When Disagreement Is a Good Thing: Coming to Terms With Impact Investing

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Ask someone at TBLI 2013 for a definition of impact investing and you’re unlikely to get the same answer. Berry Kennedy listens to another part of the long conversation defining the impact investment field.

There must be “clarity between philanthropy, CSR and investing efforts. They are not all impact investments,” stressed Ximena Escobar de Nogales, head of social performance management at Bamboo Finance, an inclusive-finance private equity firm.

It was a bold opinion in a presentation to a room full philanthropists and corporate representatives who consider their work to be exactly that: impact investing. A bold statement, but not a surprising one: The stance is another variation on the debate mentioned in Friday’s blog about what exactly constitutes impact investing. In a way, TBLI is a conference full of people who are glad to see each other but are not quite sure what everyone is doing there.

“There is a little too much sniping at each other,” admitted Paul Sanford, chief investment officer at the private investment startup TriLinc. But this disagreement—and the process of figuring it out—is possibly the most valuable part of the conference.

Finding the boundaries of this rapidly evolving field raises questions that would rarely be heard at a traditional finance conference. For example, Patrice Schneider, chief strategy officer for the nonprofit Media Development Investment Fund, claimed the first fund’s high returns raised suspicions about the quality of the group’s impact. “When they saw our returns, they said, ‘You’re not an impact investor. You want a Ferrari,’” he said. As a result, he is targeting lower returns for his next fund.

Others take the opposite approach. “I don’t talk about impact until the very last two minutes. You talk about all sorts of things, then you talk about all the smiling faces,” said Oliver Hanke, CEO of the agroforestry investment firm Forest Finance Ltd. But while Forest Finance may talk finance first, it has its own alternative approach. “We’re not planning for an exit,” Hanke said. “A forestry project delivers over time.” The structure does allow for opportunities to sell early, but the target is for an investment of up to 25 years. It is a pretty radical idea, given the usual 10-year life of private equity funds.

Still others questioned whether the field they were there to discuss even exists. “The definition of impact investing is normal investment trying to claim a brand advantage,” said Guilio Franzinetti, who is on TBLI’s board of advisers. “Nobody takes a lower return to redeem yourself.” For Franzinetti, the term “impact investing” is just a new label for socially minded practices that have been around “since the Middle Ages.”

This lack of consensus on the nature of impact investing, and the terminology to define it, can disrupt communication between different players. “My advisers didn’t know what I was really wanting, or they didn’t want to hear,” private investor Karien Ter Muelen said. In her case, the problem again seems to come down to a definition of impact. “They think it’s impact investing,” she explained, talking about an African agroforestry investment she’s unhappy with. “I want more impact.”

For entrepreneurs, it can be hard to learn the field’s new vocabulary, especially those in emerging markets. “These standards are quite Western-dominated,” said Escobar de Nogales during a panel. She told the story of a female entrepreneur in Latin America who said she didn’t do “negative screens” on suppliers, when in fact the entrepreneur didn’t understand that negative screening was the work she did to ensure that her suppliers had fair labor practices.

Though there is debate, there is largely agreement that a consensus should be reached. “We need to make a case to the outside world,” said one audience participant. If people unfamiliar with the field “hear discourse…they’ve got other places they can put their money,” TriLinc’s Sanford agreed.

But the arguments themselves show a common desire for a new way of doing business that makes a substantial positive difference. The discussions at TBLI are just one small part of the shaping of a new industry. In the meantime, investors and the social sector alike have little choice but to become comfortable with ambiguity, waiting to see what emerges from the conversation.

Featured image source: flickr / itupictures under Creative Commons.

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