Impact investing and CSR have evolved on a parallel trajectory with many overlapping concepts and goals but little coordinated effort.
By Beth Busenhart
Corporate Social Responsibility, or CSR, has hit the mainstream. Whether you believe every company has a responsibility to give back or, like Milton Friedman, think corporations should have a singular focus on the bottom line, the principles of CSR are now woven into the fabric of worldwide business practices, and can’t be ignored.
The field of impact investing is arguably less widely recognized and certainly not integrated with mainstream investing practices. However, momentum is building within the industry.
Impact investing, sometimes recognized as a category within the practice of Socially Responsible Investing (SRI), involves directing capital toward investment in for-profit social enterprises that seek to create a tangible social or environmental benefit while generating a financial return. Many see the trajectory of impact investing heading towards the recognition of a new asset class.
Impact Investing & CSR: Mutually Exclusive?
Since both disciplines seek to harness the power of business to effect positive social change, it’s important to understand the similarities and differences of each. Can best practices be integrated or shared to create a more unified model around growing a profitable business that has socially responsible practices at the core?
What factors need to be considered?
Consider the evolution of each discipline, and you can identify key stakeholders to address these questions and uncover areas of opportunity. Start by looking at the landscape of both CSR and impact investing. They lend insight into how the two approaches in the private sector have taken on challenges typically thought to be the realm of government intervention and philanthropy.
Driven by the Entrepreneurial Spirit
Impact investing and CSR have evolved on a parallel trajectory with many overlapping concepts and goals but little coordinated effort. This makes sense given that CSR champions have done much work within large organizations, while impact investing has focused on building a movement from the ground up to develop a market based approach to tackle problems of global poverty.
In both cases, leaders with an entrepreneurial spirit successfully drove grassroots efforts.
"Corporate social responsibility" refers to a form of corporate self-regulation that is integrated into the business model and takes into account not only shareholders but also stakeholders such as employees and customers.
CSR efforts often involve the entire value chain, including suppliers, buyers and the communities in which the company operates, when addressing issues of social and environmental impact. CSR initiatives became more common in the late 1960s and early 1970s after multinational corporations formed the term to describe any group impacted by a company’s activities.
From Micro Lending to Impact Investing
Impact investing evolved out of a microfinance approach, in which small loans are made to entrepreneurs in the developing world. Accion, for example, was founded in 1961 as a community development initiative in Venezuela and is now one of the top microfinance organizations worldwide.
In the 1980s, Dr. Muhammad Yunus founded the Grameen Bank, bringing tremendous attention to the concept of micro lending. The thesis of these organizations centers on the belief that access to capital removes barriers to economic growth and breaks the cycle of poverty.
Other alternative asset management models, such as private equity and venture capital, have been adopted by impact fund managers to identify and manage portfolios built around entrepreneurs with promising business models and strategies addressing global challenges in health, education, and energy, to name a few.
Today, companies are approaching CSR in different ways. Some are more structured, with dedicated CSR departments charged with driving sustainability initiatives and reporting outcomes alongside financial results. Others include CSR as part of human resources or employee benefit programs by allocating hours for volunteer work and donating money to charity.
Yet another subset publishes their CSR efforts in annual sustainability reports, using guidelines such as those provided by the Global Reporting Initiative.
CSR Requires Integration
Often, CSR becomes a priority when companies reach a certain plateau of success. This could mean that there is money in the budget available for corporate philanthropy initiatives or spinning off a foundation to focus solely on philanthropic endeavors, thus bifurcating the company’s social mission and its profit-driven operations.
Among the most progressive examples are companies that integrate philanthropic programs at their inception. Salesforce.com, for example, set aside 1 percent of equity for the formation of a foundation even before its initial public offering. The goal was to kick start the company’s commitment to giving back.
As CSR has become more widespread, the benefits of these programs have become more widely recognized and accepted.
Social & Financial Returns Integrated
With the impact investing model, however, social and financial return are more tightly integrated. As an example, Acumen Fund has proven that investing in promising entrepreneurs is an effective way to tackle problems of poverty in the developing world in a sustainable way. The Fund has over $73 million dollars of investments in 65 social enterprises and continues to expand its portfolio and reach.
When an entrepreneur creates a viable business that addresses a social need, the proof of Acumen's success becomes obvious. Once an entrepreneur repays the initial investment, Acumen reinvests the capital in another entrepreneur, and the cycle of social benefit continues. Acumen tracks the social and environmental impact of its investment portfolio using the IRIS taxonomy and developed a software tool for collecting and managing impact data called PULSE.
To encourage other fund managers to adopt measurement standards and share data, Acumen made the PULSE solution available to the industry. This is one example of the collaboration and transparency allowing impact investing to rapidly evolve as a distinct asset class.
Generating Social Benefit: The Case of Public Companies
Accountability is key when evaluating the role impact management can or should play within a for-profit organization. Impact fund managers are accountable to investors through a requirement to demonstrate a balance between social and financial return. This responsibility to prove social benefit to investors makes social impact measurement and reporting a priority for the industry.
The fiduciary duty of a publicly held corporation, however, is to generate profit for shareholders. This is not in dispute.
With impact investing, the expectation of a social return is established upfront, whereas no expectation of social return exists between investors and companies in traditional markets. This means publicly traded companies are not implicitly responsible for generating social benefit, and no standardized reporting requirements exist.
The case can be made, however, that more rigorous and standardized measurement of CSR initiatives are needed. To adequately demonstrate that a socially responsible enterprise is more sustainable and delivers more reliable financial return over the long term, a growing body of evidence is needed that shows progress over time.
It makes sense then that CSR and impact investing have evolved along separate but parallel paths. It doesn’t make sense though, for efforts in both disciplines to remain distinct going forward. Business is global and there is no question that decisions made in corporate America’s boardrooms affect the lives of people in the developing world.
More tightly integrated impact measurement and reporting standards, however, would allow investors and stakeholders a much more cohesive experience around understanding the impact that business in general has on society.
Next: A deeper dive into impact management practices for CSR and impact investing