The Seduction of Hype

Several years ago, I delivered a presentation on the risks to the emerging discipline of impact investing. Among these risks was the notion that a wave of hype might propel the discipline into the headlines, that major Wall Street firms would see a marketing opportunity (and an enticing opportunity to green-wash in the wake of the financial crisis), and that the resulting flow of capital would overwhelm the small number of viable, investable impact opportunities before the space had the time to organically develop absorptive capacity. I remember the good-natured chuckles that spread through the room as I outlined this potential scenario, and the general sense that those of us who have been working to grow and refine the discipline should be so lucky!

Fast forward to today. With headline-grabbing stories in nearly every major financial publication, most Wall Street firms announcing some version of an impact strategy/product roll-out, a growing community of impact investors confronting a small (but growing!) universe of viable, investable ideas and the reality that the expertise for managing a business with an impact lens of impact is hard to find (particularly in such uncertain times), I’d say that 3.5 out of four ain’t too bad. The only thing the discipline lacks right now – and I’ll go out on a limb here and say that this is actually a good thing – is a massive flow of capital.

On that missing flow (and recognizing that this is purely anecdotal and should in no way be considered a rigorous analysis of potential capital flows into impact investing), in the last few months I’ve spoken with:

– A large ($6bb) NY hedge fund that intends to convert its foundation to a 100% impact entity, wants to aggressively pursue PRI’s, is willing to embrace pioneer risk in frontier economies, and has asked for help in drafting an Investment Policy Statement that will cross-pollinate asset allocation with program activity to support the foundation’s mission.
– Three families, with combined assets approaching $1bb, who have fired their Wall Street advisor firms and intend to convert their conventional portfolios to 100% impact portfolios.
– A European royal family who has been engaged in impact investing on a very small scale for a few years and is considering putting their considerable resources behind several large impact initiatives.
– The promoter of a conference which has historically seen about 1,000 attendees, but which expects 12,000 (!!) this year.

Which brings me to the point of this post…

Our Seattle colleague, Kyle Mylius, forwarded me yesterday this report. In it, the author reasonably explores the notion that recent hype will undermine the emergence of impact investing.

(As an aside, we categorically reject his notion that impact investing is an asset class. it isn’t. Instead, investors should consider, and pursue, impact throughout a portfolio, and should do so only to the extent that doing so does not put at risk their personal sustainability. But that is the subject for another post…)

But more saliently, he points out the very important distinction between impact investing and impact giving. Although both focus on similar objectives, the mindset required to give money away responsibly vs. to invest responsibly are worlds apart. And no amount of language sharing (“venture philanthropy” is a great example) can completely close that gap.

Put simply, evaluating an enterprise for its ability to efficiently, effectively execute a social mission is a different skill set from evaluating an enterprise for its ability to achieve self-sustaining critical mass and return capital to investors. Both might rest upon similar impact fundamentals. But the former is the purview of philanthropy and can be used to create markets, launch unconventional business models, provide credit enhancement for start-ups in unproven sectors, etc. And the latter is the purview of investing, in which capital is deployed with the expectation that it will be returned, hopefully with some form of profit, in the future. Again, both can be evaluated with an impact lens, but the ultimate measures of success will, by definition, differ.