Article
How finance can create social and environmental impact
By Vanina Farber
5 min.
September 2019
PRINTABLE PDF – Less than 1MB
Impact investment is a rapidly growing phenomenon that has sparked enthusiasm across a wide range of actors, including investors, policy-makers, entrepreneurs and citizens. Impact investments are an important element towards building a more inclusive capitalism that serves society better. Such investments also can enhance effectiveness and efficiency to tackle the ongoing global economic, social and ecological crises of our time.
Rather than run the risk of distorting market mechanisms through unsustainable charitable gifts, the unique and differentiating mission of impact investors is to build better, more competitive markets by investing in businesses with potentially large social benefits, such as better livelihoods and perspectives for underprivileged people or a reduced ecological footprint on our planet. Those socially beneficial goods and services—be they improved value chains, solar panels, seeds, or medicines—are, after all, the “purpose” of businesses. Impact investors also understand that profit is a condition—and result of—achieving purpose. Understanding this is critical to impact investors’ ability to leverage their scarce capital with that of traditional market-rate investors.
What characterizes “impact investing?
Coined in 2007 by the Rockefeller Foundation, the term “impact investing” was first used during an event to discuss the creation of a new global investment industry. This industry connects financial markets with the real economy by supporting organizations that create positive social and environmental benefits in addition to financial returns.
Despite ongoing discussion among practitioners and academics, two key elements are widely agreed upon: It must include intentional pre-determined social impact, combined with an analytical approach for impact measurement.
Another key aspect of impact investing is the concept of “additionality”. Two influential academics in the impact investing field – Brest and Born (2013) – argue that impact investing must improve a social or environmental outcome more than what would have otherwise occurred – a concept known as “additionality”.
The additionality principle encourages investors with scarce capital to concentrate their investments where it makes a difference.
The motivations of impact investors are varied: Philanthropic investors put impact first and may deliberately accept no or below-market financial returns, whereas for-profit impact investors seek to prioritize financial returns with a targeted social impact threshold.
What is philanthropic impact investment?
Philanthropic impact investment aims to create impact by supporting social enterprises building viable organizations and unlocking sustainable social innovations. Efforts to help new ventures navigate from a stage of proven start-up to early growth involves serious (i.e. multi-year) professional and personal commitments of key individuals and substantial resources (in the hundreds rather than the tens of thousands of USD often provided by traditional philanthropic gifts). Due to the many uncertainties combined with a lack of experience and resources at this early stage of enterprise development these commitments carry a high-risk profile.
Despite promises of an innovative business model to result in both financial success and social impact over the long term, a systematic expectation of positive financial return at this stage is simply not realistic: strategic and organizational viability is too uncertain, scale is too limited, and risk of failure is too high.
Importantly, philanthropic impact investment is distinct from charity since it provides resources with the goal of generating a cash-on-cash return, therefore “investment.” However, as it does not systematically lead to positive financial net returns within a reasonable time frame, this patient form of impact investment can be considered “philanthropic.”
A typical philanthropic impact investment size in terms of financial capital is between $USD 300,000-500,000. The risk of either complete failure or of middling performance without really taking off is substantial at this phase of enterprise development as the business is still volatile.
A philanthropic impact investment approach differs from what venture capitalists do since a clear, explicit and measurable impact goal is pursued, and capital follows more patient, longer term financial return expectations. It is also different from traditional philanthropic giving since a clear financial return expectation increases the focus on market solutions and hence a higher likelihood of longer-term sustainability.
What are the keys to successful impact investment?
- The business model should be sufficiently visible and allow for a ballpark estimation of the targeted social impact.
- There should be an element of bringing a non-traditional solution to market that unlocks social innovation.
- A medium term (3-5 years) path to economic sustainability must be plausibly articulated. This should capture the market potential and how future competitors affect growing revenue and gross margin projections. It also requires an analysis of both one-time investments and regular running cost that provide a plausible path to break-even within 3-5 years.
