Is Impact Investing an Asset Class?

by Bruno Vander Velde, MPA'12 (7/9/12)

Bruno Vander Velde, MPA'12

Despite the potential of impact investing to bring about real social and environmental change, there are still many unanswered questions about the sector.

Taryn Goodman, director of impact investing at RSF Social Finance talked to Cornell students in the spring semester about the threats and opportunities facing the impact investment industry and raised the question whether or not it can even be considered an asset class – this characterization being just one of the many unsettled questions surrounding impact investing. Taryn Goodman

She defined Impact Investing as the investment of money in organizations for the purposes of reaping social and environmental returns as well as financial returns. Many of these organizations are startup companies whose business model provides a good or service that fulfills some social or environmental need — often in developing countries — while also turning a profit.

Ms. Goodman described three foundational concepts of impact investing: that people invest for reasons other than simple financial gain; that there are opportunities to invest in “selective growth” that address basic human needs; and that all risks must be quantified and accounted for on balance sheets. Through two case studies, Ms. Goodman illustrated the strengths and weaknesses of impact investing as a tool for bringing about real social and environmental change; moreover, they highlighted the challenges that financial professionals must grapple with if impact investing as a whole is to resist adulteration and retain its distinct social ethic.

(Before venturing further, I should note that my familiarity with financial concepts is much broader than it is deep, so it is possible that this paper could reveal not only the limitations in my financial knowledge base but also my personal biases as an environmental policy student. Nevertheless, I feel comfortable speaking to the broader issues of the concepts Ms. Goodman raised.)

By all accounts, impact investing has grown in popularity and prominence in recent years, and stories abound of individual investments reaping financial returns in support of socially and environmentally beneficial goals. But there are a number of obstacles and inherent limitations to effective impact investing which financial professionals must grapple with, some of which Ms. Goodman herself acknowledged. These limitations are magnified when investments involve projects half a world away.

First, the potential financial limitations loom large. Local projects with solid potential for filling a very pressing social or environmental need might be passed over if the financial returns are deemed too small — and, as Ms. Goodman indicated, there seems to be much disagreement over just what a suitable rate of return is. Similarly, a potentially useful project that serves a localized problem could also be rejected if the project is incapable of being scaled up to a desired level — and just what level is deemed desirable may vary. Finally, it would seem that any worries about a clear exit strategy — or “exit event,” as Ms. Goodman put it — could spook investors, dooming a potentially beneficial project.

Second, metrics and monitoring pose exigent challenges. The yardstick by which a project can be considered worthy of investment can be set unrealistically high if, for example, there is an information disconnect between investors in New York and entrepreneurs in Nairobi. Any attempt to gauge an investment’s actual social or environmental impacts can be rendered an exercise in estimation, if not optimism, due to uneven metrics. That said, insufficient or ineffective monitoring and evaluation can pose a problem if there is no trustworthy local personnel to gauge or to guide a project on the other side of the world. Posed this very question, Ms. Goodman conceded that knowledge of local terrain in far-flung developing countries remains a key difficulty.

Third, there seems to be a note of dissonance inherent to the impact investing model. Near the outset of her presentation, Ms. Goodman acknowledged the limitations of the perpetual growth model that has girded the Western economy — “the world can’t continue to grow,” as she put it. Moments later, though, she described her company’s mission as one that invests in “selective growth.” How do financial professionals square the second assertion with the first? How much growth is OK? Given this conflict, impact investing could be seen as simply following the same paradigm of perpetual growth and consumption — to wit, note the requirement for “scaling up” mentioned earlier — as conventional investing. The only real difference between the two investment models would be that one could cloak itself with a veneer of “green-ness.”

To an outsider to the financial system, it can be difficult to shake the notion that impact investing will ultimately amount to nothing more than rapacious capitalism in a “responsible” guise; it doesn’t help when the narrative on Wall Street includes punditry such as this:

“Others on Wall Street should take note of the trend in impact investing from sites such as Impact Assets and others. They could perhaps learn from them. They might even find out how ‘greed can do good.’ ” (emphasis mine)[1]

Regardless of intentions, such acknowledgements of “greed” in the age of Occupy Wall Street could be counterproductive.

I do not mean to discount entirely the utility of impact investing, but merely to point out its inherent limitations as a panacea for effecting constructive social and environmental change. To its credit, RSF was presented as very careful, even leery, of the proposed projects it was asked to invest in. The case studies that Ms. Goodman described illustrated the level of research and foresight that must go into investment decisions; I found this aspect of her presentation to be most incisive.

Questions remain as to whether impact investing counts as an asset class or not; I do not feel well-qualified to weigh in on this matter, especially given the amount of disagreement it has engendered among experts in the media. Regardless of how impact investing is classified, among its biggest threats is dilution by a wave of new investors jumping on the socially responsible bandwagon. Ms. Goodman noted this risk, which will only increase as impact investing becomes more popular. A recent article in The Economist points out this popularity:


“ … JPMorgan … predicts that by 2020 there could be between $400 billion and $1 trillion invested [in impact investment vehicles], generating cumulative profits over ten years of between $183 billion and $667 billion.”[2]

If enough impact investing firms can maintain their standards and continue to contribute to beneficial projects, thus differentiating themselves amid a growing wave of competition, the investment ethic they establish — as a tool for financial benefits AND for “good” — might well become the dominant one.

That said, impact investing has inherent conflicts at its heart. In my view, this could preclude it from being anything more than an ancillary tool for solving social and environmental problems.


[1] Kostigen, Thomas. “Wall Street must wake up to impact investing.” June 24, 2011. Accessed at:

[2] News article: “Happy returns: The birth of a virtuous new asset class.” The Economist. Sep. 10, 2011. Accessed at: