Beyond metrics: How impact investing – in all its forms – could help fight the coronavirus crisis

Three very different types of financing are currently labelled 'impact investing'.  By separating them out, and understanding how politics, power and profit motives influence their actual impact, we can figure out the best role for each kind in tackling the coronavirus crisis. An exploration by researcher and author Philipp Golka.

As the coronavirus crisis ravages the world, many socially minded investors and entrepreneurs are asking themselves how they can help. Understanding impact investing through a sociological lens may help to identify possible pathways and challenges to do so.

From my perspective, one of the key barriers to impact investing unleashing its full potential is that we often obfuscate what it’s all about. There is a common distinction between “impact first” and “finance first” investments – but although that might be helpful to classify investor preferences, it makes less sense from a structural perspective. Indeed, too often there are three completely different things blended together under the label impact investing.

Often, three completely different things are blended under the label 'impact investing'. This is deeply problematic

This is deeply problematic, because each of the different types of impact investing comes with entirely different sets of challenges that need to be tackled to maximise actual impact, not just what’s being measured.

First, let’s briefly take a look at what these types are. Second, I’ll propose a framework to evaluate their respective challenges. Lastly, we’ll take a look at what this means for impact investing in the Covid-19 crisis.


Market, social, and public impact investments

First in the impact investing family are investments that are geared at changing the economy by making companies care about the social and environmental consequences of their actions. For now, I will call these market impact investments as they attempt to change firms in existing markets. This type of impact investing first emerged in the United States and was promoted by the Rockefeller Foundation and the B Corporation movement, among others. In a way, it takes the older concept of shareholder activism a step further by more proactively managing investee firms through impact metrics. That said, this is an enormously heterogeneous field without clear standards or regulation. This is why it includes a broad spectrum of investment vehicles that are geared more or less towards the redistribution of profits to financial investors.

Second in the impact investing family are private investments geared not so much at changing the profit-driven parts of the economy, but rather at transforming the provision of social and public services. I will call them social impact investments. This type first emerged in the United Kingdom around entrepreneurs such as Ronald Cohen during the early 2000s. There, it is commonly known as “social investment” and arguably its most prominent innovation are social impact bonds. Although geared at the welfare state, social impact investing is still private capital – hence it must not be confused with social investment in the sense of public expenditure towards increasing a nation’s human capital as outlined in Anthony Giddens’ “Third Way.”

This brings us to the third type – technically, these are not even impact investments in the sense of the well-known 2010 JP Morgan definition – public expenditure and investments that follow some kind of impact-logic. For now, I will label these public impact investments. Public impact investments, too, come in different forms and follow an impact-orientation in different grades. Most prominent are investment vehicles comprised of public funds, but one may even include public expenditure subject to some form of codified impact metrics here (such as the attempt by the City of Hamburg to introduce impact metrics to some of their household spending).

Of course, not all forms of impact investing fall neatly into one of these categories – hybrids do exist. Nevertheless, keeping these categories in mind can increase their respective potential. Let’s take a look at how. In my book, I argue that three dimensions are often overlooked when it comes to impact beyond metrics: politics, polity, and political economy.


The politics, polity and political economy of impact investing


Social impact is inherently political. There is no such thing as objectively positive social impact. What is seen as morally good or bad is always a matter of perspective – and codifying it into impact metrics may run the risk of suppressing different ideas by giving a specific perspective the appearance of objectivity. Of course there are some propositions that are nearly universally accepted, such as saving lives. But others may be deeply partisan. For example, in the early days of British social investment, proponents would contest public welfare programmes and charities by claiming they perpetuated poverty. Only after these critics began cooperating with – and changing their view on – social enterprises and charities around the Commission on Unclaimed Assets and what would later become Big Society Capital did their perspective become more balanced.


The polity (or system of governance) of impact investment refers to the question of who has the power in shaping the impact investing field. While financial resources are part of it, the polity of impact investing refers to more than just money. In particular, it means which actors have a voice in defining what counts as positive social impact or constitutes an effective intervention – and which actors do not have such voice. As the name impact investing suggests, its polity often focuses on the investors and hence their interests may become overrepresented relative to other stakeholders. For example, the voice of labour unions and beneficiaries is rarely heard in the impact investing sphere, and the role of government is often confined to a catalyst and champion, rather than a regulator (a notable exception is France’s social and solidarity economy, where profit distribution to investors is limited by law).

The polity of impact investing often focuses on the investors and hence their interests may become overrepresented relative to other stakeholders

Political economy

Whose voice is and is not heard all too often directly translates into who pays and who profits from impact investing – i.e. its political economy. While impact investments monitor and manage their social, environmental and economic consequences in some form, this does not mean they reduce economic inequalities. After all, impact investing is often championed by wealthy individuals who sometimes go as far as touting it as a superior alternative to charity and tax-based redistribution.


Impact beyond its metrics

While all of these dimensions are relevant for all three forms of impact investing, they matter in different ways.

Let us first take a look at market impact investing. As its mission very often is to increase the social and ecological sustainability of the market economy, its politics should be crystal clear about that. The narrative is that a thoroughly financialised economy that puts profits over people is deeply harmful to our societies and the environment. That said, all too often its polity perpetuates the financialised structures that have given rise to the problem in the first place. In a polity where investors have the power to define what counts and does not count as social impact, it is likely that factors detrimental to their material interests will be under-represented. When it is up to the investors to choose whether (or to what extent) organised labour, workers’ rights, wage inequalities or profit redistribution count as social impact, these issues will almost certainly feature less prominently than they would, were it for workers, scholars or governments to set up the impact metrics.

