Impact investing: hype v substance, the importance of ownership and the role of aid

Oxfam’s Erinch Sahan tries to disentangle hype from substance and makes a pitch for a new approach to impact ErinchSahaninvesting.

Impact investment is the next black. It’s already worth about $46 billion, and rapidly growing. In 2010, when it was a mere $4 billion, JP Morgan predicted it would be between $400 billion to $1 trillion within a decade. Forbes has declared impact investing is going mainstream, and it’s certainly well on its way.

A big chunk of this money (70 per cent) goes to emerging/developing economies. While it’s still a fraction of global financial markets (estimated to be $210 trillion), this do-gooder money will soon dwarf aid flows, and might even suck up a good chunk of aid budgets.

Impact investing 3Impact investing channels money to companies, organisations or funds that have a positive social or environmental impact. What sets it apart from your ‘plain vanilla’ investment is that it requires (and measures) social and environmental impact, alongside a financial return. It is also different in that it accepts lower financial returns, so long as the investment does some social or environmental good. Its do-gooder nature combined with an expectation that it’ll give you a financial return means it’s growing in appeal among investors of all shapes and sizes.

A vision for nicer capitalism?

The size of impact investing is important but its symbolic power in shaping the economic narrative may be even more critical. Impact investing is seductive because it rides the promise of the entrepreneur. It feeds the narrative that business-people, not governments or NGOs, can heal the world. It takes the excitement of neo-liberalism (the entrepreneur as the hero) but sprinkles in enough good intentions to make it likeable. It doesn’t challenge the economic narrative, because the ethos of impact investing is that solving the world’s problems should be profitable. As explained by a prominent lawyer working on impact investing: “Increasingly, there has been the realisation that there does not need to be any trade-off between profit and purpose”. Impact investing puts the entrepreneurial super-hero at the forefront of fixing all manner of problems.

There’s a lot I love about impact investing. It won’t channel investment into companies who slash rainforests, enslaveImpact Investing 2) workers or burn coal. It acknowledges that business is not a single entity, that there are different classes of businesses that are materially different, intrinsically better for the world. It accepts the difference between a solar-energy company vs a coal-burning utility, an organic rice producer vs a fertilizer-dependent mono-crop plantation, or a company specialising in providing services to smallholders vs a large-scale agribusiness that drives communities off their land. Critically, it acknowledges that social impact is possible when we compromise on financial return. This is all good stuff and is a step ahead of development practitioners who are just trying to get more business investment in developing countries, regardless of the broader cost.

Inclusive ownership and the DNA of a business

But here’s my quibble: ownership and governance of a business determines its DNA, driving who reaps the rewards when the business succeeds. Impact investing mostly twists itself in sophisticated knots trying to measure the impact of an enterprise, putting impact metrics at the heart of its decisions. But why not start with the DNA of the business, asking whether it’s structured to be really pro-poor? If you have a choice, why not opt for companies that, if successful, will spread prosperity the furthest and widest?

Employee-owned companies distribute wealth among their employees. Farmer-owned businesses bring profits back to farmers. Community-owned fishing enterprises mean communities get the benefits (and incidentally are more likely to lead to sustainable fisheries management). And the right governance mechanisms, for example those that

Mmmm, tasty impact
Mmmm, tasty impact

put workers  (e.g. in Germany) or farmers (e.g. Divine Chocolate) on the board, give workers and farmers a real say over the direction of the company, and how key stakeholders are treated. Impact investors sometimes do channel funds into enterprises with inclusive ownership models. But it isn’t the key hurdle on whether an investment can qualify as “impactful”. It should be.

What should donors do?

Donors are being seduced by impact investing, as they search for private-sector development programmes that can show results. While the concept isn’t particularly new, with IFIs and enterprise development programmes having invested into ‘impactful’ businesses in developing countries for years, the interest is growing. USAID, DFID/CDC, DFAT (can I not still call it AusAID?) and others appear intrigued with the possibilities. Want further proof on the perceived trend among donors? Just look at the direction of the large development consultancies (who are the real experts on their clients’ direction of travel). Firms like GRM, who have build their business around delivering bilateral donor programmes, are putting impact investing ’front and centre of their private sector related service offering’ to their clients. In my view, as donors go deeper into impact investing, they should in turn put inclusive ownership ‘front and centre’.

