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As impact investing grows, it moves toward defining moment

Impact investing is in the midst of explosive growth as more investors look for ways to become involved. More investment capital flowing into impact investing strategies means more opportunities to make positive social and environmental change. Yet, while growth unlocks new and exciting possibilities, it also fuels long-lingering questions.

As the impact investing industry grows, there are, for example, calls for increased clarity around definitions. What is impact investing and what isn't? These questions become more commonplace as more people learn of our industry. The alphabet soup of related terms — ESG, SRI, MRI — encompasses hugely important practices, but might confuse newcomers seeking to integrate considerations of values and impact into their investing.

Those of us who believe in the potential of impact investing to drive social and environmental change want to make sure the term retains its value and that the industry does not lose its necessary focus while benefiting from much-needed growth. The impact investing industry is too important to the future of our world to fall victim to “definition creep.”

Still, it's early days in what is likely to be a multidecade process. Monitor Institute's 2009 “Investing for Social & Environmental Impact” report, which provided a blueprint that seeded the Global Impact Investing Network's agenda, predicted four stages in the evolution of the industry. First, disparate entrepreneurial investors start innovating independently. Second a marketplace takes shape as activity and infrastructure develop. Third, the value of the marketplace is captured and significant numbers of mainstream financiers enter. And the fourth is maturity, when activity reaches a steady state. Impact investing is already well into the second stage; the track records of early pioneers and data confirming the viability of impact investing are encouraging mainstream financial institutions, across all asset classes and regions, to enter the industry. We are on the cusp of transformational growth.

Still, for impact investing to retain its appeal and most importantly, its effectiveness, it has to have a strong identity and deep integrity. Social or environmental benefits must always be “baked” into the investment thesis and the positive effects must be specifically targeted and tracked.

On the industry's path to maturity, there will inevitably be people who want to jump on this exciting bandwagon by claiming the label of impact investing, and unintentionally or intentionally mislead their clients or themselves over what impact investing is. If anyone can affix the label of “impact investing” onto whatever they are doing, no matter how well intentioned, then impact investing will inevitably fall short of its full potential. Diluted activity will undermine the integrity that is core to what motivates many investors to get involved in the first place.

At the same time, if in our desire for complete clarity, we draw the circle too tight at this stage of the industry's evolution, we run the risk of strangling much-needed growth and innovation.

The Monitor Institute report cited “two types of peril” that could jeopardize the future of impact investing.

One was that impact investing would prove too hard, due to lack of enabling infrastructure, lack of deals of sufficient scale, or fragmentation, causing investors to give up too soon in finding their way. The other was that investing for impact would be too easy, that the meaning of impact could turn out to be so loose or so diluted as to be virtually meaningless, making impact investing more of a “feel good” than a “do good” exercise.

We need to be wary of both, and continue to work together to build a high-functioning industry that addresses challenges, untangles confusion, and ensures that neither “too hard” nor “too easy” inhibits the growth of this movement.

Innovation almost always goes through a messy period. While this might make purists uneasy and confuse newcomers, accommodating some gray area on the edges of impact investing during this growth phase might be in the best long-term interest of the field. We have a long way to go if we are to scale impact investing to match the scale of the social and environmental challenges facing our world; it is estimated, for example, that an additional $2.5 trillion-plus annually will be needed if we are to achieve the United Nations' Sustainable Development Goals by 2030. The GIIN has called on all investors to play a role in closing the gap.

Messiness can be uncomfortable. But it might be inevitable as we develop this powerful but complex instrument of change. Albert Einstein said, “I wouldn't give a nickel for the simplicity on this side of complexity, but I would give my life for the simplicity on the other side of complexity.” This quote resonates with me, as it speaks to how things appear really simple before you start asking the hard questions, at which point things get really messy and complex.

The complexity around impact investing has only increased since that 2009 Monitor Institute report. Today, I would argue, we are in the thick of things, in the complex and gritty part of figuring this all out. It is indeed messy, and, at times, frustrating.

Long-lingering questions persist and new ones arise, including:

  • How can we increase the efficiency of the industry to enable more capital to reach investment opportunities faster?

  • What are impact measurement and management practices and reporting practices that will ensure effective, results-driven deployment of capital?

  • How can we foster greater collaboration and mutual respect among those impact investors that require market rates of return and those that target important business models that might not be as profitable?

  • How can we accelerate the shift in how people think about the role of capital to ensure the scale of investment capital being used as a powerful global force for good matches the scale of the problems?

The GIIN, together with our network, will be digging into these and other questions, determined to trudge through the messiness of this stage to reach the simplicity on the other side. Given the current scale of urgent social and environmental issues that need to be tackled, the world cannot afford to let large amounts of capital remain on the sidelines. The stakes are too high to leave these questions unanswered.

Amit Bouri is the CEO of the Global Impact Investing Network, New York, a non-profit organization dedicated to increasing the scale and effectiveness of impact investing. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.

This article originally appeared in the February 20, 2017 print issue as, "As impact investing grows, it moves toward defining moment".