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The Pitch: Roadblocks in Making the Case for Impact Investing

By: Caitlin Reimers Brumme 16 Feb 2017
Professor Kash Rangan, who researches impact investing, helped to lead the on campus gathering.

Just over one week ago, a select group of twenty general partners of U.S-based impact investing funds gathered on campus to discuss and debate the challenges and opportunities facing them as a sector and as leaders. The participating funds represented a specific approach to impact investing - private investing to achieve market rate returns and high impact. Social Enterprise Initiative faculty members Shawn Cole, Kash Rangan, Michael Chu and Vikram Gandhi facilitated the multi-day discussion and were joined by fellow HBS faculty Bill Sahlman, Dutch Leonard, Josh Lerner and Andre Perold.

A fascinating conversation ensued. I thought I would share just two reflections from the provocative discussion:

Universally, the general partners spoke about the practice of investing for impact as central to their fund’s mission and strategy. In fact, many of the general partners specifically discussed how they believe competitive returns were not in spite of impact, but rather driven by impact. In the words of one participant, “impact creates a framework for both managing risk and increasing opportunity.” And yet, many funds (particularly newer funds), found the term “impact investing” to be a marketing hazard, not an asset, due to the association of impact investing with concessionary returns. As such, some of the funds in the room discussed their decisions to de-emphasize the term ”impact” when fundraising to avoid being presumed “concessionary” by definition. This type of decision proved symptomatic of an industry-level challenge.

Impact investing is defined by the Global Impact Investing Network (GIIN), as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments […] target a range of returns from below market to market rate.” Herein lies the challenge: a single term, “impact investing,” is used to describe distinct strategies that likely appeal to different types of investors. Participants in the room discussed the many ways this creates both strategic and tactical challenges – from fundraising, to sourcing, to exits. For the industry to grow and mature, the participating general partners agreed there is urgent need to segment and classify variations within impact investing (as has already occurred within the broader socially responsible investing sector). As HBS Professor Dutch Leonard urged the participants, this includes the hard work of defining what is in and what is out.

The other re-occurring theme throughout the conversation was that there is no substitute for the painstaking work it takes to build track record. Industry track record is comprised of individual track records, and fledgling funds and new managers have to start small and prove themselves. HBS professor Bill Sahlman reflected on the evolution of the VC industry – urging these fund managers not to be overly frustrated, but to stay focused on the opportunity, and on building and demonstrating their own success stories.

Investing for impact is a rapidly growing area of focus for our students, our alumni and our faculty. I am thrilled to have recently joined Harvard Business School to launch the Impact Collaboratory, an effort to deepen partnership with practitioners working at the vanguard of their field in order to advance important issues at the intersection of business and impact – impact investing is a critical piece of this work. I look forward to sharing more as our work unfolds.

Caitlin Reimers Brumme (MBA 2012) recently joined HBS to lead the new Impact Collaboratory.

Find out more about what’s happening at HBS in Impact Investing here.