Businesses that are truly different in their ownership and governance do exist. Many such businesses are thriving. Employee-owned companies in the UK alone represent £30 billion in GDP. And according to Cass Business School, their sales grew 18-times faster during the economic downturn than those of their competitors. Inclusively owned and governed companies have greater productivity and innovation, through more motivated staff. The economic case for alternatives to shareholder-owned corporations stacks-up. Impact investing could justifiably decide to give these materially different kinds of enterprises a ‘leg-up’.

It’s not too late to shape the 100s of billions of dollars that will go toward impact investing over the coming decade, including from donors. It’s a young field that is still grappling with what it means for a business to have social impact. It can be shaped so it gives a different breed of businesses a ‘leg-up’. The aid world can help make this happen.

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11 Responses to “Impact investing: hype v substance, the importance of ownership and the role of aid”
  1. Hugo Sintes

    Thanks Erinch, a provocative piece, which is great for a blog. Some thoughts:
    – from oxfam perspective, i think one thing we see is need for different forms of finance to support enterprises, alongside investments, be it grants for capacity development, smart subsidies for early stage enterprises, guarantees or other forms of risk sharing
    – personally, I’m less keen on taking sides on ownership – we see private entrepreneurs who are exploitative, others who are committed to fair wages and prices who might have a talent to grow a business fast (eg Shekina in Rwanda which we support); and we see cooperatives with significant growth, others which stagnate despite significant support due to issues with governance, management, or market changes affecting their business model. On the other hand, it is clear that cooperatives are a very common enterprise structure particularly in agriculture and remote areas, where we operate, so they will always be a key part of our portfolio.
    – if ownership is not the key indicator, then one has to use others and we have to recognise here the huge efforts of the sector to calculate jobs, suppliers, etc many now segregating by gender. However, even with the best IRIS standards, there is always space for interpretation, and funds should probably be valued too for their efforts to reach particular segments (eg vs cherry picking), being transparent about costs and successes, or promoting particular innovative or transformative approaches. I think our EDP programme ticks some of those boxes.

  2. Erinch Sahan

    Hi Hugo, I’ve always been interested that Oxfam’s EDP programme has been more agnostic on ownership, albeit supporting cooperatives and farmer owned enterprises in many instances. When you do support local entrepreneurs (as opposed to farmer owned enterprises), how can you vet in a robust way and ensure good practices into the longer-term by the entrepreneur (beyond relying on the benevolence of the owner)? Practices like fair pricing and terms of trade for smallholders they source from? Or respect for labour rights for workers? I think this is captured by the broad term of governance, and I think Oxfam’s EDP programme is accumulating some useful insights on the governance side of the ownership-governance tandem I focus on in the blog.

  3. Hugo Sintes

    Assessing the interests and benevolence of the owner is very much part of the pre-investment process. We meet with the owner and its suppliers/other stakeholders to assess commitment. We have also put in conditions to our support, like a review of prices, and in some cases demand that a % of profits are shared more widely, or have even discussed opening the opportunity for farmers to join as shareholders. All our experiences are relatively new though, so don’t have enough evidence on what works, though normally take every case as individual as local context and opportunities vary. It’s also important to be able to monitor performance, and we have finalised relationships with private limited enterprises (as we have with cooperatives) when we were not satisfied with social performance (same applies to other areas). In any case, alongside our investments, Oxfam continues to build the capacity of farmers and women to be organised and increase their capacity so that they can opt out of the specific arrangement and supply chain, if that is required.

    Farmer organisation is an essential piece of our vision to build more equitable supply chains, but that doesn’t always mean farmer ownership of the enterprises. That could well be the case in many circumstances, but in other cases organised farmers can potentially sell through existing or new privately owned enterprises and still be organised to strengthen bargaining power, visibility vis-a-vis other private and public actors, etc. We are also not saying cooperatives cannot be entrepreneurial, we have many examples in the UK and abroad of many that are, but there is certainly a need to understand under which conditions cooperatives become effective businesses (we are launching so research on the matter soon), and be open to other actors which can play a key role in increasing opportunities for small holders, while providing fair terms.

