A Closer Look at Impact Investing

This post is the first in a series in association with Wharton’s Impact Investing Initiative. We’ll also be discussing current projects, like our collaboration with Bridges Ventures on the MBA Impact Investing Network and Training Program (MIINT) and the Wharton Social Venture Fund.

Photo by Scott Spitzer. Penn Campus Communications.
Photo by Scott Spitzer. University Communications.

This week, ABC News released a column by Ted Schwartz, a certified financial planner, called “How Impact Investing Can Earn Returns, Peace of Mind.”  At Wharton Social Impact Initiative, we were pleased that such a mainstream news outlet had taken interest in the topic.

Advocates claim impact investing expands the traditional bottom line by including a positive social or environmental impact.  Skeptics are intrigued but dubious, questioning the feasibility and scalability of impact investing for financial and social returns.

It’s little wonder that impact investing is a hot topic of conversation and study at Wharton these days. Students oversubscribed Wharton’s first-ever course focused on impact investing in each of its three sections in 2013, and the Wharton Social Venture Fund is one of the most sought-after student programs in the school.  The topic – both a promise and a puzzle – sits squarely at the intersection of Wharton’s renowned financial expertise and its commitment to social impact.

At Wharton Social Impact Initiative, we are excited to launch our first formal programs and activities on impact investing. But first:

What is Impact Investing?

In impact investing, investors actively seek a positive, measurable social or environmental impact alongside a financial return. These types of investments span across asset classes and occur in both emerging and developed markets.

The impact investing industry owes its history to a host of philanthropic and investment practices.

For instance, many foundations and individual philanthropists believe they can achieve their social missions by including both below- and market-rate investments alongside their traditional grant-making.

“Impact investing is emerging as a potential tool for tackling some of the world’s most complex and enduring social problems”

Additionally, mainstream practices like socially responsible investing (SRI) and environment, social, and governance (ESG) screens have for years offered investors ways to reduce the negative effects certain types of investments would otherwise produce.

What differentiates impact investing from the practices above is that investors intentionally seek a social return in addition to the traditional bottom line. With impact investing, it’s not about a ‘do no harm’ approach but rather actively seeking specific, measurable social impact. For example, where SRI funds might screen out fossil fuels, an impact investor might back a bio-fuel technology.

Impact investing is emerging as a potential tool for tackling some of the world’s most complex and enduring social problems, yet researchers are just now beginning to take a closer look.  Despite increased awareness around impact investing, many mainstream investors still consider the industry a niche activity for specialized players.

How can Wharton Social Impact Initiative contribute?

We aren’t the first to this field.  The others who have come before us – researchers and practitioners – have blazed the trail in impact investing.  We believe, however, WSII can offer the impact investing field valuable resources as it continues to evolve.  If the impact investing industry is to move forward, it will require increased standardization, extensive data collection, and a rigorous approach to tracking the effectiveness of the investment on social impact.

At WSII, we like to think of ourselves as optimistic skeptics, and we are excited to face these challenges head on and engage in a genuine dialogue around the successes, failures, and barriers in impact investing.

Wharton’s history with financial research and the financial services industry provides a unique opportunity to examine impact investing with the same critical eye as we do other investment tools.

In fact, WSII recently kicked off a project exploring exit performance as it relates to mission preservation of private equity deals. We’re looking to go beyond performance, though, and instead are curious as to how the social impact that investors so actively seek early on can actually continue once a company is acquired. That companies are successful and thus acquired by mainstream investors and larger companies shows that the impact investing field has come a long way and that there is a potential for growth in this market. But we wonder if the impact endures, post transaction.

These are just a few of the questions we are exploring through our impact investing work here at WSII. We are encouraged by the theoretical and empirical work already underway, and we look forward to collaborating with our colleagues from across the world to collect data, encourage rigorous research, and train the next generation of leaders in business and finance for increased social impact.

NickHeadshotAbout the author: Nick Ashburn, GSE’12, is the Director of Special Projects for WSII’s Impact Investing Initiative, where he provides direction for impact investing activities, including the Wharton Social Venture Fund and Wharton’s inaugural conference on the topic.