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Social Enterprises and Solving the World's Problems: How Impact Investing Needs to Change

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Impact investment suffered a blow to its credibility last week with the news about SKS, the Indian company that took micro-credit from the realm of nonprofits to the stock exchange, has been linked by its own investigations to the suicides of over-extended clients who were allegedly bullied to death by debt collectors.

The details are horrific.

Let's hope that SKS only represents greed run amok, a deadly example of the same greed that caused the banking and economic crisis that has beset us since 2008. Let's hope that for-profit companies can balance profit motives with social impact because government and nonprofits can't solve the world's problems by themselves.

SKS does represent greed run amok as well as a complete breakdown in governance. Its IPO brought huge amounts of money into the micro-credit sector and the pockets of its founder and shareholders. It also created enormous pressure for growth -- growth that disregarded the best interests of the people it was supposed to serve.

And therein lies the horror. By definition, impact investing deals with vulnerable people, those who are powerless and desperate. Which means that impact investment must be held to a very high standard of the usual things -- transparency and accountability -- as well as a much higher standard of care for clients that may conflict with the idea of maximizing profits.

The Global Impact Investing Network (GIIN) is painfully aware of both the need for regulation and the potential loss of social services if people view any profit as exploitation of the poor. "Irresponsible investment undermines the promise of impact investing and it should be exposed and condemned," the organization said in a 2010 letter to its members about the events in Andhra Pradesh. But it also pointed out that without mission-driven, for-profit businesses, poor people will be left without essential services because governments and nonprofits can't do it all.

GIIN advocated a number of solutions, among them:
  • measuring social impact, which we don't yet have the tools to do
  • building government relations that result in regulations to "prevent exploitation while encouraging entrepreneurial zeal." (The suicides in Andhra Pradesh led to local regulations that, in effect, shut down all micro-credit operations in the state. A national bill to regulate without killing micro-finance was put before the Indian parliament in August 2011. It is up for reconsideration in March 2012)
  • effective self-governance, an effort that has been underway in the micro-finance community for years and is still in the conference and talking stage

The critical element in all these is focus on the best interests of the client, not maximizing return on investment.

As the GIIN letter pointed out, the presence of profit is not always evidence of the exploitation but impact investments must differentiate themselves by adhering to higher standards. Their products and services are essential but their power to harm is also greater.

Perhaps one solution is expansion of the Benefit Corporation model in which social good -- impact -- is as important as profit. Investors know going in that their financial return won't necessarily be maximized but, for impact investors, that should be just fine. If it's not, they can invest elsewhere.

"Impact investors need to police the boundary between true impact-focused enterprises and those using the impact label inappropriately to attract capital and support," says Antony Bugg-Levine, chairman of the GIIN board and author of the book Impact Investing: Transforming How We Make Money While Making a Difference. "As a start, they can adopt industry-led standards of reporting and transparency, such as GIIN's IRIS (Impact Reporting and Investment Standards) standards that will allow the community to compare investments."

He also suggests open and honest conversations about what works and what does not (success and failure are both good teachers) and working with governments to draft regulations that recognize a new sector -- social enterprise -- that fall between nonprofits and for-profits.

And, of course, we as consumers, investors, and donors (in the case of nonprofit micro-finance) have a responsibility as well. As Bugg-Levine notes, "As with donations to a nonprofit, impact investing in a social enterprise requires judgment by the investor and due diligence in the business model, and its owners' and managers' commitment to their social mission."

In other words, look twice. Make sure you're buying from or investing in a good company, not a "greenwashed" marketing program.