- Good ideas ultimately only become realized if combined with entrepreneurial energy and relevant skills: Therefore, the most critical criteria are the existence of either an individual entrepreneur or an entrepreneurial team that has the essential intrinsic entrepreneurial qualities and skills mix that are necessary to succeed.
Professor Vanina Farber is the elea Professor of social innovation and the director of elea Center for Social Innovation at IMD.
Research Fellow Patrick Reichert is a researcher at the elea Center for Social Innovation at IMD.
Peter Wuffli is the Chairman of IMD Foundation and Supervisory Boards and the founder of elea Foundation for Ethics in Globalization.
Read the full article here.
Contact
for additional information on IMD publications
Related topics
Social Innovation
Investment
Browse all topics
Center for Social Innovation
Related topics
Social Innovation
Investment
Browse all topics
Discover our latest research
IMD's faculty and research teams publish articles, case studies, books and reports on a wide range of topics
All articles
Keep reading
Article
Impact orientation and venture capital financing: The interplay of governmental, social impact and traditional venture capital
In addition to traditional venture capital (VC), governmental VC and social impact VC investors have emerged as alternatives to fund entrepreneuria...
Finance Venture Capital Social Innovation
By Valentina Lo Mele, Anita Quas, Patrick Reichert and Stefano Romito
in Finance Research Letters
October 2024, vol. 68, 105987, https://doi.org/10.1016/j.frl.2024.105987
Read more
Article
Civic wealth creation: Bypassing monopolies through collective action
The market power of monopolies can severely restrict citizens’ freedom of choice. In the case of utilities, often portrayed as natural monopolies, ...
Social Innovation Geopolitics
By G. Thomas Lumpkin, Eduardo Meléndez and Sophie Bacq
in Academy of Management Perspectives
May 2024, vol. 38, no. 2, https://doi.org/10.5465/amp.2022.0105
Read more
Case Study
Ikea Belgium Welcome Home Project: From ad hoc to deep social impact
The case describes IKEA’s new approach to making an impact through IKEA Belgium’s “Welcome Home Project,” dedicated to assisting single-parent fami...
Social Innovation Sustainability
By Sophie Bacq and Valerie Keller-Birrer
Case reference: IMD 7-2549, © 2024
Read more
Article
The lean impact start-up framework: Fueling innovation for positive societal change
How can innovative solutions to address societal grand challenges be cultivated in a pragmatic and impactful way? In this article, we propose the “...
Social Innovation Entrepreneurship
By Sophie Bacq and Stephanie Wang
in Journal of Management
5 April 2024, ePub before print, https://doi.org/10.1177/01492063241240713
Read more
Impact orientation and venture capital financing: The interplay of governmental, social impact and traditional venture capital
By Valentina Lo MeleAnita QuasPatrick ReichertandStefano Romito
inFinance Research LettersOctober 2024, vol. 68, 105987, https://doi.org/10.1016/j.frl.2024.105987
Summary
In addition to traditional venture capital (VC), governmental VC and social impact VC investors have emerged as alternatives to fund entrepreneuria...
Contact
for additional information on IMD publications
Related topics
Finance
Venture Capital
Social Innovation
Browse all topics
How to collaborate for systems change: Lessons from the world of giving
By Peter VogelandMalgorzata Smulowitz
inI by IMD19 August 2024
Summary
Philanthropic foundations are combining resources to tackle grand challenges and increase impact. Peter Vogel and Malgorzata Smulowitz explain how ...
Read more
Contact
for additional information on IMD publications
Related topics
Family Business
Social Innovation
Browse all topics
How the media should cast women in a positive light
By Shelley Zalis
inI by IMD
Summary
Accurate female representation in the media will have a transformative impact on the next generation of female leaders.
Read more
Contact
for additional information on IMD publications
Related topics
Diversity And Equity And Inclusion
Organizational Culture
Social Innovation
Browse all topics
From grease to green: Impact investing due diligence on ZhanaSolutions
By Vanina FarberandShih-Han Huang
Case reference:IMD-7-2518©2024
Summary
Fatbergs and grease waste from industrial kitchens are hardly the most enticing topics for a business school case study. Yet ZhanaSolutions, the st...
