The Challenge Today – Who is Doing What?
When we look at how critical problems in our world are being addressed today, it is clear that priority issues affecting humanity are not being solved as quickly or effectively as we would hope. There is no shortage of challenges to tackle: education, gender equality, energy access, clean water access, etc. Take the environmental sector as an example. From non-profit public awareness campaigns, academic pilot studies, corporations buying carbon credits and governments politicking over emission “rights”, each respective institution is separately undertaking their interpretation of how to approach this issue. But despite all the efforts, the world’s current environmental state is still an immense challenge.
Governments and non-profit organizations have traditionally been at the forefront of addressing our global development challenges. But an approach to utilize for-profit business models to create social benefit has also emerged. According to the Global Impact Investing Network (GIIN), Impact Investing is defined as:
Impact investments aim to solve social or environmental challenges while generating financial profit.
The mindset is that by harnessing corporate efficiency and innovation, development problems will be framed and addressed with smart and financially viable solutions. As the sphere of impact investing evolves, what are the implications of how profit and purpose will drive investments?
Is it Profit Driven Purpose?
A broad question when evaluating a for-profit model to create social benefit is how much investment motivation is driven by profit versus purpose? As a for-profit model, it is fair to assume that financial return is a substantial component on the decision of how to invest. This then leads to the issue of how market dynamics drive where investment dollars go. Certain sectors (e.g. clean energy) could be expected to have a larger potential financial upside compared to other sectors (e.g. panda conservation). Similarly, creating x amount of energy is a more definitive and concrete social measurement compared to potentially preventing y pandas from extinction. If certain sectors emerge over others given the benefit of their profit and attractiveness of their purpose measurement, then should there be a concern that those sectors are in the limelight receiving the majority of investment dollars and divert attention and money away from less profitable or socially concrete (but still important) sectors? Is there a concern of equity in a market based approach of allocating resources for social good?
Or Purpose Driven Profit?
Whilst financial return is certainly critical to investors, impact is also a concurrent factor in impact investing and it is reasonable to assume that investors also strive to create the maximum social impact they can with their investment dollars. Maximizing impact per dollar usually means that impact investors ideally would invest in funding an enterprise at its early stage, rather than invest in later stages of its development. Research has indicated that follow-on investments are related to lower returns.  But if all investors choose to invest only at the seed-stage, where will funding come from for investments to support other important (but less “sexy”) parts of the enterprise, e.g. growing the staff base? If everyone wants the glory of building ventures instead of seeking to keep and sustain them, social enterprises will face a huge challenge in scaling their operations to affect a larger audience and thus, are restricted in their social effect.
The Way Forward?
We have yet to see social enterprises reach the scale of creating a market to the extent of traditional corporations. But this hasn’t stopped entrepreneurs from building their ventures despite the risks including but not limited to: raising capital needs, operating on tight overheads, addressing a low income market, lack of impact measurement consistency, foreign geographies, restrictive regulatory issues, currency risk, distribution challenges and much more. Yet, it is often because of the nature of entrepreneurs as serial problem solvers that motivates meeting those challenges. As the sphere of social enterprises and impact investing develops, their financial and impact results will begin to shed light on whether using a for-profit business model could address our global challenges in a more effective way than is currently served by traditional non-profits, governments, academic institutions and corporations.