What are the key challenges and risks of social impact investing? (2024)

The Social Impact Bond (also referred to as Pay for Success) is another really interesting private-public partnership method of investing in innovative social change. Social Impact Bond investments aim to create real economic value through concrete social impact performance metrics. It's this concrete measurement of ROI that I find so interesting and replicable. Here is a simple explainer if you are interested in learning more: https://www.goldmansachs.com/insights/pages/social-impact-bonds.html

One thing I’ve found helpful to understand and differentiate social impact investing from traditional investing and philanthropy is by looking at the focus and outcomes. For philanthropy, the money goes one way, from the donors to the beneficiaries. For traditional investing, it’s bidirectional, from the investors into the projects that are serving the customers, and then back to the investors as profits. For social impact investing, a good portion of the money goes into uplifting the beneficiaries, as the end-goal is not to make hefty profits.

In my experience, social impact investing can help bridge the gap between philanthropy and traditional investing. When the World Bank classified Botswana middle-income, a lot of donors pulled out from the country to take their aid where it was needed most. Funding dried up, and most civil society organizations closed shop. With the right policies, social impact investing would have continued where philanthropy left off.On the upside, the recent COP28 saw specific agreements made that could be attractive to investors. So, this might be a good time for social impact investors to diversify their portfolios and invest in areas like climate-smart agriculture, energy, or infrastructure.

Some of my favorite early-stage social impact start-ups go through Accelerator programs like Echoing Green, Fledge, SeaChange, and others. You can sign up for their newsletters for cohort announcements; you'll learn about some of the most brilliant ideas ever conceived!

It used to be difficult to identify social impact opportunities. With the advent of technology, especially AI, things are changing. You can now use investment platforms leveraging AI to extract key metadata from social enterprises and civil society organizations like location, mission, activities, objectives, and funding needs.

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Just to add, the transaction cost and time taken to design the model and financial disbursem*nt are also high. Social Impact Investments also give limited flexibility to accommodate additional intervention activities during the course of implementation given that each activity is linked to cost. Additionally, the emphasis is more on outcome/s (usually achieved in limited timespan) with limited accountability towards process and output level results.

When pursuing social impact initiatives, the biggest risk is not achieving meaningful outcomes for stakeholders. This can happen if the right stakeholders aren't identified, and the impact falls short or is not measured at all. Often investors focus on ESG aspects of the portfolio and not working with the portfolio company to measure outcome To prevent this risk, it's important to focus on the right stakeholders and accurately assess the impact. Impact investors have a responsibility to work closely with investees to ensure they have a strong framework for measuring and managing impact, as well as learning from stakeholders about the true impact across five dimensions: WHO, WHAT, HOW MUCH, CONTRIBUTION, and IMPACT RISK.

One of the biggest challenges is to strike a balance between different expectations. Social impact investing straddles the world of profit-making and community development. If not addressed properly, there can be trade-offs and negative spillovers that might affect the relationship between the investors and investees. With philanthropy, the outcomes have to benefit the community and the environment. However, the profit-making element of social impact investing can benefit the community and not the environment, or vice versa. So, both parties—investors and investees — need to understand this before project implementation.

When advocating for the human rights of Indigenous peoples, we have called for the recognition of the communities as an integral stakeholder in their development. The community should be included in the decision-making process. The community should have a seat at the table when investors plan a social impact project, regardless of whether it’s for the benefit of the people. With the community owning the project and leading its implementation, the investors are protected in the event of conflicts arising from negative spillovers.