I was listening to the Planet Money podcast about how Wall Street is exacerbating the drought in California. It seems that investing large sums of money to speed up depleting the aquifer is a wise strategy for investors and farmers. Price of pistachio nuts is sky high and 1 pistachio nut needs 1 gallon of water, so farmers need to go deeper to pump up water, which needs more money. Wall Street to the rescue. Wonder if the fund managers are telling their asset owner investors that this agriculture investment is “impact investing”. This idea shows how the perversion of bonuses, no proper water pricing, and short term incentives makes good financial sense but very bad environmental sense. Check out the podcast.
Don’t reward bad behavior. It is one of the first rules of parenting. During the financial cataclysm of 2008, we said it differently. When we bailed out banks that had created their own misfortune, we called it a ‘moral hazard,’ because the bailout absolved the bank’s bad acts and created an incentive for it to make the same bad loans again.
Amit Sharma Co-Founder, Empowerment Capital
I find several phenomena in and around the “impact” sector to be a bit perplexing, given its stated objective for seeking social returns alongside financial/economic returns. As financial purists or ‘socially neutral’ investors may look to receive strong returns–or at least commensurate with deployed risk–when it comes to social enterprise investing, sometimes behaviors and expectations compared to traditional investing efforts seem set aside or changed in the following ways:
Time horizon: there are numerous examples in high tech, social media and initiatives in the information and big data economy where companies have openly expressed no view to near term profitability, and yet institutional investors flock to such deals with the patience that the firm is working toward strong market share, sector dominance or to achieve total proof of concept. One look no further than amazon– the world’s largest cloud-service provider taking years to achieve profitability (arguably continuing to innovate in ways that sacrifice near term profitability). Mainstream investors seem to find such investments attractive despite no real near term returns…but social enterprise ventures seem to be held to a higher standard–where investors demand attractive exits in the short term and positive cash flows in 18-36 months that will justify injections of capital.
Low vs high tech: some of the most innovative new ventures boast high tech solutions to meet consumer demand, requiring relatively large capital and R&D investments. Yet, often we look to impact-oriented activities to employ low-tech solutions to solve pressing development challenges, forcing such companies to cut on needed investments that would otherwise be more costly but ultimately could lead to greater efficiencies in delivering on our social objectives at scale. While multiples may be more attractive in sectors like gaming–whereby mainstream investors often incentivize beta testing, market exploration and high tech innovation–social enterprise may equally see attractive economics if they too were able to make larger capital expenditures that would benefit investors over time AND help achieve greater impact.
Risk-return calculation: Financial returns are a mere representation or proxy for other forms of value to investors: increased personal security, greater life and work flexibility, the facilitation of desired lifestyle, and/or the feeling of success that comes with positive economic investments. But all such returns need to be measured against risk–be it deployed financial capital, leveraged assets or relationships, or foregone opportunity costs given competing priorities. It seems to me, that if we ultimately seek greater welfare for ourselves and our communities, social enterprise investments may bring returns that are indeed commensurate with or exceed our deployed risk.
Growing impact may require a broader look out our fundamental investment objectives, and a reconciling of the standards we hold to mainstream vs social enterprise.