mhoml

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Impact investing is only a good idea in specific circumstances

Hi there, I’m assuming this is written for everyday investor, but not as a critique to the whole sector?

I think some of the nuances and innovation in impact investing are overlooked in this article, though I would agree it is harder for everyday investors to tap into the sector (at least for now). However, I don’t think the solution is necessarily to just opt for donation:

(1) Simply by demanding more ethical or impact-led investment products, this will change the behaviours of fund managers and businesses. Already, there are more and more ethical products on offer, because millennials are more socially conscious. Of course, we don’t want to encourage “impact-washing” but that’s a whole different topic.

(2) There is no mention of innovative financial models used by the impact investing sector. An example is blended finance. As opposed to just giving out philanthropic donation, you can leverage that to draw out private capital. These are private capitals that would otherwise not be accessible, so I would argue this is additionality. Impact bond is another model, where you know for sure the investment is used to achieve the outcomes defined (i.e. no payment for investor if outcomes not achieved). If you were going to donate that money anyway, an impact bond gives you the chance of receiving a return + interest. If done right, impact investing can do good at scale where pure philanthropy cannot.

(3) I think a more subtle and contentious point is, by introducing market mechanism, you are forcing NGOs and social enterprises to step up their game. They need to have accountability, and are forced to be more resourceful. Effective charities stay, less effective ones die out.

Of course, impact investing is by no means a silver bullet. As of now, its financial models are more geared towards larger charities, so small/new charities would still rely primarily on donations. Philanthropy still plays an important role, but I would argue it is insufficient to solve problems at scale.