*Artigo originalmente publicado na Revista Financial Times Wealth
Impact investment has been defined as investing with the intention of generating positive social and/or environmental impact with the expectation of making financial returns. When I launched SITAWI ten years ago as a non-profit organisation in this field, that term did not exist. We started by focusing on the tremendous need for loans to non-profit businesses and social enterprises in Brazil, and we called the approach ‘Finance for Good’.
The original idea was to raise philanthropic dollars and turn them into investment dollars for the most deserving organisations. Our loans have varied over a wide range of enterprises, from working capital to provide day-care for vulnerable children in a favela, to convertible debt for a jobplacement agency powered by artificial intelligence for people with disabilities. As these organisations have paid us back, we have recycled the funds into new projects – currently, that ‘recycling factor’ stands at 4 and as long as we don’t do anything crazy, it tends to increase continuously.
SITAWI operates as a hybrid organisation. A non-profit side raises philanthropic funds and provides loans, investments and guarantees to non-profit and social enterprises. It also manages donor advised funds and is structuring Brazil’s first social impact bond. A for-profit side provides responsible investment advisory and research services.
To date, we have disbursed more than R$10 million (more than USD3 milllion) towards positive impact, through 50 organisations which have reached over 200,000 people. With several revenue lines – which include 10 per cent ‘royalty fees’ from the for-profit business – the non-profit side generates 73 per cent of its operating budget, with individuals and families donating the rest. That level of self-sustainability is important because it increases the leverage of contributions received: each R$1 donated for operations allows us to place R$5 for impact.
Given the definition of impact investment in the opening paragraph, we appear to have proved that there are opportunities to change the world and become (more) wealthy at the same time. Who would say no to baking a cake with such icing? But that is not enough of a recipe: the first ingredient of managing the challenge is to define and measure social impact and evaluate trade-offs between impact and returns.
At SITAWI, we use impact breadth, depth and risk to evaluate and monitor our loans and investments. The targets set by the UN’s Sustainable Development Goals offer an initial starting point, but there is no global consensus on what exactly impact is and how to measure it, so other investors will have their own strategies and measurement approaches.
However, there is a richer approach in determining how an impact investing strategy fits within an investor’s portfolio. Around the world, the hype focuses on investing for impact in startups – effectively providing venture capital. But there are opportunities to integrate impact considerations into every asset class. We can make direct loans or invest in microfinance funds. And when investing in public equities, we can see the opportunity to integrate environmental, social and governance considerations into our decision-making process. In that sense, all investment dollars can help to drive the impact agenda.
If the focus is expanded to include not only the investments themselves but the development of the field as a whole, we can create a second ingredient for our recipe, which I call Social Finance. This provides the ‘filling of the cake’ by using philanthropic capital to support the infrastructure needed for successful impact investing, such as intermediaries, accelerators, think-tanks, convening activities, and the like.
Finally, there is a third ingredient behind the success of our impact investment recipe, which is to look beyond the risk-return-impact relationships of the investments at the ‘base of the cake’. This is to determine the principles behind investment practices and the nature of the world they are creating. Do they foster or deter community engagement? How extractive are they? How is the risk balanced between investors, entrepreneurs, workers and the community? A group of investors are already thinking about such issues through the Transform Finance Investor Network (www.transformfinance.org).
While I believe that in a select few instances true alpha can be generated with our recipe, I am certain that, as a rule, you cannot have your cake and eat it too. If an investor is earning outsized or even market returns when solving a deep complex social issue, the issue was probably not that deep or complex. There is therefore no need to paint it as an impact investment, and there will be another part of the value chain which could use the extra return extracted by such an investor to create much more impact.
These finance considerations should be put into perspective, however, because they reflect only one aspect of who we are as individuals, as families and ultimately as a society. There are other levers which can build the world we want to leave to our grandchildren: the values ingrained in the companies we work in or invest in and get our returns from, the values of the products we consume, the values embedded in our philanthropy.
Investing is important – but reality is more nuanced, and dealing with it is more complex. Impact investors will not succeed by wasting money, but they also will not succeed by focusing only on money.