It is now over 20 years that I have dedicated at least parts of my work efforts to a space currently known as Impact Investing. My first projects included supporting the design of a summer academy for Microfinance and supporting a cooperative bank in Bolivia with product costing. The sector evolved dramatically over the past two decades, mostly for the better. Still, some of the more recent inventions, such as the use of the Social Development Goals (SDGs) for exaggerated promotion raise my eyebrows. In the following, I reflect on some of the critical impressions I collected. I use this to review and adjust my work to improve myself. I encourage you to share your perspectives as well.
- Following the principles of finance, it is possible to “invest” into financially sustainable projects that deliver no positive impact on environmental or social goals. But placing money into projects that fulfill sustainable impact goals without financial returns is called “donation”. I am not disputing the meaning of words. It does show though that even our language choice does not equal financial, environmental, and social goals.
- Over the past decade, share prices of “blitz-scaling” companies significantly outperformed the markets, with some recent corrections. They were based on the idea that these companies burned through VC funds to grab market shares. On occasion, they even arbitraged labor laws to squeeze their gig-workers or disrespected environmental considerations (ride shares did not measurably reduce city traffic). How can projects with a focus on social or environmental impact compete where their results are measured on an annual or even more frequent basis and no credit is given for potential future benefits?
- Social and environmental impact cannot be properly measured in short cycles. Of course, we can argue that a short-term/harvest-related loan provides value to a smallholder farmer. But real change can only come from providing an environment where the farmer and her family have continuous access to financing. Then it is possible to engage in long-term personal planning, including, sending children to school, investing in more land, and better production methods. My experience at Proyecto Horizonte shows that it takes time and trust to engage in real changes. The short-term support as often provided in the past fostered more of a consumption approach rather than an investment approach among the target population.
- Managing several Impact Funds for international organizations and donors, a lot of effort goes into explaining the general concepts of investing. Admittedly the concepts are the same that I found in my very first finance textbook (1988 edition of Grill/Perzcinsky for those who also started with an apprenticeship in Germany). But they need to be on our minds:
- Investing in private debt, such as loans, has limited upside. In a best-case scenario, the investor gets the money back. This means we need to stay disciplined when it comes to terms and conditions and collateral. Relaxed conditions only lead to higher losses in case of defaults. These losses are usually not covered by charging higher rates.
- When a loan defaults, all appropriate measures need to be taken to recover. Of course, the approach for clients unwilling to pay differs from the approach for clients unable to pay. We owe it to those borrowers who make every effort to comply with their obligations to be disciplined and focused with those who don’t.
- Lending is always a relationship business. In most cases, no matter where in the world, good borrowers have found their lenders and those who actively seek financing usually show a higher proportion of unqualified borrowers. Success and impact will take time, once a positive reputation is established, dynamic growth will kick in
As I said, I only reflected on some of the critical aspects. A lot of good projects are done, and real help is provided. There is no shortage on LinkedIn on all the celebrations of great projects. I am proud of all the good work the community does. I am excited to be part of the industry and look forward to contributing in the way I do currently and the ways I will do in the future.