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The Difference Between Social Impact Investing and Socially Responsible Investing

The single biggest problem in communication is the illusion that it has taken place.
George Bernard Shaw

Impact investing is a hot topic right now. A few years ago, while I was researching investor behaviour in impact investing at the Free University of Berlin, few people in the startup scene around me seemed to have a solid grasp of, or interest in, impact investments. These days everywhere I go – regardless of whether it’s Silicon Valley, Berlin, Nepal or beyond – people seem to be talking about it. A multitude of impact venture funds, social impact accelerators and certification programs like the B-Corp program have sprung up onto the stage of our global investment markets. Some VCs have started incorporating statements about adhering to dual- and triple-bottom line principles into their mission statements. In short, it’s looking good for impact investing. It seems to be rapidly gaining in popularity.

Unfortunately, when topics get hyped, that hype generally creates a bit of confusion, and that confusion can lead to ineffective communication around the topic. With this article, I aim to clear up some of the fuzziness I’ve been seeing in regards to how impact investing is defined, and clearly define what distinguishes it as a concept from socially responsible investments (SRIs).

Just in case you don’t know what sort of confusion I am speaking of, let’s take a quick look at market size estimates. According to an extensive investor survey by the GIIN, the Global Impact Investment Network, assets under management in impact investing have grown annually by 18% between 2011 and 2015. By GIIN metrics, the amount of assets currently allocated to impact investments is generally estimated to be in the billions with a market size floor of around 115 billion. This number accounts for a tiny fraction of the 156+ trillion global financial markets. However, other people actually estimate the market size for impact investments to be much higher, with estimates ranging into the range of several hundred billions, or even trillions! This current discrepancy between estimates makes zero sense and can only be explained by the fact that there appear to be different standards regarding what sorts of investments should be counted as impact investments. Devon Thorpe, author of the impact focused blog Your Mark on The World, clearly hit the nail on the head with his explanation of why the gap between market size estimates has widened to such an extent: “The market has grown, but not that much. What is happening is that more and more people are arguing that the investing they do should be counted as part of the impact investing pool.”
In this context, it clearly doesn’t help that even Forbes author Anne Field seems to think of impact investing and socially responsible investing as sort-of-the-same-thing, lumping both categories together in a recent article covering the growth of the impact investment market. She refers to the market size of SRI at 8.72 trillion, even though the headline of her article clearly refers to impact investing.

Let’s set this straight. Impact Investing is not the same as Socially Responsible Investing.

Here is a common definition of impact investing, by the GIIN network:

impact investments

Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”
(emphasis mine)

The history of “impact investing” is a pretty short one. The term itself, impact investing was coined only 10 years ago, at a 2007 meeting which took place at the Bellagio center in Italy and was organised by the Rockefeller Foundation. The purpose of this meeting was “to explore with leaders in finance, philanthropy and development the need for, and ways and means of, building a worldwide industry for investing for social and environmental impact.” As a concept, impact investing has also been closely tied to a focus on a “dual bottom line” or “triple bottom line” . There is a “duality of goals” for each investment made with an impact approach. Financial returns are only one side of the investment goals. If impact investment don’t meet their social impact goals, they are generally not deemed as successes. This distinguishes impact investing from “regular” or “mainstream” investing, where the main goal of the investment is to generate financial returns. Impact investment approaches are also not limited to one particular industry. It is generally understood as an investment approach across asset classes.

Let’s contrast this with a definition of Socially Responsible Investing, by

“Socially Responsible investing (SRI), also known as values-based or ethical investing, refers to the practice of integrating social and environmental factors within investment analysis to avoid investing in companies that have negative impacts on the environment and/or society.”
(emphasis mine)
A main feature of socially responsible investing is screening against negative externalities. “Negative screening” has been around a lot longer than impact investing, starting with the Pioneer Mutual Fund in 1928. It is generally defined as “the conscious decision not to invest in companies that are inconsistent with the personal values of the investor.”  The roots of SRI can be traced back centuries, or even to ancient times. William Donovan’s “A Short History of Socially Responsible Investing” makes for a pretty interesting read.

Can you spot the difference between the two concepts? While SRI approaches are generally supposed to AVOID causing negative social impact, impact investments have the explicit goal to advance positive social impact. Impact investing distinguishes itself from other investment approaches through the intentionality of creating social change. What also sets impact investing apart from SRI is the introduction standards and methods for the assessment of impact goals. According to the 2015 GIIN investor survey, around 99% of impact investors actively measure the outcome of their investments.

SRI seems to often be used as an overarching term for all types of social investment approaches, but only a tiny fraction of SRI investments could actually be classified as impact investment.  Comparing SRI to impact investing is like comparing apples to oranges. Screening out bad stuff, doesn’t equal building good stuff!

In our conversation around impact investing, we should be mindful of the terminology we use. Language is the foundation of communication, which is the foundation of system-wide change.