A SOCAP Guest Post by James Militzer, Editor at NextBillion
As we prepare to convene in San Francisco for SOCAP17 we asked several of our media partners to share a few of their most timely and important news stories with the SOCAP community. This week’s suggested reading comes from NextBillion.
There was no shortage of promising news in impact investing this year. But if NextBillion’s guest writers and readers are any barometer, the sector’s rapid growth and apparent trajectory are causing some concern.
We recently ran the traffic numbers on our blog content since January of this year, and five of our top 10 most-read posts (and four of the top five) involved critiques of the impact investing sector. NextBillion publishes quite a bit of impact investing-related content. But with our broader focus on the diverse ways business approaches are being leveraged to fight poverty, investing is just one of many topics we cover. So it’s rather striking to see this degree of uniformity in our readers’ preferences.
Check out the posts below – which include both critics and defenders of current impact investing trends, along with other social business coverage – and see which arguments resonate. And if you have anything you’d like to add to the discussion, don’t hesitate to contact us – as an open forum for the social business world, we’re always in the market for thought-provoking guest posts.
“In a rational yet self-reinforcing cycle,” write three leaders from Ceniarth, fund managers often become cheerleaders for their investment propositions – “even if evidence subsequently mounts that the thesis may not be playing out as advertised.” That’s exactly what’s happening in the energy access sector – in particular the venture-backed solar home system market, they say. That’s why the impact investing firm, which has been active in the energy access sector since 2014, is reducing its exposure to this market. Its leaders discuss this decision and explain why they’re taking a public stance on the issue even though it would be “economically rational … to keep our heads down quietly.”
Breaking up the string of provocative impact investing posts in our top five, MicroSave founder and managing director Graham Wright makes an equally sharp argument about the risks facing microfinance as it moves into the digital age – and the need to leverage fintech appropriately. In this interview, recorded at the 2016 European Microfinance Week, he expands on the stinging critique of some well-known digital lenders that he made during the conference (“rapacious consumer lending” and “automated loan sharking” were among his more memorable quotes). For another side to the story, check out this video, in which Wright tangles with defenders of the sector in a live debate.
“After a long march toward mainstream acceptance, many in impact investing are claiming victory,” writes Oxfam’s Mara Bolis. But any triumphalism is premature, she says, in light of some growing concerns outlined in an Oxfam report. Among them is the tendency to assume that any investment in an enterprise in the global south is inherently socially positive. But perhaps more importantly is “the prevailing ‘have your cake and eat it too’-sized return expectations” that many in the sector are promoting. “Let’s not pretend that investors seeking a pure market return can tackle the most complex global challenges in high-risk markets,” Bolis writes, “They cannot.”
4. There is Such a Thing as Too Much, Too Fast: Avoiding ‘Mismatched Expectations’ in Off-Grid Energy Investing
The IFC adds its take to the debate around off-grid energy investment with a frank assessment of the risks of entrepreneurs and investors pushing rapid growth in the emerging sector. Though the industry must expand to serve the 1.2 billion people who lack electricity globally, the authors argue, “there may be a tension between achieving strong social returns and ensuring a robust return on investment.” Among the sources of this tension is the fact that off-grid energy companies often offer high levels of consumer financing to fuel their customer acquisition phase. “This ultimately turns the business into a financial intermediary,” the authors write, “and mastering financial intermediation is fundamentally different from delivering high-quality energy services.”
After calling out the “steady stream of hyperbolic, content-free puff pieces all heralding that the impact investment industry has gone ‘mainstream,’” Ceniarth’s directors don’t mince words in critiquing the mentality this trend is fostering. Forget the promises of market-rate returns, they say: “Those people who promise comfortable market-rate returns while solving global poverty are the equivalent of diet gurus promising that one can lose weight while eating limitless amounts of chocolate cake.” While they acknowledge that numerous ESG-oriented funds are delivering perfectly solid returns, they argue that “to pursue direct impact in truly marginalized and underserved regions and communities, it’s necessary to grapple with the reality that these contexts often require concessionary rates of return, an appetite for a range of risks … as well as a need for creative structures and patient timelines.” In short: Impact investors can’t have it all.
Whether it’s a celebrity scandal or a bankrupt business, people love to hear about others’ misfortunes. But in the case of social enterprise, this questionable tendency has a clear positive side: As the Failure Institute’s founder Leticia Gasca puts it, sharing stories of unsuccessful enterprises can “break the stigma around business failure” and potentially help other entrepreneurs avoid the same fate. In this post, Gasca discusses a study the institute conducted of 115 Mexican for-profit social entrepreneurs whose initiatives had floundered. Among many intriguing details, the study highlighted “three factors that stand out as causes for failure” in social business – it’s definitely worth a read for entrepreneurs in all sectors and stages.
You can’t have a debate without hearing from both sides, and this submission from the Global Off-Grid Lighting Association (GOGLA) rounded out our discussion of the risks and rewards of impact investing in off-grid energy. GOGLA representatives started by pointing out the huge need: With an estimated $49.4 billion of investment needed annually to reach Sustainable Development Goal 7 on energy access, the $200 million invested in off-grid solar last year is a drop in the bucket, and private investment has been scarce until very recently. That’s why they believe Ceniarth’s public stance against “hype” in the industry “does a disservice to the many companies that are approaching the sector responsibly and building sustainable business models.” Rather than potentially discouraging others from getting involved in off-grid solar, they say, investors should be patient and “support the industry as it addresses its challenges.”
For a different take on the off-grid solar debate, check out this post from the founders and partners at Persistent Energy Capital LLC, another investor in the sector. And while you’re there, explore NextBillion’s other content. You’ll find plenty to read, from news and events to jobs and analysis – whether you’re interested in impact investing, financial inclusion, agriculture, or the many other sectors serving low-income customers in emerging markets and beyond.