Rethinking the rationales for decision-making by entrepreneurs and investors
Social Finance and Impact Investing are clearly hot topics. The media are full of them and the global impact investing market is growing dynamically. However, it is far from clear which different nuances the terms comprise and what types of investors make up this new investment market.
For this reason, several market studies are currently being conducted by national off-springs of the Global Steering Group for Impact Investment that came into live in 2015. Anecdotal evidence and preliminary data suggest impact investments happen where a balance between near-market financial returns and some social impact can be achieved under conditions of moderate to low risk. This is for example the case in renewable energy projects or in ‘tech for social good‘.
However, we see a mismatch in that impact investing is not meeting social entrepreneurship in all its facets. If impact investing is to have the transformative effects on society it proclaims, we need to find ways to channel it into fields ridden by persistent problems such as global supply chains suffering from human rights issues, homelessness, or inequalities and lack of empowerment for vulnerable groups.
We are evolving from an era of seeking competitive advantage and leaving your competitors behind to a golden age of collaboration…
In order to increase the social innovation and impact produce when impact investing meets social entrepreneurs we need to foster a mind shift on five different levels. The first two I discuss here, have to do with the need to revisit the rationales that guide investors’ and entrepreneurs’ decision-making.
1. Acknowledging complexity in impact measurement
Already back in 2016, it has been claimed that the next frontier in social impact measurement isn’t measurement at all. In fact, the large variety of measurement tools has been well documented in breadth and in depth, there is a sizeable industry of impact professionals who can assist organisations in assessing impact, and even extensive databases containing indicators for almost any type of intervention. The real challenge for those measuring impact is to take a step back and reflect on what guides their decisions. To make the most of impact measurement, it must stop being a one-off exercise performed to please a funder. Instead, it needs to become a continuous process that enables organisational learning and informs long-term investment decisions. In other words, the focus in the practice of impact measurement has to move from proving to improving.
For this to happen, social entrepreneurs must resist pressures from investors and other stakeholders to have impact information ready on the spot. Impact measurement needs to be done thoroughly, since nothing is as bad for decision-making as bad evidence. Gathering solid impact information should not be seen as a burden or cost factor, but an active investment into decreasing the risk that impact is not really happening. Thorough impact measurement takes time and deliberation, but once a proper system is in place tracking performance gets much easier, which benefits ventures and investors alike.
At the same time, investors are realising that they often cannot pin down impact properly, because they are still too focused on (social) returns on investment and neglect other types of impact indicators. Dashboard approaches that are used for assessing social progress at the macro level of society can be an effective response to this. They embrace rather than reject complexity and combine different kinds of information, including qualitative evidence. Broadening the range of information considered might help channel investments into activities considered unattractive in a one-dimensional assessment.
2. Moving from idiosyncratic to integrated strategy
We are evolving from an era of seeking competitive advantage and leaving your competitors behind to a golden age of collaboration – and not only since the coronavirus pandemic. Some social problems are so persistent and complex that they have been called ‘wicked’. Faced with these, it is no longer enough for social venture leaders and impact investors to think about their organisations in an idiosyncratic way. Instead, they need to comprehend both, the problems and the potential solutions as systems, and thus strategise in an integrated way.
If impact investing is to have the transformative effects on society it proclaims, we need to find ways to channel it into fields ridden by persistent problems…
‘Integrated strategy’ means that decision-makers need to define their role in relation to others and think in coalitions of actors. The Social Economy Canvas, newly developed by the European Commission’s Joint Research Centre and DG GROW, helps ventures and investors embed themselves in a bigger system comprising actors from science, civil society and policy to name but few. By doing so, it helps social ventures embrace a joint problem solving perspective. ‘Integrated’ also highlights the importance of thinking strategy from the ‘theory of change‘, rather than drafting positive social change as an add-on to a pre-existing, value neutral strategy. This is why co-creating with the base of the pyramid is for example a better guiding principle than simply targeting customers at the base of the pyramid.
It involves more effort, but integrated thinking helps organisations and investors thrive in the long-run. It can help staying on track over time and avoid mission drift. But keeping the larger context in sight is even more important when ventures and investors need to embrace strategic mission drift, also known as ‘pivoting‘, to respond adequately to unexpected shifts in their organisational environment. A systems perspective can help entrepreneurs and investors see new opportunities for joint engagement, which they might have otherwise ignored.
The embracement of complexity in impact measurement and an integrated view on strategy making requires shifts in mindsets, internal structures and processes to come to fruition. But the efforts involved in this, are likely to be offset by a greater range of impactful investment cases.
Gorgi Krlev is a researcher and project director at the Centre for Social Investment (CSI) of Heidelberg University. Follow him on Twitter @gorgikrlev.
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