  4. Erinch Sahan

    From the thought-leading website on impact investing in response to this blog post:

    Let A Thousand Flowers Bloom

    A thoughtful and fascinating piece has been published by Oxfam’s Erinch Sahan, in which he gently takes to task the impact investing industry for its ‘do-gooder’ profile.

    No doubt I am biased but his emphasis on the importance of how a company’s ownership is structured seems to me to be slightly beside the point. He writes that impact investing’s “do-gooder nature combined with an expectation that it’ll give you a financial return means it’s growing in appeal among investors of all shapes and sizes.” Absolutely correct.

    What he doesn’t appear to like is that impact investing gives a “vision for a nicer capitalism” and doesn’t really go to the heart of the matter.

    Sahan asks: “why not start with the DNA of the business, asking whether it’s structured to be really pro-poor? If you have a choice, why not opt for companies that, if successful, will spread prosperity the furthest and widest?” What he calls for is a switch of funding into more employee-owned businesses. That’s an Aunt Sally if ever I saw one. Yes, of course employee-owned companies that aim at making a beneficial social impact need and deserve funding.

    But that’s not in contradiction to a wide spectrum of other companies – vast and small – that are trying to do the right thing and are interested in attracting investors who are persuaded of the morality and commercially-successful aspects of impact investing. Let a thousand flowers bloom.

    A final thought: who says that a nicer version of capitalism isn’t needed?

  5. Stefano Barazzetta

    Thanks to both Erinch and Hugo for the very interesting debate.
    As Investment Manager at an impact fund investing in SSA and India, I’ll give you my two cents.

    I agree with you Enrinch when you write that in the sector there’s the tendency at putting “the entrepreneurial super-hero at the forefront of fixing all manner of problems.”
    But this is not much related with neo-liberalism in my opinion, but with accountability, and with simplicity in managing the relationship: it’s much easier to deal with an individual (or few partners), vs dealing with dozen of co-owners. It’s a simple matter of pragmatism (not very romantic, I agree).

    I also tend to share Hugo’s view about ownership: we are agnostic about it, and we try to focus on what’s – in our opinion – the best and most efficient way for the company (we mostly work with private limited enterprises) to deliver social and/or environmental impact, no matter the ownership.

    On the other hand, governance (as opposed to ownership) is very relevant in order to ensure that the company is actually delivering real impact: we usually require a board seat and/or we require veto rights on some specific issues (reserved matters) at contractual level, specifically targeting areas which are key for us (i.e. target customers, pricing, etc…).

    I am a bit in a hurry now but I’d be glad to discuss more about this,

    Stefano Barazzetta

  6. Alison Griffith

    Thanks Erinch for putting this out there. It’s a good blog that inspires people to jump in and comment. Let a thousand flowers bloom sounds attractive as long as resources (public and private) are directed to ensure the healthiest strongest flowers represent those who have been excluded. We’re exploring what impact investment can contribute to that. This blog from 2013 flags another concern and makes pitch for combining it with systemic transformation.
    We need to keep learning together, adjusting and challenging as we go.

  7. Glenn Cummings

    Hi Erinch,

    Just a quick thought on employee owned organisations. I think these work really effectively to further social aims of businesses and spread the wealth in smaller scale companies, but as they get bigger, an employee ownership scheme really only replaces one profit maximising group (shareholders) with another (employees).

    For example, I work for a social enterprise, we make stuff, sell it and reinvest profits in health promotion activities. We had a significant contract with a much larger, successful employee owned company. During negotiations and subsequent discussions it became clear that the company was determined to maximise its profits as it was for the best for the employees doing the negotiating and everyone on their side of the table. Our social enterprise isn’t employee owned, but has a benevolent membership ownership structure. Leaving a little bit in the deal for us would have had a wider, more positive affect in the community than the position we ended up in.

    Perhaps it was the negotiating power of the respective parties that contributed, but we weren’t treated particularly well during negotiations and ended up making a loss on the deal. Maybe it is sector related; I don’t know much about agriculture. But in our experience, ownership structure isn’t necessarily the best indicator of ‘good for society’.

    Interested in people’s experience from across sectors.


