Impact Investing: Harnessing the Power of Business for Social Good

This article originally appeared in The Guardian.

Paula Goldman, Senior Director, Omidyar Network (@pdgoldman)

Impact investing is a way of investing with the implicit intention of generating positive social impact with a return on capital. It ends the old dichotomy, which saw business as simply a way to make profit, while social progress was best achieved through charity or aid.

Instead, impact investment sets out to harness the power of business to tackle social challenges – for example, by providing the funding to scale up great ideas like solar lanterns. Businesses that provide low-cost but innovative goods and services for the poor, such as solar lighting, can sometimes be seen as too risky by traditional investors. But risk-taking impact investors have given d.light – a leading US manufacturer and distributor of solar lanterns – the opportunity to prove its business case, transforming itself from a small-scale operation to a thriving global enterprise. D.light produces half a million solar lanterns every month. They are already providing safe and reliable lighting to over 20 million people worldwide and aim to increase this number five-fold by 2020.

D.light is just one of the many success stories that impact investing is producing across the world, in developed as well as developing countries.

It is why David Cameron hailed impact investing as “a great force for social change” and put it high on the agenda of the G8 summit, which the UK hosted last year. But we have only touched the surface of what can be achieved.

We are in the early days of an important shift, as Sir Ronald Cohen – ‘the father of social investment’ – has forecast, similar in impact to the rise of the modern venture capital industry fifty years ago. The rise of venture capital led to whole new types of investment models for entrepreneurs, helping to transform economies and boost prosperity. We are seeing start-ups and innovative products pop up around the world, not just in Silicon Valley and London, but in Nairobi, Delhi and Lagos.

We have a similar opportunity to now accelerate the impact investing industry on a global scale – to bring large financial resources to bear on some of the world’s most pressing problems. But to maximise this potential, those who work in philanthropy urgently need to look at what works, to share best practice and to identify the obstacles still standing in the way.

With this goal in mind, more than 300 investment professionals recently gathered in London from across the planet at a forum organised by the Global Impact Investing Network. They included senior figures from some of the world’s leading financial institutions, as well as representatives like me from philanthropic investment firms and foundations.

To be sure, there are many challenges ahead. Venture capital took decades to become truly viable and the impact investing industry will not mature overnight. To reach scale, impact investors will need to continue to take high risks on new business ideas and – just like venture capital – see lots of failures scattered among an emerging landscape of breakthrough successes.

Many valuable lessons have already been learned. For example, the first waves of impact investing tended to focus, understandably, on initiatives that would deliver the greatest financial and social returns. While this approach was undeniably instrumental in helping to make the case for impact investing, it meant that strategic investments elsewhere were overlooked. There is now a recognition of the particularly acute need for investment at the very earliest stages of innovation, which can then provide the foundation for the rapid emergence and scale-up of entire new commercially viable sectors. Similarly, an initial focus on supply-side efforts to mobilise and place capital overlooked the critical need to actively develop the capacity of initiatives to absorb and use capital effectively. Increasing focus on this issue has yielded a number of promising innovations – many of which are catalogued in a recent landmark report, Impact Investing 2.0, published by Duke University and ImpactAssets.

Today, it’s hard to imagine what our world would be like without the many innovations catalysed by venture capital, from the commercial internet to the mobile phone. Fifteen years from now, I believe we’ll say the same about impact investing. We’ll look back on a host of innovations benefitting millions of disadvantaged people – in education, in healthcare, and yes, in solar lighting—and will have a hard time remembering the day when people viewed charity and business as working towards opposite goals.