Did you know that the term impact investing was coined about ten years and has grown to more than $500B worldwide? According to the Global Impact Investing Network (better known as GIIN, “gin”), impact investments are “made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” We went to the field’s annual conference last month called SOCAP: At the Intersection of Money + Meaning in San Francisco to learn as much as we could about the field’s evolution and future. The conference is put on by SOCAP (which stands for Social Capital Markets) and brings together investors, entrepreneurs, and social impact leaders to share and learn about the evolving field of social impact investing. Here is what we learned about the four key questions the social impact investing movement is trying to figure out.

1. Can impact investing actually make a sizable dent in social problems?

It is clear that we do not yet know the answer to this question and there is a long way to go before we do. Here is what is becoming more clear:

• The capital markets are not helping us address social problems, and are often exacerbating them: The mass accumulation of wealth and the focus on shareholders versus stakeholders with absolute disregard for social, economic, environmental, and employee impact has created a tangled and unjust mess. There is becoming greater awareness of the extent to which the markets benefit from these impact externalities and perpetuate injustice.
• Philanthropy is insufficient: Philanthropy, just like our economic structure and the social challenges we face, are a product of the extractive and exploitative capital markets. This makes the philanthropic model appear more like a mechanism for robber barons to assuage guilt for benefiting off acts/decisions/policies that created many of the negative externalities that philanthropic gifts are trying to address. As U.S. Impact Investing Alliance Executive Director Fran Seegull stated, “philanthropy is runoff of a broken capital system. How can we expect a broken system to ameliorate what it created with scant grant dollars?” There is also no urgency or accountability for philanthropy to create substantial impact. As the Mulago Foundation’s Managing Director Kevin Starr stated in a session on taking bold risks, “no one gets fired for lack of impact in philanthropy” and many are not currently “placing bets at the scale of the problems we are facing. The real long-term risk is making safe bets on solutions that do not create sustainable change.”
• The potential impact of transforming the capital markets into a force for social good is enticing: The size of the capital markets pales in comparison to current social impact investments, with $212T being invested in the capital markets compared to $502 billion in impacting investing, $80B in philanthropy, and $25B in government spending to address social good.
• We need to funnel a lot more resources: If we truly want to achieve the UN’s Sustainable Development Goals by 2030, the current price tag is an estimated $7T a year.

2. How can you make money (or not) by doing/investing in good?

The answer to this question seems to be “it depends”. What we do know is that impact investing involves trade-offs and making decisions about how much social impact and profit are enough. At some point, one has to prioritize one over the other since the evidence to-date shows that the programs which often create greatest impact do not produce the largest financial ROI. This raises all kinds of important and tricky questions such as:

• What types of social problems are most appropriate for impact investments and can these social problems truly be addressed through a social enterprise model that is focused on scale?
• What does an “exit” from a social enterprise trying to address a social problem truly look like?
• Is it more important for investors to just jump in and start investing because “perfect may be the enemy of good”, or for investors to increase confidence in their investment decisions by utilizing rigorous analytical and measurement tools that try to fit the mess that is human behavior change into clean, defined categories and metrics?
• How do you test the degree of social impact created and how much beneficiaries sustainably benefited from the investment?
• How do vehicles like Donor Advised Funds (which are often criticized for their lack of transparency and use as a tax avoidance mechanism) impact access to investment capital and how can the wealthy be incentivized to leverage and use their wealth in potentially more effective ways to address social challenges?
• Is the perpetuity model of private philanthropy still relevant when we have growing social problems to address, or should philanthropy have more urgency and be expected to deploy capital faster?
• What does “risk-adjusted market rate return” really mean in terms of who assesses risk and with what ruler? What return can an investor anticipate when investing in public good?
• What if the social impact created by investments does not have significant traditional ROI but creates unquantifiable value and net impact (the total impact created minus the economic, environmental, social, worker impact externalities or negative unintended consequences)? It is really fair to compare the returns of social impact investments to that of the traditional capital markets that do not account for externalities?
• What is the role of patient capital (financial investments in a business with no expectation of turning a quick profit in anticipation of more substantial returns down the road) that is invested in long-term impact? Many investors are finding that patient capital can lead to greater impact given sufficient time and flexibility.
• What is considered social impact and where do you draw the line (e.g. Uber was an initial financial and social impact investment success for Kapor Capital until Uber grew and developed negative and controversial business practices)?
• Can investors and philanthropists work collaboratively to share deals and opportunities to increase investments for initial and continuing investment for promising solutions, social enterprise, and entrepreneurs?
• How do we ensure we are not “impact washing” (the practice of individuals raising capital with the false promise of social good, which ultimately sullies the field for everyone)?
• Under what circumstances do we accept concessionary returns (where an investor accepts a lower financial ROI in order to support an entrepreneur who is serving a distressed community, working on a pioneer project, or addressing an intractable social problem)? And should it be called restorative or reparative instead of concessionary?

