Impact investment is not the fairy tale many think it is. Here’s why.
By Hanna Ebeling, Chief Executive Officer
Although full of stories of courage and wicked problems, impact investment isn’t a fairy tale.
There’s no magical unicorn of high impact and high returns. No brave knight in shining armour to rescue every cohort in need of help.
The reality is impact investment is filled with diverse issues that take hard work, creative thinking and a test and learn mentality to solve. It’s about taking risks and trying new approaches, whether that’s in social finance, catalytic capital and venture philanthropy – or big-ticket size social infrastructure.
Ultimately, it’s about passion and people.
I worry that without acknowledging and paying attention to the human side of impact investing, we will perpetuate the capitalist mechanics that have created inequality and inequity in our world.
As a society we need to be constantly questioning, creating and innovating – always looking forward and asking, ‘what do we want the world to look like?’ This means shifting focus away from the number of deals and potential for scale, towards building resilience that will bring sustainable impact in the long term.
Yes, this may take longer. Yes, there may be trade-offs. But I believe this is where the beauty of impact investment lies. In the collaborations and partnerships. In the experimenting and taking risks. In finding new solutions to age-old problems.
I think Albert Einstein’s quote sums up impact investing perfectly:
“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”
In my role as Sefa's CEO – and over a decade in the sector – I’ve come across plenty of misconceptions about impact investing. It’s time to bust some of them, so we can create a more impactful sector – one that’s focused on the impact, rather than the profits.
Myth 1: Bigger is always better
Typically, I see a lot of focus and effort spent on scale – measuring the number of people impacted or how much money has been disbursed.
But it's not always about scale. It's also about the depth of impact. About going deeper and solving entrenched social issues – or focusing on a particular cohort in a particular place.
Often when we go deeper, investing in very small but targeted projects, we can create far-reaching ripple effects that impact the broader system, adjacent projects, partners and more.
For example, Tender Funerals is a social enterprise that helps people access a basic human right: being buried with dignity. Their offering is simple – affordable funerals. But what they’re really doing goes so much deeper. They’re changing people's mindsets and feelings about end of life and caring for loved ones, when they’re close to dying and after death.
Myth 2: Investment is the only measure of success
Social issues are diverse and require different tools and approaches. Focusing on the end game – what impact you want to achieve – influences what success looks like. And this may not be investment.
It may be building partnerships, changing social policies or closing your doors when a mission has been fulfilled. Success comes in many different forms and may not always involve capital.
Nightingale Housing develops sustainable homes that celebrate and support the wellbeing of diverse communities. While their socially, financially and environmentally sustainable apartments are in high demand, the organisation’s success goes far beyond investment. Its innovative model has put the pressure on commercial developers to change their approach and deliver homes that are also more sustainable, affordable and community focused.
Myth 3: You need impact precision to invest
The name ‘impact investing’ suggests you can have it all. Investors want specific impact that’s perfectly measured – and brings strong financial returns.
Often, they expect organisations to have a bulletproof framework from the start, with a clear blueprint for what the future will look like. Yet when it comes to commercial investments, investors don’t always set the same high bar of expectations for the ‘social licence’ of their investment. Why?
The reality is most organisations don’t have this kind of rigour from the start. What they do have is the drive, passion and resilience to experiment and create meaningful change. And that’s what social innovation is all about.
We need to give these organisations a break. We need to have empathy and compassion and allow them to test, learn and make incremental steps towards their goals.
Myth 4: Impact investment is too risky
As humans, we’re wired to be cautious of new things. But impact investment is not something to be feared, because contrary to common belief, it is not risky.
In Sefa’s 12 years, we’ve disbursed over $45million in capital, and only had one loan default. That’s because the organisations we invest in are driven by deep passion and a desire to create social change. They’re filled with intrinsic social resilience – things you can't see on a balance sheet and you won't find in a P&L.
Genuine impact investment takes a different approach.
For us at Sefa, getting to know our clients takes a little longer. But once we’ve deployed capital, we can see organisations revitalise and flourish. They move into places of social need, plant seeds and grow.
Investors simply need to look beyond the balance sheet and take time to get to know the organisation, its people and track record of resilience.
So go beyond the balance sheet and look at:
Leaders with heart and stamina
Creativity
Number of committed volunteers
Ability to live with uncertainty
Ability to build a plane while you’re flying it
Longevity
How an organisation handles challenges.
Myth 5: Impact investment is the holy grail for all
Impact investment is not always overly impactful or profitable. The diversity of wicked problems means we need a wide range of tools to help us solve different issues, even when they might be less scalable or financially sustainable at first impression.
There are four key mechanisms that we focus on at Sefa:
Social infrastructure – significant investments with a broad focus, these may include social housing, disability services or aged care where there is an opportunity to create scale.
Social finance – customised and bespoke finance that usually requires more patience and outside the box thinking.
Catalytic capital/blended finance – ‘uncommercial’ finance that could combine grants with repayable capital, this is often early-stage funding or for specific wicked social problems other mechanisms can’t support.
Venture philanthropy – philanthropy with an entrepreneurial lens, where repayments are social outcomes rather than money.
The risk we run with focusing solely on investment for social infrastructure is that it sets the bar too high for projects that require support through other mechanisms.
Here’s just one example of a deep local impact that could have been missed. Community organisation Blacktown Youth Services Association (BYSA) developed an innovative youth-led model to continue supporting disadvantaged and at-risk young people in Blacktown and Sydney’s Western suburbs. BYSA’s localised operations and limited resources made it too small to qualify for meaningful government funding. But with our help, along with investment from Vincent Fairfax Family Foundation and Paul Ramsay Foundation, the organisation is now heading for a sustainable future.
Towards a happily ever after
Impact investing has real potential to make meaningful change. But to move closer to a happy ending, we need to see beyond large, low-risk social infrastructure projects. We need to roll our sleeves up and get ready to be in it for the long haul. To take risks, try new things and ultimately remember why we’re doing this: to make lives better.
I will be talking more about the myths of impact investing at this year’s Impact Investment Summit – come and join the conversation at the conference.
If you are an investor interested in making real change happen, reach out to me at hanna.ebeling@socialenterprisefinance.com – or take a look at our impact stories here.
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