Unpacking the impact in impact investing

There has been an increasing realization that, along with philanthropy and government aid, private enterprise can contribute to solving social and environmental problems. At the same time, a growing number of investors are expressing a desire to “do good while doing well.”

These are impact investors, who seek opportunities for financial investments that produce significant social or environmental benefits. However, the rapid growth of the field of impact investing has been accompanied by questions about how to assess impact, as well as concerns about potentially unrealistic expectations that social impact and market-rate returns can be simultaneously achieved.

This article is addressed to impact investors who want to know whether their investments will actually contribute to achieving their social or environmental (hereafter, simply “social”) objectives. We introduce three basic parameters of impact: enterprise impact, investment impact, and nonmonetary impact. Enterprise impact is the social value of the goods, services, or other benefits provided by the investee enterprise. Investment impact is a particular investor’s financial contribution to the social value created by an enterprise. Nonmonetary impact reflects the various contributions, besides dollars, that investors, fund managers, and others may make to the enterprise’s social value.

The methods for assessing enterprise impact, which are relatively well understood if erratically applied in public policy and philanthropy, are no different in impact investing. The principal contribution of this article is in setting out the concepts of investment impact and nonmonetary impact. The most novel and intriguing question we consider is whether and when investors can expect both to receive risk-adjusted market-rate returns on their investments and to have real social or environmental impact: that is, can investors both make money and make a difference? Many impact investment funds claim their investors can. One recent study asserts that most of what it estimates to be a $4 billion impact investing market involves investments producing market rate returns.

Read the full story at the Stanford Social Innovation Review.