The Next Era of Impact Investing: InSight’s new report sheds light on balancing mission and margin

On the evening of Thursday, November 7^th, at the New York City World Economic Forum offices, Paula Goldman of Omidyar Network raised a glass to the Impact Investor project.  She invited the audience of over 75 fund managers, investors, philanthropists, and government representatives to toast with her, declaring it a moment of celebration for the impact investing industry.  “Capital sitting on the sidelines [of impact investing] has been searching for what success looks like,” she said.  Thursday night marked the end of that search.

Attendees were gathered that evening to discuss InSight’s newest report, Impact Investing 2.0 – The Way Forward: Insights from 12 Outstanding Funds, supported in large part by Omidyar Network and written in partnership with CASE at Duke University and ImpactAssets. The event featured a brief presentation of the findings from the research, followed by a longer panel discussion.  The panel consisted of fund managers from four of the 12 impact investing funds profiled in the report: Asad Mahmood of Deutsche Bank, Maya Chorengel of Elevar Equity, Tim Bubnack of Huntington Capital, and Gil Crawford of MicroVest.  Each spoke about how the report’s four key findings applied to their own work and the lessons they’ve learned from launching and deploying their funds.

The panel discussion with these four talented individuals was, unsurprisingly, the most engaging part of the evening.  One key takeaway from the conversation was the need for impact investors to balance financial discipline with social considerations.  We have found in our research that the most successful funds are those that have developed this balance, ensuring that investments are financially sound, but also meet impact objectives.  (For more detail on how exactly they achieve this precarious equilibrium, check out the “Mission First and Last” section of the report.)

Tim Bubnack talked about an instance when Huntington wavered in its financial discipline, investing in a company that employed many workers from low income areas and badly needed the capital infusion, but was led by a manager who proceeded to misuse company funds.  “That investment went sour,” Bubnack said.  “The owner did not share our values.”  He added that the lesson for other investors is to look closely at the culture of a company, and not to overlook any “red flags,” no matter how socially impactful the deal might be.

Maya Chorengel reiterated this point as she described her own experience getting swept up in a business’s potential impact, only to lose the investment when the company fell apart due to the entrepreneur’s lack of business management experience.  She also echoed Bubnack in emphasizing the importance of shared values between and investee and an investor. “Our heroes are our entrepreneurs,” she said.  “We share the same DNA, the same drive.”  But this shared mission is more than just a desire to have a positive impact: Elevar identifies entrepreneurs who also share their business sense.  “We have an eye for business models that can scale and become commercially viable,” she said.

But, as our research partner Jed Emerson of ImpactAssets pointed out, the impact investing sector has perhaps placed too high a premium on “hard skills,” or financial acumen, with the goal of establishing the field as a legitimate type of investment on par with mainstream investing.  Gil Crawford agreed, and made the case for the importance of “soft skills” in impact investing.  He observed, “Big institutions have focused too much on the selfish gene, when we as human beings are hardwired to be spiritual and cooperative.” Crawford argued that a keen awareness of social concerns is central to good management. “Good business and social considerations maximize value,” he said.  The MicroVest CEO, who has worked in the past for private banks, nonprofit institutions and charitable organizations, explained that there does not have to be a tradeoff between financial return and impact, but that there is rather a “sweet spot” where the two intersect.

Asad Mahmood of Deutsche Bank drove the point home.  He warned the audience about losing sight of social concerns in the pursuit of profits, saying, “Too much margin brings malice.” As the only panelist from a large institutional bank, he acknowledged Deutsche’s role in the global economic downturn.  “The reason the world is in the shape that it’s in,” he said, “is because our systems are broken.” That said, he also called on the audience to reject the “benevolent puffery we’ve seen in this sector,” and to go after investment with all the tools available to them.

The evening was filled with such insights from panel participants and audience members alike.  In addition to stirring up excitement for the new insights delivered in the research, the reception served to further the conversation about the state of impact investing. In a concluding statement that seemed to capture the tone of the entire evening, Chorengel observed, “Value creation can come from our values.  We could be, at some point in the future, a guiding light for all of capitalism.”   We at InSight certainly hope that our research can chart the course toward realizing that vision.

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