January 26, 2015

Impact, financial returns and social innovation – How do they go together?


Impact investing presents an appealing promise: it suggests that social impact, the primary goal of philanthropic investors, can be achieved while simultaneously generating financial returns that serve as a source of economic sufficiency for the investor.

A dilemma presents itself when we insert social innovation into the equation. On the one hand, and despite the many other controversies surrounding social innovation, it can be interpreted as a potent force for leveraging social impact. On the other hand, social innovation entails experimenting and taking risks – both are discouraged by narrow financial expectations.

Impact investors have to be aware of this dilemma and are called to break open the iron cage created by the expectation of steady financial returns, if they want to leverage social impact through social innovation.

The imperative of creating social impact is ever more loudly put forth by organisations, policy makers and investors alike. All of them have recognised that financial performance is not everything. This is particularly so when we are dealing with entities that are fundamentally ‘social’ in nature, in the sense that they care for others and try to address un- or underserved needs.

Since the measurement of impact presents so many challenges, especially on a field or sector level, the ITSSOIN project (‘Impact of the Third Sector as SOcial INnovation’) proposes to focus on social innovation as a core impact of the third sector. One of its publications‘Social Innovation as Impact’ is dedicated to framing the issues involved.

EVPA is one of the project’s Network Partners, whose function is to critically assess the research performed. In a recent discussion with EVPA’s Research and Policy Director, Dr. Lisa Hehenberger, we have been able to assess some of the implications that result from the collision of impact investing and social innovation. One of the effects is the dilemma presented above, which I want to outline in more detail:

The very components of the term ‘impact investing’ dictate that social investors find themselves caught in the struggle to achieve social impact while maintaining their own organisation’s viability through creating a financial yield on their investment. In particular for larger organisations, this comes with a seeking of financial returns. The recently launched EVPA industry survey has shown that the vast majority of the participants aim for capital repayment (45%) or demand a positive financial return from their investment (34%). Only the remaining fifth operate on a pure grant making logic; that is they forego any financial reflux on their investments.

Returns, however, are mostly found with investees who have a proven model; a track record of success. But these investment cases are about scaling and much less about innovation. The result is a funding gap for social innovation,  entailing considerable risk and promising little immediate financial return.

Thus,  the phenomenon of being averse to innovation we observe not only with public funders -where commissioning and service contracting focus on reliable and steady service provision leaving little room for experimentation- but also with social impact investors.

On the other hand: Where exactly do investors expect the highest social impact to emerge? The answer is most likely to be ‘where innovation occurs’, since innovation is a significant shift in service or advocacy models that in turn result in a higher state of social productivity. Yet, if there is insufficient funding for developing ideas that might lead to said shift, where is it supposed to come from?

Social investors do of course find themselves in a much more demanding web of obligations and expectations than the above image can account for. But with the potential benefits of unleashing innovation in mind, it is worthwhile to consider and find ways to resolve the present dilemma. Incorporating a focus on how investors deal with social innovation into EVPA’s industry survey might be a first step towards this goal. It would sensitise investors for the issue and provide us with more detailed insights into their complex decision making at the same time.

Kindly supported by

European Commission

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