  8. Nicholas Colloff

    Sorry, Erinch, but two very practical problems with your proposal. First is deal flow. There is more impact labeled money available than suitable deals so to restrict that flow further by creating an ownership hurdle, at this stage of the industry, would mean an even greater dilution in the already ‘fuzzy’ concept of ‘impact’. The second has already been mentioned which is that employee ownership does not guarantee higher impact – better distribution of benefits within a particular structure (itself arguable) is only one aspect of the benefits of any particular enterprise (scale, negotiations with other enterprises, environmental commitment etc). In this last category, for example, compare M & S and John Lewis and arguably M&S outstrips JL – for example in the cotton value chain.

  9. Stefano Barazzetta

    @ Nicholas
    “There is more impact labeled money available than suitable deals so to restrict that flow further by creating an ownership hurdle, at this stage of the industry, would mean an even greater dilution in the already ‘fuzzy’ concept of ‘impact’.

    Very good point: I could not agree more.

  10. Rob Nash

    There is a lot of focus on increasing deal flow to meet the investor appetite. Of course there is a need for more investment and a desire to increase the flow of funds that are ‘impact-labelled’, and a need to have sufficient opportunities to establish and grow new funds.

    But isn’t there a real danger of replicating a common trap for new investment products and fashionable asset classes? The establishment and main-streaming of the product itself becomes the primary focus too quickly because that’s what generates buy-in and energy from the industry, comfort for asset owners and revenue for fund managers. But there may be a price in terms of diversity of approach and objectives.

    As others say, impact investment is a fuzzy concept. It is new and it feels pretty early in the day to be trying to be narrowly prioritising deal flow across the whole impact class over establishing more clearly what, if anything, is really distinctive about various approaches to impact investment in terms of their investable characteristics and social returns (direct and indirect).

    My concern is that that drive to greater volume and for impact investments in general is already in danger of prioritising the meeting the requirements and constraints of large investors in ways that might mean we fail to realise the opportunity of understanding more deeply the impact potential of various forms of business ownership, governance and strategy – as well as the potential of individual entrepreneurs or business viewed agnostically with regard to ownership structure. The drive to raise deal flow in investments will presumably create a landscape that is more receptive to the blooming of certain flowers, to some extent at the expense of less favoured varieties.

    In any case, it must surely be the case that the ownership model is not everything and nor is it nothing in relation to impact. In which case it seems as though it is worth spending more time and effort understanding the financial and social returns produced by different business models and continuing to ask whether existing investment approaches and investors are able to support them in sufficient diversity as well as volume. Is it possible that the drive to scale is better focused further down the line on more specific clusters of impact investments that are successful in more clearly identifiable ways.

  11. Erinch Sahan

    @Nicholas agree that employee-ownership isn’t a silver bullet, nor should it be the main hurdle for impact investing. But we shouldn’t be agnostic about the structures of enterprises that are promoted. All else being equal, an enterprise with more inclusive ownership structures is naturally more impactful, and we should be deliberate about leveraging that fact. Re deal flow, why not have a more honest grading of funds based on their inclusiveness of ownership and governance? Doesn’t mean you restrict the deal flow, you are just more honest about the distinctions within it. Re M&S vs JL/Waitrose – see below response to Glen.

    The ownership model doesn’t end the conversation of whether an enterprise is more impactful, but I’m baffled by why impact investing continues to be agnostic towards such a defining characteristic of an enterprise.

    @Glen I agree that employee-owned companies can also be profit maximisers, and are not automatically more likely to treat other stakeholders (such as suppliers) better. Which is why inclusive ownership must be accompanies by governance systems that incentivise the right behaviour towards all stakeholders.

    Overall, I can’t see why we would ignore the ownership structure of an enterprise – whether the argument is to ignore it to maximise deal flow, or because it doesn’t guarantee an enterprise doesn’t have other shortcomings.

    The debate has continued among the enterprise world within Oxfam, and one thread we’re exploring is how to leverage the drive/ambition of an entrepreneur (especially in the delicate early years of an enterprise) by letting them retain the carrot of ownership, whilst instilling triggers to make sure that with success comes greater redistribution of wealth to the extent possible (e.g. progressive share transfers to farmers up to a threshold, as the profits of the enterprise grow).

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