Understanding Barriers to Impact Investing and Identifying Potential Solutions
It is important to barriers so that we can identify the opportunities we have to improve the impact investing ecosystem.
It is important to barriers so that we can identify the opportunities we have to improve the impact investing ecosystem.
By Jennifer Oertel, CMF Impact Investing Expert in Residence
In a previous blog post we discussed the importance of not letting the lack of a commonly agreed upon lexicon hold anyone back from engaging in impact investing. We then pondered whether it is acceptable for mission driven organizations to give away 5% of their assets toward charitable mission while 95% of their assets could actually be exacerbating the problems that their charitable efforts aim to solve. In this article, we offer a balanced perspective on some of the more common barriers (let’s call them “challenges”) to impact investing.
It is important to acknowledge these barriers so that we can better identify the opportunities we have to improve the impact investing ecosystem and to collaborate together around this important tool in the philanthropic toolbox.
Let us not forget that we also face many challenges in pursuing our charitable missions – but we have never let that stop us from trying
Lack of incentives. We are not incentivized to question the way things have always been done. In many cases organizations see more potential risk in proposing impact investing or doing a deal that doesn’t work out than in maintaining the comfort of the status quo.
Query whether this should be the case in philanthropy where we are supposed to be seeking the solutions to positive social and environmental change. And consider the flip side - many organizations have received tremendous positive attention from their impact investing activities. I have seen this attention lead to increased donations and clients, over and over again. And we know that with the great wealth shift, millennials and younger generations want to see more impact from their investment, charitable and even consumer dollars.
Too much information. It is overwhelming to sift through the plethora of opinions and information that’s been published. It’s hard to sift the wheat from the chaff, what to believe and what to take with a grain of salt, and very often we wind up in analysis paralysis.
Lack of examples. Although there is a plethora of information in the public domain, there still seems to be a disconnect in the amount of information available on putting that knowledge into practice. Some of this stems from the fact that impact investing questions centuries of common practice in which we only looked to the financial performance of our investment portfolio and not the potential harm of our investments – or the opportunity cost of not deploying our investment capital intentionally to help meet charitable mission.
Blending impact and finance creates confusion. Impact investing is a complex subject. On the one hand, we have socially minded people trying to understand the world of doing business deals; on the other, their board members and officers who may understand the business of granting may be more traditional in focusing on purely for-profit views when they think about investments.
Lack of a commonly agreed upon language. As highlighted in our previous blogs, we don’t think this should be a barrier. However, a lack of common language has led to confusion. For example, organizations reaching out for advice on an investment may be told, “That’s not really true impact investing…” because the person responding wants to sell them a proprietary product or doesn’t want to cut into their own profit margin.
Time constraints. I hear, especially from community foundation leaders, that they feel like learning about impact investing and trying to get their board on board to implement it feels like an additional full-time job.
Lack of role clarity. Because of the evolving nature of impact investing, many roles are not clearly defined or understood. In most cases, we have no credentials by which to choose experienced advisors. Someone knowledgeable in conducting due diligence may not be the person to lead your work in finding and negotiating impact deals, but often organizations are quick to want to outsource this work to anyone who seems to know more than they do.
Lack of understanding or erred professional guidance. The investment world is a bit of a mystery to most of us who aren’t seasoned investment professionals. This can also lead to an “either or” mentality – organizations thinking they have to choose between an investment in a fixed income bond fund and a direct investment in a local impact fund. It can add to the fear surrounding getting started. Further, we’ve witnessed investment advisors put the kibosh on their clients’ interests in impact investing. Lawyers who don’t understand it have done the same. Organizations need to keep in mind that they are the consumers of their advisors’ services – the power should be in their hands, not in the hands of their professional advisors. If your advisors tell you that you “can’t” do something, then you should seek another opinion – perhaps a different advisor.
Sacrificing returns.
Scaling. This challenge comes in many forms. Impact investments are often one-off transactions and very local. Scaling toward a big exit is not necessarily the top priority of entrepreneurs. Particularly in workforce development enterprises, scaling up the social support for the workforce can be more difficult than scaling up the business aspects.
Transaction Costs. In part due to the misunderstanding of impact investing on the part of professional advisors, and in part due to the unique nature of impact investments and the fact that participants aren’t necessarily familiar with doing deals, the costs of investment can add up.
All of these are surmountable. Please do not hesitate to call upon the Expert in Residence program at CMF for help.
In the meantime, I recommend viewing this TED talk on culture change and our current, extractive economy by Deborah Frieze of the Boston Impact Initiative.