OP-ED: Impact Investing—Can it really achieve social and financial goals?

Industry experts weigh in on whether impact investing can truly bridge social good and commercial returns while avoiding past pitfalls of (foreign) aid.

OP-ED: Impact Investing—Can it really achieve social and financial goals?
Photo by Kenny Eliason / Unsplash

Picking up from the final line of my previous TechTides Africa piece—"Beware of lazy oversimplifications regarding origin stories, the framing of social impact, and the who or what drives economic progress"—I’ve been reflecting on a recurring debate within Africa’s tech startup ecosystem.

Same same? 

Some have drawn comparisons between impact investing and foreign aid, raising concerns about their effectiveness and unintended consequences. In my experience over the past couple of years, this debate often involves well-intentioned, multidisciplinary industry stakeholders earnestly discussing how to better support innovative tech entrepreneurs. The aim? To harness technology to build businesses that deliver outsized performance in terms of both commercial success and social impact (ideally in that order, for more hard-nosed capitalist types).

Critics worldwide argue that impact investing, much like foreign aid, frequently suffers from a disconnect between intentions and outcomes. This misalignment, they suggest, stems from unclear theories of what constitutes impact and muddled expectations about returns. Such issues can lead to capital misallocation and mere blips in moving the needle on social change. Additionally, impact investing may inadvertently foster dependency and distort markets, echoing issues seen with foreign aid, such as sustaining inefficient systems and delaying necessary broad-based socio-economic shifts. These perspectives underscore the need for careful alignment of goals and rigorous measurement to avoid replicating the shortcomings of traditional aid, as flagged by some of its fiercest revilers.

Despite its promise to bridge the gap between social benefit and financial return, impact investing’s success on both fronts remains debated. This was a central theme of a Not So Secret Sauce podcast conversation I hosted exactly a year ago, featuring Thabiso Foto, CFO of 54 Collective (formerly Founders Factory Africa); Shruti Goel, co-CEO at Upaya Social Ventures (based in Bengaluru, India); and impact measurement and management consultant Emily Waters (based in Bangkok, Thailand).

Same flock, different feather

At its core, impact investing is designed to support initiatives that yield both positive environmental or social impacts and financial gains. The debate often revolves around whether these dual objectives can be met simultaneously or if they are inherently (and perhaps hopelessly) in conflict.

Goel provided helpful terms of reference delimiting the scope of the debate by offering that impact investing aims to create measurable positive changes through strategic investments. Waters added that this field includes a range of practices aimed at tangible outcomes—distinct from Environmental, Social and Governance (ESG) approaches, which primarily integrate these factors into business operations.

The consensus among the three experts was that while ESG often centres on compliance and disclosure, impact investing is driven by the goal of fostering specific positive changes. This distinction underscores the diverse motivations and frameworks behind these investment strategies, which I won’t unpack further here.

Measurement matters

In impact investing, the adage "Not everything that can be counted counts, and not everything that counts can be counted" rings frustratingly true. While effective impact measurement is crucial for validating success, simplifying this process for accurate reporting and helpful assessment remains challenging. 

Frameworks like the “Theory of Change” and the “Five Dimensions of Impact” provide tools for understanding how business activities might translate into desired outcomes for all interested stakeholders. These frameworks - often evangelised by fervent, cultish proponents - help stakeholders (not least, non-African financiers and powerful companies and institutions) articulate and categorise their impacts, aligning their missions with measurable results.

Tech impact

The leveraging of technology, particularly in early-stage startups led by African entrepreneurs, is seen as a powerful enabler of economic growth and crucial impact outcomes like job creation and sustained economic participation. Debate continues over tech's effectiveness in driving meaningful social change, with in-trench advocates like Foto arguing that it is essential for achieving broad impact goals.

Foto’s experience as CFO of a leading African tech venture capital firm highlights a shift in corporate shareholder and investment partner expectations. She noted that CFOs are increasingly required to track progress and report not only on financial performance but also on various social impact metrics. This, she said, reflects a growing recognition of the need for long-term sustainability alongside immediate financial returns. Foto advocates for a balanced approach that aligns financial goals with positive social outcomes, challenging the notion of their mutual exclusivity.

Ultimately, Foto, Goel and Waters offer a hopeful perspective on the future of impact investing. They maintain that with the right frameworks, a commitment to both purpose and profit and a willingness to adapt, achieving both impact and financial returns is not only possible but critical for sustainable progress.

Editorial Note: A version of this opinion editorial was first published by Business Report on 13 August 2024.