The Impact Investment Trap
Development organisations need to be careful to not throw good money after bad investments.
Since joining Engineers Without Borders Canada (EWB) in May, many discussions with my new colleagues have centered around the growing role of private sector impact investing, as a complementary approach to existing development efforts in emerging economies. The concept for EWB is relatively simple, in that, investments are made into promising local ventures, with the expectation of generating significant societal or environmental impact, alongside a modest financial return over time. The theory behind this approach, is that the value created, can be widely distributed in a much fairer and equitable manner, through social or environmental outcomes, rather than benefiting an exclusive minority by single mindedly delivering shareholder returns. Longer term, the positive outcomes are intended to indirectly spur opportunities beyond the initial investment, creating local economies that are self-perpetuating and more resilient to economic shocks.
On paper, impact investments present an exciting opportunity for development organisations who are looking for an investment approach, that combines the best of private enterprise and philanthropic development. However, managing financial and social-enviro returns, while all the time creating value for the customer, brings a greater level of complexity, than experienced by the typical development project. The competing goals of these three perspectives creates a natural tension, requiring a greater level of trade-off and compromise, especially considering the scarcity of resources available in a developing economy. In turn, it is natural for a socially conscious development investor, to trade-off financial viability indefinitely, to achieve its social-enviro objectives. When this happens, the fundamental philosophy of the impact investment is undermined, and the venture simply reverts to yet another development project, without the added economic benefits that impact investing brings.
Development organisations that involve themselves in the complex world of impact investing, must not lose sight of financial viability as a key outcome of the investment, that is equal in priority to the aforementioned social-enviro outcomes and value creation. They must maintain the same high level of financial discipline required by a for-profit business, and know when to pull the plug on an investment that has not, and will not perform in the near future. Refrains that impact investing necessitates a longer investment horizon are absolutely valid, but this must not be an excuse to prop-up perennial underperformers. Both the for-profit and development worlds provide many frameworks for creating strategy and managing performance, that can easily be modified and evolved to satisfy all competing tensions of impact investment ventures. In fact, a hybrid version of two of the most well known—the development Logic Model and Kaplan/Norton’s Strategy map—could provide a cross-over approach that is flexible, in order to bridge the gap between for-profit and development.
Over the next few months, I hope to find answers to these questions, and truly understand what is needed for development to fulfill its obligation to all of the spheres that it impacts.
EWB Long Term Fellow
Interested in Alex’s experience? Apply today for an EWB Fellowship, and gain valuable international leadership experience, while working towards long-lasting solutions for local communities.
Originally from Portsmouth in the United Kingdom, Alex Wise is a EWB Long Term Fellow working with Ignitia Ltd in Ghana. Alex graduated from the University of Surrey, UK with a Bachelors of Engineering in 2005 and went onto earn a Masters of Business Administration degree in 2013 from the Telfer School of Management, University of Ottawa, Canada. Alex worked for 10 years in resource based industries, first as an infrastructure integrity engineer, and most recently as Director of Corporate Strategy for a medium sized engineering company in Toronto, Canada. Alex has a keen interest in impact investing from an implementation perspective, and is currently working with Ignitia Ltd, an impact venture specializing in tropical weather forecasting, to scale and develop their business in West Africa.