In Defence of Impact Investing

Berlin, 8^th May, written by Jonathan Eade

Since entering the early stage startup impact space in the halcyon days of 2019, there is little doubt that impact investing has changed a lot. The arrival of the new government outre atlantique has only turbocharged these changes. Note changed rather than retreated: somewhat inconvenient for the naysayers but the impact investing space continues to grow healthily  around 11% per year on average according to the GIIN (the Global Impact Investors Network). So far this year, even with the messy geopolitics, this steady trend continues unabated. But what is it that’s changed and what effect is it having on the sector? Spoiler alert, most of these changes are for the better!

1/ Those pioneering VC’s of even just a few years ago are now up against more mainstream investors – even KKR has an impact fund. With institutional money arriving at scale the sector has become both far more professional and results driven, both in terms of impact and financial returns. On the other side of the same coin, startups have also had to become more impactful and less superficial to attract this new breed of investor. In my early days it seemed nearly every startup was trying reverse engineer the UN’S SDGs somewhere into their business model  somehow and then promptly declare themselves impactful. This certainly won’t wash now – if you call yourself an impact startup you’ll be expected to deliver on meaningful and likely measurable metrics. Think along the lines of lives saved, tons of CO2 avoided, etc.  

 2/ Whilst global events may keep out low conviction investors - for now at least - it has also triggered renewed interest in higher risk private markets impact investing generally. Investors, including retail investors, are seeing the potential of new (disruptive) technology and innovations (and dare I say European as well!) and are increasingly getting on board in the early venture stages despite the risk profile! This trend was even recently flagged in Morgan Stanley’s latest survey for sustainable investing where <most see greater opportunities for sustainable or impact investments in private markets compared to public markets>.

3/ Impact investing has been decoupled from ESG, at least in the early stages, and not a moment too soon! This is no bad thing since they’re broadly different with ESG often getting caught up with greenwashing or being seen as an exclusion exercise (no investing in sex and violence, for example) or as a compliance reporting exercise rather than having any intention to do good (which is what impact investing is!). In any case it does very little to move the needle in terms of changing anything in the real world though it certainly lines the pockets of consultants and it does that perhaps too well! There is clear blue water between impact investing and ESG once again and long may it remain.

4/ With the decoupling of impact investing from ESG, the KPI burden on impact startups has also (finally!) become more rational. At the earliest stages when pennies are scarce, this matters a lot! Impact founders should be focused on building their company and creating their intended impact that they set out to create rather than wasting scarce time and resources on a ton of irrelevant KPI’s and reporting requirements that add little value and were never part of the core business. Clearly, many of these ESG frameworks make sense once a business is fully established and are well-intentioned, but for early-stage startups they’ve often been more of a costly distraction than a driver of progress.

5/ The most curious trend, though at best mis-guided in my view, is the attempt to add defence into the impact sphere. There has been no shortage of talk that startups focusing on defence are protecting our democratic way of life, and so should be considered impactful. But tools that strengthen democratic resilience can just as easily enable authoritarian aggression. So whilst investing in defence seems particularly necessary right now (actually it’s critical!), it should remain distinct from impact investing. There is no contradiction here at all: both impact investing and defence are imperatives but they should stay forever separated and require very different skillsets both on the part of the investor and startup. Put simply, the integrity of impact and defence depends on not pretending to be the other – hopefully this trend will disappear as quickly as it arrived.

So where does all this leave us now?

Well for one, impact investing is heading towards the mainstream at quite a pace. When I first started out in the space I received pitchdecks for digital business cards as a way to save trees. These days the froth has gone and the impact is megatons of CO2 as opposed to half a dozen trees. Institutional money has raised the bar on what credible impact actually looks like and this is encouraging. The decoupling of impact investing from ESG will likely do everyone a favour (more focus on impact and getting there faster) though we must ackowledge that a lot of the ESG concepts try to do good too e.g. balanced male/female founding teams etc. The defence debate will, I suspect, resolve itself but nevertheless give the academics something to contine to argue about for some time to come yet. Ultimately, the integrity of impact investing has always rested on knowing what it is not and for me that remains unchanged (though the detractors remain!). And if you’re a founder in this space right now, the good news is the capital is there and increasingly generaration Z want careers that reward the planet and society as well as pay some wages. The impact story is far from over. In fact, it's just getting going.