SOCAP16’s Reflections part 2

Laboratório de Investimento Social
The more mature a market is, the better performance it will have. This is because both kinds of return depend on a variety of factors that must be adequately developed, requiring time and evidence.

Let me tell you about the different visions on how the impact investing market is developing stated at SOCAP16.

Going back to its roots, impact investing refers to investments in social interventions, capable of delivering both a social and a financial return.

socap16_

This concept, depending on the country at hand and the development stage of its social investment market, may be more or less applicable in practice. The more mature a market is, the better performance it will have. This is because both kinds of return depend on a variety of factors that must be adequately developed, requiring time and evidence.

Take as an example the establishment of outcome metrics important for all social investment deals:

In order to establish that the success of an intervention is represented by achieving a certain % of a given metric, there must first be evidence (data) and some reasonable amount of evidence, which naturally at the initial stage of a market do not exist. Thus, at an initial phase, it is common to see a trial and error approach applied to the definition of metrics in pilot projects.

“Impact investing will soon outperform traditional investments”

In all fairness, it would be naïve to claim that impact investing is already generally delivering competitive financial returns in comparison to traditional investments.

However, most of practitioners believe this to be true in the future and (…get thrilled!) it already is for some investors! Nick Flores, Impact Investor director at Caprock Group, claimed that their impact investing portfolios have already outperformed their traditional ones; mainly due to the risk mitigation strategies embedded in impact investment portfolios[1].

“Impact investing requires a joint effort and commitment from all stakeholders”

As another takeaway from SOCAP16, there was a consensus regarding the role and profile of impact investors. Impact investing is not yet for all types of investors. It is crucial that investors are aligned with the underlining social impact of the investment and share common aims with the investees. An impact investment has to be seen as a team effort to achieve a common goal, which also requires improved communication between investors and investees. While investors should become more familiar with the “impact language”, investees must in turn be able to talk the “financial language”.

Finally, I would like to leave you with an on-going debate between practitioners: while impact investing seems to be following a capitalistic/market approach, where 1) investors are compensated by their investments’ performance and scale and 2) impact is driven by merit over competition and effectiveness, there are still critics who claim that caps on financial returns should be applied as a way of protecting the beneficiaries’ interests.

What do you think? Should there really be a cap on financial returns in impact investing?

Rita Casimiro

Analyst

Social Investment Lab

[1] Caprock Group’s investment information is not publically available

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