In social impact investing, the politics, polity and political economy take a different shape. As it emerged from venture capitalists entering the field of social service provision, the politics of social impact investing often builds on a focus on entrepreneurs and rapid scale. While this is not wrong per se, it is important to keep in mind that a relentless focus on the “core product” might come at the cost of oversimplifying problem causes, possible solutions and the process of getting there. In the UK, such narratives have been used to legitimise austerity measures that certainly had detrimental effects on social wellbeing. As with market impact investing, it does matter that this leads to changes in the polity – but in a different way. While market impact investing saw a new breed of investors attempting to take the place of purely profit-driven investors, in social impact investing financial investors obtain a voice in a field where they were unheard of before.

Yet with innovations such as social impact bonds, this may run the risk of drowning out the voice of beneficiaries. Very often, the success metric in SIBs is based on beneficiaries’ behavioural change – without them having been sufficiently consulted. Likewise, with investors playing a key role in defining success metrics, questions arise regarding their democratic and scientific legitimacy and oversight. In terms of the political economy, the costs and benefits of the impact generating programmes are often unevenly distributed. While social workers and beneficiaries may do the bulk of the work, they hardly receive a piece of the cake. Likewise, SIBs may transfer tax revenues paid by all parts of society to those who can afford to invest in them.

For public impact investments, the challenges arising from its politics, polity and political economy take a different shape still. Regarding the politics, it often propels a narrative that overemphasises the role of steering and (new) public management over the other dimensions of public services. In the worst case, it may create an illusion that efficient and effective public services are mostly a matter for numbers-driven top-down management, rather than, for example, a motivated workforce and an organisational culture of learning. This way, linking spending to impact indicators may discourage expenditure aimed at the social, cultural or technical infrastructure upon which the creation of impact is based in the first place.

Significant portions of public resources may be spent on experts, rather than service provision itself

Often, such initiatives introduce new types of experts into the respective fields, such as evaluators, consultants, and in the case of SIBs, lawyers and financial advisors. Despite delivering specific expertise, the material interests of these are often detrimental to a sustainable transfer of knowledge to the public entities, as this could reduce the demand for these forms of expertise. As a result, significant portions of public resources may be spent on experts, rather than service provision itself. As these non-outcome payments for SIBs (legal fees, administration expenses, etc.) are usually not shared publicly or part of SIB evaluations, their proportion of overall SIB expenses level is, unfortunately, rather unknown.


The case for impact investing in the corona crisis

How does this translate to impact investing in the coronavirus crisis? The answer is: more impact investments per se will not be enough to help address the crisis – rather, each type of impact investment will need to play its role by taking into account its politics, polity and political economy. While these differ depending upon the type of impact investment, it is clear that Covid-19 shows the urgent need for state action with a high capacity for public health interventions. Impact investments may play various important roles here, but it is imperative to keep in mind that private capital, no matter how impact-oriented, can in no way serve as a replacement for or alternative to public health systems. 

Market impact investments may play a powerful role right now, not least by revealing the flaws of profit-maximising pharmaceutical and healthcare industries and providing a more sustainable alternative. Particularly in times of crisis, the more equitable political economy advanced by impact investments compared to their profit-maximising counterparts holds enormous potential. This may include their long-term perspective and a focus on universal access arising from the fact that they ascribe value to non-financial outcomes. While the polity of many market impact investing initiatives is deeply rooted in various communities, it is nevertheless important that impact investors are aware that they sometimes (and often unwillingly) exclude a number of voices – particularly when constructing impact metrics. When designing and implementing impact investing initiatives for Corona relief, the voices of interdisciplinary experts on public health need to be constantly heard – as do the voices of those affected by the initiatives.

The voices of interdisciplinary experts on public health need to be constantly heard – as do the voices of those affected by the initiatives

Making these voices heard matters even more for social impact investing initiatives, as they are more closely linked to public health systems. Thus, to help address the effects of the pandemic, it is imperative for these initiatives to work out how they can support and leverage public health systems. This means listening to their needs and building initiatives to cater for them – rather than attempting to redefine them. In the current crisis, the politics and polity of social impact investing initiatives should be built around public health systems – rather than around investors, even if they are philanthropic. In terms of the political economy, the most pressing questions will arise in terms of access, in order to ensure an inclusive distribution of the respective services.

For public impact investments, the key issue is not to fetishise impact metrics. While evaluation certainly is helpful, it costs time and resources that might not be available. The key task for public impact programmes is now to get resources to where they are needed as fast as possible. Thus, vital payments should not be contingent upon metrics that – although potentially successful in pre-crisis times – curb public service delivery during the crisis. After all, it is the frontline workers who create large parts of the positive impact. An impact-driven approach to management should understand this and, particularly in a crisis, focus on support rather than command.

Ten years ago, impact investing set out into the mainstream with a mission to put people over profits. After a decade focused on growth, and in the midst of a global crisis, it is key to remember that, while private capital can – and must – play a part here, its place ought to be confined by the fabric of our society. Keeping this in mind by reflecting upon its politics, polity and political economy, impact investors may indeed unlock impact beyond its metrics.

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Header image by Kevin Kobsic for the United Nations Global Call Out To Creatives.