3. What is the role of power in impact investing, who has it, and how do we address its impact?

If we really want to transform the capital markets to address social challenges, we need to acknowledge that capital is power, that the majority of the power is currently in the hands of a few, and we need to do a lot more if we truly want to shift how power is distributed. Roosevelt Institute President & CEO Felicia Wong shared that “wealth is crystallized history. It is passed down from elders to their children and it is power relationships frozen in time.” If we know that the gap between White family wealth and the wealth of families of color is hugely disparate and only widening, and we know that slavery, Jim Crow, redlining and other policies, immigration, mass incarceration, and other factors create fuel for this wealth gap, what are the implications for the power of people of color? Color of Change Executive Director Rashad Robinson, discussed that power is really “whether or not people care about disappointing you”. Currently the White family median net worth is $138,800 compared to only $9,590 for Black families, and it is going to get worse if we do not take drastic action. The wealth gap varies across the country, with the White family median wealth in Boston being $247,000 compared to $8 for Black families. This disparity also impacts Black business owners, as the average White business owner has average revenues of $600,000 compared to $119,000 among Black business owners. This also varies by city, as these numbers are $1.3 million and $32,625 respectively in Detroit.

In order to share power more equally, those with the power (mostly White men) who wrote/write the rulebook for how the economy is structured and how wealth is accumulated and dispersed, have to give up some of that power in order to create equity. Alicia Garza, the co-founder of Black Lives Matter and Principal at Black Futures Lab (which recently conducted the first Black Census in 154 years), discussed that there is a difference between empowerment and power. Empowerment is having strong self-esteem or a good feeling about who you are, whereas power is the ability to make decisions about your own life and others lives, to make and change the rules, and to shape the story of who you are and can be. Even though it feels like we are making progress, giving power to specific individuals does not change the system and the way that power functions. “Creating more black millionaires is not going to change an economic system that is fundamentally structured to keep some people out. We need to build power in a way that changes the rules and how power currently operates in our economic system. We cannot change the current imbalance when people with all the wealth are making decisions about the rules,” said Garza.

When communities of color are seen as “underserved” rather than “undervalued” or “underestimated”, the programs we design are often created “for” communities, not “with” communities where leadership roles and ideas are held by the community themselves. One example and hot topic at the conference are Opportunity Zones, which were in many cases not designed by the people they are intended to serve and can appear as another mechanism to reframe gentrification. As Robinson stated, “We do not want to mistake presence for power. What do we actually want to achieve? Do we just want to incorporate diversity and inclusion into a racist structure? Charity is about profiting off racism if it does not have a strategy for how undo the system. To truly undo the current norms, racial and gender justice needs to be at the center of all our work. Anything else legitimizes current structures as they are.”

