2/13/14 – This guest post is written by current GSSE MBA Candidate Katie Bessert. Katie is starting an impact investing fund that focuses on the water industry.
“We all stand for something, and my bias is to do things that also promote the benefits of markets and incentive structures, and if we can align those, that’s the low-hanging fruit.” — Lloyd Blankfein, Goldman Sachs, CEO
Impact investing has been around for hundreds of years, but because the media has inundated us with images of glaciers disappearing, distended bellies on babies, and sewage-filled gutters we have been guided towards these popular causes in our charitable giving. Last year the U.S. alone donated roughly $316.28 million to charitable organizations. You know why? Because throwing money at things that make us sad makes us feel better, simple as that! After seeing Harry Styles or Charlize Theron tweet about a national disaster, we text in our $10 donations and feel like we made a difference. I hate to be the bearer of bad news, but, that’s not working.
So – what does work? There are currently 1,426 billionaires on the planet managing $5.4 trillion in assets. These people didn’t acquire this audacious amount of money because they blindly threw their earnings at things that made them “feel better”. There is sound and quantifiable reasoning behind their investments which include measuring risk, growth and opportunity. These practices need to cross over into the philanthropic world if any real change is to occur.
The good news is that this paradigm shift is beginning to happen. Organizations are now realizing that financial sustainability within a social or environmental business is imperative in order to have a real impact. With the growing popularity of micro-loan institutions like the Grameen Bank, people are becoming aware that individuals in developing nations are solutions unto themselves and not just the passive beneficiaries of celebrity endorsed charities. The big hitters like Goldman Sachs and Morgan Stanley are responding to this psychographic shift by offering, and engaging in, investments that promise positive social impact as well as financial returns. The World Bank has even gotten in on the game with a Development Marketplace which funds different social enterprises around the world. A company, no matter how good the intentions or how exquisitely idealistic the motivations, creates zero impact once bankrupt. A donation to an organization that delivers a glitzy solution – without engaging the community that it affects – disappears as soon as cameras are gone. After the twitter feed has died down, and the funding has dried up, more often than not all that remains is an inoperable water pump and a tax write off.
And yet there is another way!
Business can create change the way capitalism creates wealth. There are new analytical devices, like B Analytics, which uses proven metrics to evaluate businesses based on multiple impact variables. Impact returns can therefore be measured and reported alongside financial returns. There are also tools to mitigate potential risk, like the psychometric application from Entrepreneurial Finance Lab which evaluates high-potential, low-risk individuals and businesses and “measures credit risk without depending on business plans, credit history or collateral.” These tools make it possible to identify innovative local solutions that affectively address issues with the goal of financial sustainability.
If this notion seems a little farfetched, please refer to Aavishkaar India Micro Venture Capital Fund. Aavishkaar is one of the most successful impact investing firms in the world managing over $94 million in assets. They have managed to foster businesses with an intrinsically connected focus on commercial and developmental success while managing to deliver an average of 13% internal rate of return to investors. They have never accepted a grant and have grown every year since 2001.
What needs to happen now is for people to stop throwing their money at gimmicks like Jay-Z and his magical merry-go-round water pump. Instead, financial institutions need to get people on the ground in developing countries to measure attractive businesses that address social needs. Philanthropists need to reassume their roles as investors and realize that the same principles used to create their wealth should be used in evaluating lasting social impact. Financial returns and social benefits are not mutually exclusive and the sooner that we can shift away from donating money because Katy Perry told us to, toward investing money into the brilliant minds and practices of the people themselves, the better off we will be. The solution already exists, and she is out there waiting for your investment.