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Kennedy School Review

Topic / Social Innovation and Philanthropy

Don’t Let Impact Investing Distract Philanthropists from the Bottom Billion


I am an impact investor. I believe that deploying capital more responsibly is necessary to redirect global capitalism toward greater social and environmental sustainability. However, I am not naïve. Impact investing is no silver bullet, and—alone—will never be sufficient to solve the world’s direst problems.

My classmate Matt Tyler recently wrote in the Kennedy School Review that impact investing could be draining talent and resources from improving government.

Here I offer another critique: the hype surrounding impact investing could distract philanthropists from the poorest of the poor. Scarce philanthropic capital should be reserved for the ‘bottom billion’—those who cannot afford basic goods and services and from whom one cannot expect to extract a profit anytime soon.

Proponents of impact investing argue that the over $400 billion of annual global philanthropic giving is a drop in the bucket compared to the tens of trillions of investment capital that could be rechanneled for social impact. Moreover, they claim that all charitable donations are lost there and then, with fundraising becoming a constant and inefficient effort. Instead, impact investing promises to recoup a financial return to be redeployed for other worthy causes.

I subscribe to all of the above: impact investing presents a viable opportunity to make some of our philanthropic giving more financially sustainable. The globe’s leading philanthropies are also embracing impact investing—earlier this month, the Ford Foundation has committed to convert $1 billion of their endowment into investments that “earn not only attractive financial returns but concrete social returns as well.”

The problems start when philanthropists (like the ones I regularly meet at conferences) start jumping on the impact investing bandwagon just because of the hype. Unlike the Ford Foundation, instead of viewing impact investing as a tool to align their endowment investments with their mission, they are diverting grant funds that would normally be deployed for much-needed humanitarian aid, capacity building for vulnerable populations, and other non-revenue-generating activities.

This move could represent a danger for philanthropists worldwide: venturing into impact investing should not be done at the expense of addressing the bottom billion’s direst problems—something that can often be only achieved through outright donations, because there’s no money to be made in providing medical or food relief, or advocating for refugees.

Nowadays, however, it is hard for philanthropists not to get distracted by impact investing’s promise to do good and generate a financial return at the same time. Such distraction is well-intended—I often hear the following rationale: “Imagine: if we earn a return we can recycle the same capital for another worthy cause!” However, they forget that making money while still targeting and benefiting the poorest of the poor is very hard to do.

For example, a foundation interested in environmental issues might decide to reallocate some grant capital into impact investments in off-grid solar power generation in Africa. Social enterprises build these smart grids and raise capital from impact investors on the assumption that by 2030, over 5 billion people will join the ‘consumer class’ with a spending power of more than $10 a day, and will be able to pay for things like electricity bills. Consequently, impact investors develop an expectation that their capital will do good, but also generate a sizeable financial return. This places pressure on social enterprises to become profitable as soon as possible.

However, realities on the ground often play out differently. Social entrepreneurs quickly realize that there are many hurdles to getting people to pay their utilities. For example, poor citizens in the developing world may not be able to save enough to pay for bills at the end of the month. Since social enterprises need to make money, though, who do they turn to? The low-hanging fruit: customers who already have the willingness and ability to switch to something as modern as a clean grid. Therefore, foundation money that would have gone into projects such as education or health or financial inclusion to benefit the poorest, instead ends up boosting the nascent middle class. Et voilà: impact investing distracts philanthropists from those most in need.

I’ve witnessed this trend first-hand. In 2013, I started the Future Funders ‘giving circle’ with five friends. We each pitched in time and money to demonstrate that regular people like us can pool enough resources to support social enterprises. We decided from the beginning that we were only going to sponsor companies focused on the bottom billion. We then spent over a year trying to source our first deal—which ended up being a grant to a Cambodian company that makes water pumps for smallholder farmers.

Why did it take us so long to find a suitable recipient for our philanthropic capital? Because we did not let ourselves get distracted: while many other social enterprises we screened were originally conceived to solve urgent societal problems, they had already been pressured by impact investors to ‘fire’ their poorest and neediest clients, who could not afford to pay for the company’s goods or services. And I remember that many such investors were international NGOs and foundations (i.e. philanthropists) experimenting with impact investing as a new, hyped-up tool.

How do we prevent philanthropists from being distracted by impact investing, and in turn from distracting the organizations they sponsor from focusing on the neediest beneficiaries?

The key is to remember that philanthropists’ fiduciary duty is to meet the social needs of the most vulnerable.

For philanthropists who want to serve the ‘bottom billion,’ this means that their portfolio should continue to overweigh humanitarian aid, grants for capacity building and other forms of support that can only be provided through donations. Moreover, philanthropic capital ought to be catalytic to achieve two things. First, to prepare the terrain for governments to provide basic services and enact policies that enable the poor to become productive and start earning a living. Second, to provide the initial backing that can help social enterprises become financially self-sustaining, and enable them to attract more investment to the societal problems they’re tackling.

Ultimately, this means that philanthropists’ impact investing activities should be confined to two domains: to align their endowment investments to their mission, or to support early-stage businesses that tackle social and environmental issues affecting the bottom billion. Philanthropists should view impact investing as one of many tools to enhance their social impact. But recklessly riding the wave of hype surrounding impact investing risks leaving the poorest of the poor behind.


Paolo Fresia is a Master in Public Policy candidate at the Harvard Kennedy School, where he co-chairs the Business and Government Professional Interest Council. After graduating, Paolo plans to start his own impact investing firm. Before HKS, Paolo was a corporate sustainability consultant in Hong Kong, financial coordinator for Doctors Without Borders in Haiti, and a bond trader at Goldman Sachs in London.

Photo Credit: Soneva Foundation via Flickr.