In the Growing Impact Investment Sector, Investors Need to Share Power, not just Capital
4 mins read · April 14, 2021
Alyssa Ely & Denise Hearn, Stanford Social Innovation Review
Summary
Impact investing is on the rise. According to GIIN, in 2020, the market reached roughly $715B in assets under management. The report Growing Impact published by International Finance Corporation (IFC) says that the Impact investing in private markets could be as significant as $2.1 trillion in assets under management. Yet, only $505B worth of assets are measured for their impact on development and financial returns. When it comes to impact capital, who holds power over decisions and where to allocate investment? And how can we show how — and not just where — this capital is allocated?
The Criterion Institute came up with process metrics, developed in collaboration with the Australian and Canadian governments, to assess the power dynamics of capital flows across asset classes. The organizations wanted to apply an equity lens to funding ambitious solutions to social problems. In Canada, the Social Finance Fund (SFF) is leveraging this framework in deploying its catalytic capital of $755M to accelerate Canada's social finance sector - in a more equitable way.
Key Findings
Understanding the needs of the affected communities is crucial. Having an expert or a member from these communities as part of an impact investment committee or on essential decision-making bodies with voting power can help reduce biases and improve alignment between stakeholders. At the same time, knowledge from outside of traditional finance should be valued, compensated, and embedded throughout the process.
Investors should prioritize the inclusion of underrepresented groups of various intersecting identities (such as race, ethnicity, and gender) and measure the percentage of organizations, companies, or investment portfolio firms led by underrepresented groups that apply for funding and the rate of those that are awarded funding.
To rebalance the power between the capital deployer and capital recipients, both parties need to share control of important decisions in the investment process — such as structuring deal terms or expected outcomes.
Investors aiming for a more equitable time frame should measure each phase of the investment process (application, capacity building, due diligence, the delivery of the funds, and others) compared to the schedule they initially set and work with capital recipients if issues arise.
To make the investment process more transparent and equitable, information must be shared more openly between the capital holders and the capital recipients.
To share financial risk more equitably, investors should seek to understand and identify the risks entrepreneurs or communities face, and carefully assess what could be done to mitigate them.
Investors aiming to make sure a deal's incentives align with their goals should ensure that the investment transaction's financial and impact objectives show up meaningfully in the deal terms. One form this can take is a "mission lock" — a governance deal term that prevents shareholders from pressuring leadership into financial decisions that could compromise the organization's social mission.
Takeaways
This is the time to gauge these questions, says Alyssa Ely, an impact investment advisor and gender-lens specialist dedicated to using capital markets for social justice, and Denise Hearn, a senior fellow at the American Economic Liberties Project. Both authors argue that capital alone is insufficient to transform inequitable systems. The authors suggest the need to interrogate the power dynamics underlying investors' and funders’ decisions and operations, to meet the complex challenges of addressing racial, gender, and economic inequality - moving from a "power over" to a "power with" approach.
References
Ely, A., & Hearn, D. (2021). Impact Investors Need to Share Power, Not Just Capital. Stanford Social Innovation Review.
