The impact investment industry is growing rapidly, a fact that many of us in the field celebrate. In 2010, J.P Morgan projected up to $1T in investment would be deployed this decade — which would make impact investing twice the size of official development aid to the world’s less develop countries (as defined by the United Nations), presuming historic levels of aid stayed constant since 2010. Many of us are starting to envision a day where we can drop the “impact” moniker and just assume that investments take into account social and environmental factors.
Can Impact Investing Avoid the Failures of Microfinance?
The impact investment industry is growing rapidly, a fact that many in the field celebrate. But is the right model being scaled? Impact investors can learn from the history of microfinance, an industry that was at a similar stage 15 years ago. In that case, scaling the industry through financial market adoption became the predominant preoccupation and ambition before the questions of “Does it actually work to reduce poverty, and under what circumstances does it work best?” were fully answered. For impact investing to avoid the same pitfalls, investors need to follow several principles: engage communities in the design, governance, and ownership of enterprises; ensure that those running institutions and structuring transactions, add more value than they extract; and balance risk and return between investors, entrepreneurs, and communities so that everyone benefits. Making sure that the impact investment industry follows these mechanisms may slow down growth, especially as it will require investment in infrastructure and deeper relationships with beneficiary communities. But a cautious approach may be warranted to achieve the social impact that the industry was created to achieve.