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Can investing drive social impact?

Professor Wenjue Knutsen explains what happens when private capital does public good. And expects a return
Deborah Aarts, Artsci’04
Can investing drive social impact?

What role can private investment play in addressing social problems? Should it be involved at all? They’re questions Wenjue Knutsen thinks about a lot. As an associate professor who studies nonprofits and social enterprises for both Smith and the School of Policy Studies at Queen’s, she’s noticed growing interest in “social impact investing”—directing private capital to public good, with the expectation of returns. In conversation with contributor Deborah Aarts, Knutsen explains how social impact investing works and why its promise of a “blended return” is gaining currency.

Deborah Aarts: What exactly is social impact investing and how does it work?

Wenjue Knutsen: Essentially, it is financing that provides funds or investments to social enterprises, which is a big umbrella term that refers to organizations that simultaneously pursue business and social impact activities. Some of these are non-profits that require income to achieve financial sustainability and independence; others are for-profit businesses that generate revenue from products or services that further a social mission, such as a company that sells organic fertilizer. What unites them is their focus on a double bottom line: the nature and extent of the investor’s returns often depends, at least in part, on the recipient organization’s ability to deliver on its social mandate.

What does this look like when put into practice?

Social impact investments can be led by pretty much any investment institution, from fund managers to financial institutions to family offices. A good example that comes to mind is in Brazil. In 2009, a group of socially-minded young entrepreneurs there started an organization called Vox Capital, with the promise of a “blended return.” They raised money for the fund from banks, private investors and families with similar values. They then made a series of 20 investments in startup social enterprises working to fundamentally change people’s lives through improving such things as health care, housing and education.

What makes this different from typical ethical investing funds can be seen through the nature of the returns. For example, a significant proportion of the fee that Vox draws is dependent on whether investees have reached measurable targets related to social impact. This shows social impact investing’s commitment to social causes. In comparison, the primary objective of ethical investing or socially responsible investing is still financial returns.

This sort of funding clearly fills a gap, but what’s really in it for investors?

It can be helpful to think of it in financial terms, but in a different way than you might think. Say you’re financially secure, with an annual budget set aside for doing good in the world. If you make a donation, that money is gone for you, aside from a small amount you’ll get back on your tax return; it’s a one-time, one-way transaction. But if, instead, you divert that money into a social impact investment fund that supports organizations doing social good, you stand to not only keep your principal but, hopefully, to make a return on it. Your money can therefore also be recycled and used repeatedly. You can help one group of people now and another in the future, and so on.

What is a reasonable return for investors working in the social impact space?

Research in the social impact investing space is still limited, so we don’t have aggregated data, but we can point to individual cases. For example, with Vox Capital in Brazil: a few years into operations, their goal for returns was the rate of inflation plus six per cent. They also suggested that, perhaps, a return of four per cent would be too low, but 20 per cent would be too high. It depends on what kind of organizations the investment is supporting. And, as with all investments, there’s a chance that the financial return will be zero.

Do you see interest in social impact investing growing?

Yes. Late last year, the Global Impact Investing Network estimated the size of the worldwide impact investing market to be US$1.164 trillion, the first time that figure has topped the US$1 trillion mark. It’s still not fully mainstream yet, but it’s playing a bigger role in our economy.

Why do you think that is?

There are several reasons, but three main ones come to mind. First, lots of people say our society’s going downwards. But I think our business world is definitely going upwards, at least in terms of developing conscientiousness related to social impact. You can’t find a big-name company that does not have a corporate social responsibility practice. That’s a big change.

Second, we’re moving to a place where blended values—mixing profit and social good—are becoming more and more common. People are looking for meaning in their life and in their work. Third, our society has a lot of unfulfilled gaps related to social issues. People are aging and we have higher demands related to our quality of life. That’s when social impact investing can try to take off some of the pressure.

You’ve also looked at social impact bonds (SIBs), in which investors fund agencies and non-profits to provide social services on behalf of governments. At first glance, this seems to be privatizing what should be a public responsibility. Is it really?

No, I don’t think so. SIBs are complicated, but I think of them as a way for investor groups to fund a pilot project for the government. These tend to be intervention or preventative services, like initiatives meant to prevent people from committing crimes or entering the foster-care system.

The investor group can fund a project, and if the agency providing services hits an established target—say, 22 out of 30-ish at-risk children in a preventative program stay with their mothers, as was the case with the Sweet Dreams initiative in Saskatchewan, the first SIB in Canada—the government will reimburse basically all the money that the private investor put forward, plus, usually, a percentage return. But if they don’t hit the target, that means the project doesn’t work—the pilot failed. The investor may be out of their money, but the government is not. In fact, it has just saved a lot more money by not implementing a program that doesn’t work broadly.

Let’s pretend I’m a hard-nosed Milton Friedman devotee who believes the only purpose of business is to make money. Why should I care about social impact investing?

Here’s what I’d say: What’s the purpose of your life? What’s the purpose of your business? Is it really just about wanting more money? Isn’t that getting boring? A lot of people get into social impact investing because they’re looking for meaning. And there are lots of ways you can make a social impact without you lifting a finger. All you need to do is put the money with somebody who will do the work for you.

Think about what you care about most in this world. Think of the social impact your investments could make towards that. You may be able to do a lot more with social impact investing than with traditional philanthropy. So I’d say: think cautiously, think carefully, but really think about it

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