This article is part of a series on building systemic solutions to systemic problems.
After attending the recent gathering of power players in the philanthropic world, known as the Global Philanthropy Forum my head was spinning with facts and figures documenting the magnitude of the seemingly intractable problems the world faces today. For all the good intentions in full view at the conference, I couldn't help but feel, that we're still stomping on the piss ants, while the elephants are a charging. The piss ants are the incremental solutions ... sometimes promising programs that either address a very small problem or propose solutions to large problems that are incommensurate with the scale of the problems. The elephants are the apocalyptic issues: climate change, public heath, nuclear proliferation, human trafficking, water, energy, poverty and on and on. For all the talk about seeking game changing ideas there is very little hard evidence that the power players in philanthropy have yet to discover or support truly systemic solutions to what are essentially systemic problems.
The Unfulfilled Promise of Impact Investing: The approach that perhaps comes closest to a systemic solution is Impact Investing. Impact investing is an effort to nudge more commercial investment capital into the social investing space by getting them to consider the social impacts of their investments alongside financial returns using double or triple bottom line approaches. In its ideal form, impact investing holds great promise for shifting significant sums of capital. According to a recent research report by the Monitor Group, the impact investing industry could grow from its present $50 billion to $500 billion in assets within the next decade. JP Morgan has forecast a market size for impact investing of $1 trillion by 2020. So far, Impact Investing has been long on promise and short on performance. It hardly registers as a blip agains the 70 trillion of commercial capital invested today because remains a relatively obscure field, understood by few, seldom making its way into the minds or behaviors of most portfolio managers.
Instead most investors remain myopically focused on one single measure of return - the financial return, because that's how their success is still evaluated by their peers and the industry at large. Matt Bannick, CEO of the Omidyar Network emphasizes just how large this challenge is, "Two thirds of these investors are so called "returns first" investors --unwilling to bend the risk/return equation and take outsized risk to create large-scale social impact. Traditional investors have a critical role to play. They can have massive impact down the road. The question is, 'Who will take the risk to invest in these world-changing innovations before traditional investors are willing to step in.' "
Bannick and his co-author, Paula Goldman, take a stab at this question in their recent article, Priming the Pump, in the Stanford Social Innovation Review. They "argue for a shift in focus--toward the goal of scaling entire industry sectors, in addition to individual firms." Says, Goldman, "Impact investors can massively increase the number of lives they touch by investing accelerating the development of specific industry segments. The need for investment is particularly acute at the earliest stages of innovation, which provide the foundation in which entire new sectors can emerge and scale rapidly by tapping commercial capital markets. Right now that's where the pain point is." In other words, if we're going to deal with the elephants in the room, we need to be thinking in terms of developing social finance ecosystems, and be willing to make some mistakes in the process.
An Investing Continuum: Today there's are many forms of capital going into the social investing space, creating a continuum of returns. Matt Bannick points out, "At one extreme, foundation grants guarantee investors a 100% loss of principle." At the other extreme, some social investors have achieved a comparable return with traditional investments, but the differential isn't large enough or well understood enough to persuade most other investment managers at foundations to shift more than a few percent of their portfolios, or foundation "corpus" to social investments. The net result is that, at best we've only moved marginal sums of capital towards the double or triple bottom line. In other words, we're still left with a strategy of stomping on the piss ants.
A Third Way: Sasha Dichter of the Acumen Fund, sums up this unfortunate state of affairs a recent blog post, "We still haven't mapped out a clear third way between '100% loss of principal' (philanthropy) and 'market rate returns.' My view is that until we create an equilibrium point around what this third way is ... we have come up short in creating a new sector and a new way to solve problems."
A third way? What third way? Is there untapped wellspring of capital large enough to deal with the elephants? Could there really be a radically innovative way for social enterprises to raise capital? How will know it when we see it?
Evolving Systems: Sacha Dichter concludes his blog post with the following, "I know that if we retain a spirit of inquiry and openness, if we allow ourselves to continue to learn and evolve, rather than getting boxed in to an old, narrow view of what success looks like, then I believe we can really get there."
Bannick sees this future clearly and it lies in innovative thinking about systemic solutions to systemic problems. "Far from being down on impact investing, we think it has vast potential, but potential that needs to be tapped by investing earlier stage, investing across the returns continuum, and investing in infrastructure and policy."
If so perhaps we will be able to stop stomping on the piss ants, because we've effectively dealt with the huge elephants charging right at us.
About the Author: John Ince is a former reporter at Fortune Magazine, a social entrepreneur and the author of two books relevant to this series of articles:
• Meaningful Money: Innovation at the Intersection of Money, Meaning and Markets
• The Code of Common Cents: New Money versus Old Money and the Next American Revolution