Monday, October 19, 2009

Does Social Investing’s Success Mean Impact? (I)

I have been meaning to write a short piece on social investing and impact and since this is going to be a longer text than in other entries, it will come in two installments.

It is interesting to compare the success that social investing has been enjoying, as an asset class and as a career path in particular, and the impact that companies that have received funding from those entities have actually had so far. As a result of last year’s financial meltdown, the creation of appropriate investment vehicles, and an increasing interest among many (young and old) in addressing social issues, the whole gamut of social investment funds have gotten a lot of attention lately. It is commonplace to hear that whatever their business models (returning money to investors or not, and if so, serving below-market, at-market, or above-market returns) funds find it pretty easy to raise capital these days.

Also, social investing in its hybrid form represents a very compelling value proposition for young professionals who want to do good and do well, as it supposedly constitutes the perfect combination of for-profit rigor and efficiency and social impact. I have seen first- hand how so many “Millennials” contemplating careers in business are almost magnetically drawn to that career option. And this is probably true also for a lot of us, even those with grey hair (yes, I know, how did that happen?), who have had hybrid careers and believe that market mechanisms can bring about social change when used appropriately.

However, the magnitude of the impact that those social venture funds have through the enterprises they support remains a question mark. Funds like Acumen, Root Capital, E+Co, or Verde Ventures take impact measurement very seriously. Since they mostly receive grant and/or subsidized money, their “raison d’être” is more about the impact they can show than about attractive returns they can serve. Those funds’ web sites certainly try to be informative on the subject. E+Co measures the impact of its clean tech investees by tracking 34 social, financial, and environmental indicators and has a very straightforward section on its web site showing numbers related to the three sets of indicators. Acumen Fund explains its BACO (for "best available charitable option") methodology on its web site but does not elaborate on its portfolios’ actual impact. In order to quantify its investments’ social impact, Acumen compares them to the universe of existing charitable options for that explicit social issue. Root Capital shows cumulative results on its web site (number of loans and borrowers, repayment rate, but also organic agriculture under cultivation or number of farmers reached).

Today social and environmental monitoring remains expensive and there are no cases that I know of where investees are the ones paying for that cost. Monitoring is expensive because of its frequency and complexity. Most funds have set up declarative monitoring processes whereby portfolio companies report on a series of indicators previously agreed upon with the funds. However, a couple of times a year, those funds have to send their staff or external consultants to check impact for themselves. Also, while social monitoring can be relatively straightforward if such indicators as number of jobs created or variation in income of families impacted are used, environmental evaluation is more complex and time-consuming. Thorough baseline studies presenting biodiversity health status of the area affected have to be carried out before relevant measures of what is expected to improve can be determined. Moreover, it is inherently difficult to isolate the impact on biodiversity health of actual actions undertaken by the companies involved as other factors may come into play.

Thus, social investment funds are up against a double pressure of having to raise grant money to pay for M&E (whatever money they make out of their investments is rarely enough to pay for the whole monitoring cost) and showing those funders and the rest of the world the social and environmental benefits generated by the enterprises they are backing.

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