Adam Smith, the great Scottish economist and philosopher, famously described market forces as “an invisible hand” that seemed to drive businesses to deliver what society needs. The financial crash of 2008 highlighted that modern business, with its global scale and complexity, is less reliable than Smith’s 18th Century capitalism; sometimes the invisible hand can do serious damage to society and the planet. What is needed is an “invisible heart” to guide the invisible hand in the right direction.
Impact investing is an idea whose time has come. Tweet This Quote
For the past 14 months, I have been part of a task force established by British Prime minister David Cameron when he was president of the G8. The task force, which is chaired by British venture capitalist Sir Ronald Cohen, is made up of one private sector representative and one government official from eight countries (Britain, America, Canada, France, Germany, Italy, Japan and Australia) plus the European Union, plus me as ‘official report’. Its ambitious goal is to figure out how to catalyze a global market in “social impact investment” – a term which describes investment that sets out to achieve a financial return plus a measurable positive social or environmental impact.
We decided to title the report, which was published on Monday, “Impact Investment: the Invisible Heart of Markets”. You can read the report here. Hundreds of other people, including entrepreneurs, investors, lawyers, philanthropists, government officials and social sector executives, have been involved in writing an impressive accompanying series of national reports and special reports looking at issues such as how to measure impact and what role impact investment should play in a mainstream investment portfolio.
The task force report argues that impact investing is an idea whose time has come. Many other influential people think so, from the Pope to Larry Summers (the pope of economics). Along with the accompanying national and issue reports, it is full of practical proposals.
For me, four main themes, plus a challenge to us all, stand out as particularly important if we are to refocus business on activities that demonstrably make the world better.
Investment decisions should be made along three dimensions: risk, return and (social and environmental) impact. Tweet This Quote
The rise of impact organisations. Implementing the task force’s recommendations would potentially unleash billions of dollars in fresh investment in businesses and nonprofits that can demonstrate a clear social or environmental impact. The report highlights the promising recent growth in these kinds of organisations, including for-profit start-ups such as Revolution Foods and Warby Parker, big established firms such as Unilever (see a recent article here that I wrote on Unilever’s efforts, highlighting the potential opportunity and the challenges), as well as non-profits such as the Teach for America and One Acre Fund. The task force is encouraged by the rapid growth of B Corps and benefit companies that expressly enshrine a social purpose in their business model, though it notes that every country could do more to create legal structures that help entrepreneurs driven by social impact to get the job done.
Three-dimensional investing. Traditional investing has been two-dimensional, basing decisions on calculations of risk and return. The task force argues that in the 21st century, investment decisions should be made along three dimensions: risk, return and (social and environmental) impact. It argues that many pension funds, sovereign funds, charitable endowments etc wrongly believe that they are not allowed to factor impact into their decisions, so the task force sets out proposals to clarify laws governing investment to make it clear that impact should be part of the calculations of prudent investors. There are encouraging signs that big investment managers are starting to take impact investing seriously, and banks are offering wealthy investors impact opportunities. There also needs to be an effort to offer impact investment options to regular “retail” investors wanting to put some of their retirement savings to good work.
An impact measurement revolution. The better impact is measured, the more money will be invested in achieving it. The task force found that huge strides have been made in measuring impact, but that governments, business and non-profits need to make a concerted effort to transform the quality of data on impact, just as in the 1930s there was a similar effort to upgrade economic statistics and corporate financial accounting.
The better impact is measured, the more money will be invested in achieving it. Tweet This Quote
New markets for impact. The recent innovation of “social impact bonds”/”pay for success bonds” has highlighted a promising opportunity to guide the invisible hand by creating new markets for impact. Governments, philanthropists, businesses and consumers all have the opportunity to encourage businesses and non-profits to do the right thing by making it clear what impact they want and putting up money to pay for impact when it is delivered.
Join the impact movement. While the task force has lots of recommendations for policy makers, it also makes clear that this is something that needs to be driven forward by all of us, in our workplaces, in how we spend our money, invest our savings and give to charity, and in the demands we make on our governments. In short, the time has come for a mass impact investment movement to create the invisible heart of markets.
Are you in?