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In August 1994, barely months after South Africa’s first democratic election, President Nelson Mandela and George Soros met and agreed that the South African Government and The Open Society Institute (OSI) would co-finance and govern Nurcha, an institution intended to encourage, through guarantees, the banks to lend to small emerging black contractors.  These contractors were receiving contracts to build subsidized housing for the new government’s massive housing programme but could not raise project bridging finance from the banks.  I was privileged to be Nurcha’s founding CEO from 1995 to 2009.

The Government and OSI jointly funded Nurcha’s operating budget, and the OSI in addition created a $50 million dollar guarantee facility which could be drawn as we matched it with guarantees from other sources and then used to underwrite some of the risk banks would be taking in lending to these contractors.  This was nearly fifteen years before “impact investing” became a term in common use. Three hundred and fifty thousand houses later, Nurcha’s story, and its transition from guarantor to lender are worth a detailed exploration.  For this piece though I want to focus on one early guiding principle, given to us by Herb Sturz, one of two directors appointed by OSI.

When we were writing our first strategic plan and budget, Herb looked at an early draft and said to me: “you should be budgeting to lose some money”.   When I expressed my surprise, he said: “You are meant to be testing the limits of what we can get the banks to do.  If we are not willing to lose some money, what’s the point?”  After 14 years at Nurcha and a decade working for the Soros Economic Development Fund, it’s a question that I have come back to time and again, as the field of impact investing has established itself and grown into a confusing and diverse array of investment practices.

It came back to me, in capital letters recently, reading a report from the Rockefeller Foundation which claims to have coined the term “Impact Investing” at a conference in Bellagio in 2007.  I was struck by the opening sentence: “while impact investing has grown to an over $100 billion global industry, the scarce evidence of social and environmental returns of these investments poses a threat to the continued growth of the industry”. 

If all the elements of this statement are true, then it is clearly time for the “industry” to reflect on what it has set out to achieve over the past decade or more.  There is no better place to start than Herb Sturz’ question to me: “What’s the point?” which in this case translates into the question: what is impact investing for?

This is what some of the important actors say:

Rockefeller says it uses investments “to enable, accelerate and harness private capital markets in addressing the pressing social, economic and environmental challenges of our time.”   The Global Impact Investors Network uses almost identical language,  but talks of “the world’s most intractable problems” being solved by impact investors and the Grameen Foundation (an impact investor) has this succinct tagline on their website: “Breakthroughs to end poverty and hunger”.

These are ambitious statements of intent, and the question arises: if $100 billion has been deployed in pursuit of these goals, and there is little to show for it, what is to be done?

A completely understandable first response is “Let’s go find the evidence”.  Sturz’ “what’s the point?” question suggests a better place to begin.  Let’s start by asking whether the goal “solving the world’s most intractable problems” has been properly framed. 

One pointer may be found in a statement published in the Guardian on 16 July 2018 by 15 leading economists including 3 Nobel Prize winners under the heading “Buzzwords and tortuous impact studies won’t fix a broken aid system”.    They point out that hundreds of billions of dollars of aid have had less impact than hoped for, and that this has led donor agencies to an obsession with measuring effectiveness, which in turn focusses aid on specific projects (micro-interventions) where impact can be measured.  They point out firstly, that the impact of single interventions in communities is almost always unmeasurable, but much more importantly that the problems that exist cannot be addressed through a series of projects.    They argue that global poverty and inequality are rooted in unjust trade systems, massive tax avoidance by global corporations, public policies, labour exploitation and climate change.  Addressing these “requires changing the rules of the international economic system to make it more ecological and fairer for the world’s majority. It is time we devised interventions -and accountability tools – appropriate to this new frontier.”   

So, the statement suggests, aid not only ignores the structural roots of the problems it purports to address; it draws our attention away from them by focussing on local, specific, and often technical solutions.

This critique is equally, or even more apposite to the field of impact investing.  The essential premise of the “industry” is that there is a world of problems “out there” broadly defined by the SDGs, (poverty, disease, lack of infrastructure and services) and that a substantial part of the answer lies in extending market solutions to those who the “markets have left behind”. 

Because impact investing is defined as making investments in enterprises, the project focus that the economists warn about, is embedded in the nature of impact investing.  Whatever they say about themselves almost all impact investment funds are in fact making a limited number of difficult investments in enterprises that are generally unrelated, except that they may be in the same sector (financial services or the agricultural supply chain).  As the Rockefeller Foundation has identified, the link between these investments and solving the world’s most intractable problems is difficult to establish.

It’s a hard truth that Impact investors will have no more success changing the world one investment at time, than the aid agencies will have in solving global poverty one local “micro project” at a time.  And this remains true no matter how much energy (and money) is spent on defining theories of change, emphasising scalability or focussing on outcomes not outputs,  which are just some of the many, flourishing approaches that have diverted the major actors from the real question:  Are we addressing the right problems, which the prominent economists suggest are rooted in the structure of the global economic system.

I intend to explore these questions in more detail with a series of short articles over the next few months.  I will look critically at the whole idea of “profit with a purpose”, highlight the extent to which impact investing has been shaped by the dominant logic of global financial capital, and explore further the traps that are set by the need to demonstrate impact.

But the most important question to explore is that posed in the statement in the Guardian quoted above:  How do we devise interventions that “change the rules of the international economic system to make it more ecological and fairer for the world’s majority” and what role could the impact investment community play?  

Within this community there are vast resources and people of enormous good will and skills.  I am most of all interested in sparking a discussion of how these can be deployed differently to start creating a more socially just economic order.  Do that, and the “problems out there” will start to take care of themselves.   If this sounds hopelessly ambitious, it probably is.  Ask yourself whether it is more or less realistic than achieving the SDGs one impact investment at time.