Read more
Reference IMD-7-2518
Copyright ©2024
Copyright owner IMD Copyright
Organization AlphaMundi, ZhanaSolutions
Industry Finance and Insurance, Investment Management;Services, Water Supply and Sanitary Services
Available Languages English
Contact
for additional information on IMD publications
Related topics
Social Innovation
Entrepreneurship
Finance
Sustainability
Browse all topics
Civic wealth creation: Bypassing monopolies through collective action
By G. Thomas LumpkinEduardo MeléndezandSophie Bacq
inAcademy of Management PerspectivesMay 2024, vol. 38, no. 2, https://doi.org/10.5465/amp.2022.0105
Summary
The market power of monopolies can severely restrict citizens’ freedom of choice. In the case of utilities, often portrayed as natural monopolies, ...
Contact
for additional information on IMD publications
Related topics
Social Innovation
Geopolitics
Browse all topics
Ikea Belgium Welcome Home Project: From ad hoc to deep social impact
By Sophie BacqandValerie Keller-Birrer
Case reference:IMD 7-2549©2024
Summary
The case describes IKEA’s new approach to making an impact through IKEA Belgium’s “Welcome Home Project,” dedicated to assisting single-parent families. The idea for the program came about during a cross-functional brainstorming session and initially involved donating funds and furniture to centers and shelters supporting such families. The project evolved to engage IKEA co-workers who volunteered their expertise during working hours to help set up housing and shelters. Another dimension was added as the initiative gained momentum and IKEA began collaborating with numerous social welfare organizations, collectively working towards policy changes intended to create a fairer and more supportive environment for single-parent families. While the program achieved remarkable results, the journey was not without its share of challenges. Transitioning from traditional donations to more innovative collaborative approaches required courage, and the team encountered resistance and skepticism along the way. Some of the social welfare organizations questioned the authenticity of IKEA’s motives, sometimes assuming economic self-interest instead of altruism. Collaboration with organizations that were so fundamentally different from IKEA required perseverance. Despite the enthusiasm of the IKEA co-workers who volunteered to support the social welfare organizations, internal communication efforts to raise awareness about the program proved to be an ongoing challenge. Recognizing the potential for international inspiration, IKEA considered sharing insights within its network. Simultaneously, the local team contemplated the next steps for IKEA Belgium, aware of the potential for further impact.
Reference IMD 7-2549
Copyright ©2024
Copyright owner IMD Copyright
Organization IKEA
Industry Consumer Goods, Furniture
Available Languages English
Contact
for additional information on IMD publications
Related topics
Social Innovation
Sustainability
Browse all topics
The lean impact start-up framework: Fueling innovation for positive societal change
By Sophie BacqandStephanie Wang
inJournal of Management5 April 2024, ePub before print, https://doi.org/10.1177/01492063241240713
Summary
How can innovative solutions to address societal grand challenges be cultivated in a pragmatic and impactful way? In this article, we propose the “...
Contact
for additional information on IMD publications
Related topics
Social Innovation
Entrepreneurship
Browse all topics
We are all activists
By Heather Cairns-Lee
inI by IMD29 March 2024
Summary
By changing our perspective from, ‘Someone should do something about this to ‘I’m going to do something about this’, we can all be activist leaders...
Read more
Contact
for additional information on IMD publications
Related topics
Leadership
Social Innovation
Browse all topics
The cooperative economy: A vision for tackling society’s grand challenges
By Katharina Lange
inI by IMD29 January 2024
Summary
A new book by Dovev Lavie, Professor at the Department of Management and Technology of Bocconi University, sets out an extraordinary plan to tackle...
Read more
Contact
for additional information on IMD publications
Related topics
Social Innovation
Strategy
Browse all topics
Six ways to grow Africa’s impact ecosystem
By Maryanne Ochola
inI by IMD
Summary
Economies in Africaare being transformed by targeted investment, but much more needs to be done.
Read more
Contact
for additional information on IMD publications
Related topics
Competitiveness
Entrepreneurship
Purpose
Social Innovation
Browse all topics