It is a fact that there is a complete lack of representation of women and people of color in the investment industry. Stanford SPARQ Faculty Co-Director Jennifer Eberhardt shared that only 1.3% of the $69T dollars held in investment firms is controlled by women and people of color. This lack of representation creates the cycle of “like investing in like” and it institutionalizes bias against non-white and female entrepreneurs. In a study conducted by Stanford SPARQ, Stanford Global Projects Center, and Illumen Capital to examine investor bias against entrepreneurs of color, they found that Black-led teams were judged more negatively than White-led teams when presenting identical investment opportunities in front of White investors. In addition, the more qualified the Black-led team was, the more bias they faced. As Illumen Capital Managing Director Daryn Dodson stated, “The fact that the better you pitch, the more bias you face means that it's not your work to be awesome, it's other people's work to see how awesome you are.” This bias not only undermines wealth, opportunity, and entrepreneurship for people of color, it also hurts our overall economy. According to Common Future CEO Rodney Foxworth, the bias and racial inequity in access to investing is resulting in $300B in economic losses each year. Foxworth pointed out that 75% of venture capital investments (a $100B industry) do not return capital and 80% of these investments are going to White men, but no one is questioning whether investing in White men is a safe bet. This is even in the face of data that clearly shows Black female entrepreneurs (who currently receive less than one percent of all total investment capital) typically outperform and achieve greater return than White male-led ventures. As another speaker at the conference said, “It’s about how we underwrite people’s potential to manifest the future.” The key question is: are White men willing to give up their power and ROI of Whiteness to change the rules of the game?

The Soul of Money Institute Lynne Twist shared that we need to hospice the natural death of the current capital markets that do not serve everyone while we midwife the natural birth of new systems. We want to build systems that reward allocation over accumulation, recognize the value of creating social profit instead of just financial profit, and stop labeling people by their financial circumstances (e.g. “poor” or “rich”).

4. Where Do We Go From Here?

As the field continues to evolve and strive to answer the above questions, here are a number of ways that we can start to change the game of impact investing:

• Focus on the next generation of wealth transfer as a key opportunity (in 2020, a wealth transfer of $30-$40 trillion will impact 30 to 40-year-old women and Millennials)
• Go beyond micro enterprise as a form of empowering undervalued communities to focus on catalytic capital (e.g. debt, equity, guarantees, and other investments that accept disproportionate risk and/or concessionary returns relative to a conventional investment in order to generate positive impact and enable third-party investment that otherwise would not be possible) in a blend of finance opportunities, including pushing the boundaries of Community Development Financial Institutions (CDFIs)
• Address the issue of monopolies, which we have seen, can undermine democracy
• Invest in local businesses, worker empowerment, ownership through worker cooperatives, and labor unions for increased and living wages
• Organizations should build their own internal skills around understanding and operationalizing racial equity as a rigorous practice
• Prioritize local and community decision-making for investing and let communities drive investment agendas
• Analyze your investment strategies: many of the large funds that Americans support also support, are tangled with, and benefit from, mass incarceration or environmental abuse in order to achieve maximum profit. There are a number of new investment firms around the country that only focus on true social impact opportunities with diverse rates of return.
• Within philanthropic foundations that make program- and mission-related investments, break down the silos that exist between those who make decisions about fund investment and strategy and those who oversee the programs that benefit and serve the community (Kresge Foundation has been a leader in this).
• Invest in organizations that analyze and change the rules of how the economy and wealth are structured
• Increase the number of people of color in the investment world to break the cycle of “like investing in like” and potentially capitalize on the billions of dollars that are missed due to under investment in women and people of color

To learn more about this evolving space, here are a number of resources you can check out:

• Global Impact Investing Network (GIIN): convenes impact investors and produces tools and resources to accelerate the industry's development through focused leadership and collective action
• IRIS+: the generally accepted system for measuring, managing, and optimizing impact that is managed by the GIIN
• U.S. Impact Investing Alliance: a field building organization committed to raising awareness of impact investing in the U.S., fostering deployment of impact capital, and working with stakeholders to help build the impact investing ecosystem
• International Finance Corporation (IFC): works with the private sector in developing countries to create markets that open up opportunities for all
• United States International Development Finance Corporation (USDFC): executive agency of the U.S. federal government responsible for providing foreign aid through the financing of private development projects
• United National Industrial Development Organization Investment Learning Center (UNIDO ILC): disseminates UNIDO methodologies and tools for investment project development, promotion and implementation, from identification of investment opportunities to project implementation
• GIIRS ratings: investment rating offered through B Lab for funds that prioritize impact as much as financial performance
• Global Reporting Initiative (GRI): helps businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well-being
• Sustainability Accounting Standards Board (SASB): establishes industry-specific disclosure standards across environmental, social, and governance topics to facilitate communication between companies and investors about financially material, decision-useful information
• Impact Management Project: a forum for building global consensus on how to measure, manage and report impact