It's Myth-Busting Time: Three Misconceptions About Impact Investing In the spirit of innovation, there has been a trend of organizations and businesses of all forms being re-branded as social enterprises, which tends to blur the lines for everyone. For greater clarity, it helps to categorize businesses by their relationship to profit generation.
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MYTH #1 Impact investing equals philanthropy
In the spirit of innovation, there has been a trend of organizations and businesses of all forms being re-branded as social enterprises, which tends to blur the lines for everyone. For greater clarity, it helps to categorize businesses by their relationship to profit generation:
- Impact-only organizations are NGOs and charities that are focused on impact, with all revenue coming from grants and donations.
- Impact-first organizations have commercial activities that generate revenue, but with all or a specified amount of the profits being reinvested in the organization or social cause.
- Socially-driven businesses have a double focus, generating profit for their shareholders and creating a positive social or environmental impact.
Impact investors generally invest in socially driven and impact-first businesses. Thus, while keeping the social impact in mind, we evaluate impact deals as businesses, and expect a return on investment.
MYTH #2 Impact investing offers below-market returns
To bust this myth, we turn to a report by Morgan Stanley which surveyed over 10,000 equity mutual funds from 2008–2015, showing that sustainable investing funds actually met or exceeded the median returns of traditional equity funds, and had lower volatility. The same study showed that 72% of the surveyed socially-driven businesses offered above average profitability. However, impact-first businesses, due to their focus on impact before profit, may offer investors lower financial returns. These lower returns should be offset by a higher Social Return On Investment (SROI), which maximizes the social impact the investor makes with his/her investment.
MYTH #3 Impact investors only contribute capital
Impact investors have an important role to play beyond providing capital. For example, they can lend their local expertise and networks to help the company scale. As impact investors are limited, they can help shop the deal to mainstream investors. As the company scales, impact shareholders can help to guard the company's social mission, advising the founders in the delicate balance between profit and mission.
