27th January 2016    4 minute read

Social Impact Investing: The Next Venture Capital For The Ethical Investor?

Social Impact Investing: The Next Venture Capital For The Ethical Investor?

NEVER MISS A STORY

Innovative approaches to address social and economic challenges are constantly introduced. With a general consensus that social and environmental issues should no longer be addressed by only philanthropic donations, and that market investments should focus exclusively on achieving financial returns; social impact investing (SII) has become increasingly relevant in today’s economic setting.

Concurrently, society is starting to demand that business leaders act more ethical and incorporate higher levels of corporate social responsibility at the companies they work for. While we can agree that ethics is a moral philosophy guided by the concept of right and wrong conduct, how this relates to business and the investment sphere in particular is still open to debate and constant examination. While poverty, homelessness, crime, and unemployment continues to plague even the wealthiest of nations; imagine, in addition to existing efforts, the effects of a shift towards a social morally conscious investment environment could have. People leverage trillions in private capital and bring the same level of focus and entrepreneurial dynamism prevalent in the private sector to meet the pressing needs for better schools, more job opportunities, improved public services and safer streets. Is this merely a fallible imagination or is this becoming a reality through social impact investing?

A growing alternative investment phenomenon

While impact investments have been prevalent in society for decades, only in recent years has a new collaborative international effort emerged to foster the development of a high-functioning market that supports impact investing. The Global Impact Investment Network (GIIN) researched the progress recognised by investors and rapid market growth is being achieved.

Parallels to the evolution of capital markets

The social impact investment market is in the early stages of development. The international initiative, led by the Social Impact Investment Taskforce, is raising awareness and clarifying the broader definition of social impact investing. However, for purposes of scoping and sizing the market, it is essential to work towards a precise common understanding of what is meant by social impact investing and agree upon a working definition to clarify what is included and what is not. This is important for policy makers, researchers and practitioners as well as for the overall development and integration of the market.

With this in mind, social impact investing has evolved over the past decade in part due to the growing interest by individual and institutional investors in tackling social issues at the local, national or global level. The recent financial crisis has added to the vast social and economic challenges facing countries across the globe and the demand for change in the financial sector. Governments are seeking more effective ways to address these growing challenges and recognize the parallels of the private sector models providing innovation and traditional capital markets meeting the demand for it.

As a result of the societal shift and a growing range of actors emerging in the social impact investment market, an ecosystem consisting of social ventures, intermediaries and investors committed to addressing social needs is forming. Government play a key role in this ecosystem, in terms of setting conditions for the enabling (or hindering) environment with inclusive (or exclusive) institutions as well as potential indirect or direct engagement in the market. Framework conditions, such as tax and regulation, significantly impact the social impact investment market due to the countless components of the social impact investment ecosystem and different channels through which social impact investing can take place.

Public Duty

With governments and the private sector already intertwining, it is the public sector that can have a catalytic role in the social impact investment market in terms of creating a conducive regulatory environment, encouraging greater transparency and taking concrete steps to help develop the market. There is a form of public urgency that has policy actions starting to address regulatory issues, notably in terms of setting up legal structures to accommodate market actors and enhance social impact investment supply. Despite significant progress investors agree that there are significant challenges the social impact investing sphere still has to overcome.

The social impact investment approach has the potential to provide new ways to more efficiently and effectively allocating public and private capital to address social and economic challenges. While such innovative approaches will not anytime soon replace the principal role of the public sector or the need for philanthropy, they can provide models for leveraging existing capital using market-based approaches with potential to have greater impact. However, given that social impact investment is a nascent field, concrete evidence is needed in terms of its impact to date. Simply stating that it incorporates an ideology of making the world a better place is not enough and further work is needed to demonstrate the gains from social impact investing compared to existing social service delivery models.

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    Beautiful article Mr. Winkelmolen! I think this concept is a beautiful one indeed! With that said, I am a full supporter of this initiative and I am anxious to see how it develops over the next few years. I also agree that even though a concept does have the best intentions at heart, we need concrete ways to analyze the impact. Otherwise, it is what I refer to as " Flaccid Rhetoric." Please keep writing ;) Sarah
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