered to fill the vacuum.  And to the fill the vacuum in capital, the key actors have sought to demonstrate “scalability” “profit with a purpose” and in the case of Michael Porter and many of the field’s most ardent supporters, the notion that there truly is commercial sense and synergy in addressing world poverty while improving the bottom line.  This is necessary, of course if the capital markets are to replace the multinationals as the source of funding.  In this narrative, impact investing is just another asset class, and there is no shortage of articles making exactly that claim.  

On the one hand, impact investing needs to show the capital markets that it is just like them, albeit with better intentions and a human face, otherwise the markets will not look kindly at this new kid on the block.  On the other hand, I would argue, this point of view was almost inevitably part of the DNA of this field of economic intervention.  Impact investing came of age in an era of near total dominance in the developed world of the view that “the markets” are all powerful, all knowing and without limits to what they could achieve if only states and politicians would get out of the way and focus on creating “investment friendly” climates. And the dominant sectors of that universe were the realms of investment banking and private equity.   It is hardly surprising then that the language and the practice of impact investing has been so thoroughly saturated by the financial discourse of the time that hardly anyone notices.

The Boards and investment committees of most investment funds are dominated by people with sometimes decades of experience in banks and private equity (PE) shops.   They are far more comfortable interrogating internal rates of return, portfolio financial performance, and a company’s return on net assets than they are interrogating either the social value of any particular investment, or the political and economic context in which they operate (except to the extent that this forms part of the “market analysis”). The standard structure and practice of many funds investing in the developing world have unquestioningly imitated the standard PE structure in both form and decision-making processes, which are in many ways hopelessly inappropriate for the markets in which they operate.

Anyone with experience in the field will know that in most investment funds, the greatest use of time, energy and resources goes into financial due diligence, negotiating the terms of the investment, making sure one is not screwed by co-investors, and getting the price exactly right at both investment and exit (why does it matter so much?).    This means in turn that the funds are staffed with investment professionals with exactly those skills, and they find themselves doing almost identical work to that which they did in the private financial sector, and which they left with the intention of contributing something more to humanity. And so serious and expert conversations and reflection about the mission of the fund, the changes it would like to see, the social and economic context in which the funds work, and the extent to which there is really a contribution to “addressing humanity’s most pressing issues” are far less common and accorded less weight than “running the numbers”.  This is not necessarily neglect – it more likely reflects the unconscious assumption that if the investments work as a business then the problems will be solved over time.

I have no desire to denigrate the people who work in the sector.  I have formed many close and respectful friendships with investment colleagues in different institutions, and I have always admired the rigour and passion that they bring to all aspects if their work, often having chosen to walk away from far more lucrative careers. Nor do I wish to tell Foundations or family offices or “responsible investors” how they should invest their money.

My concern is with exploring jointly ways to maximise the contribution that all this skill and money can make to really changing the world (which is what many ardent advocates claim to be doing).  The economists I quoted in last week’s blog pointed out that this change requires a fundamental restructuring of the global economy, to make it fairer and environmentally sustainable.

For the impact investing community to think through its contribution to this  ambitious goal, it needs to forego the image that it has consciously and unconsciously cultivated: - that it is just another industry (Rockefeller’s term) in the global economy, and it needs to forego the perspective that inequality and poverty are just a consequence of market failure, and the solution is more of the same, but done better.

(1) Isenberg D: Fighting Poverty and Remaining Rich: Impact  Alpha. August 20 2018