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Moving Beyond Trade-offs in Impact Investing

In this video, leading impact investors discuss the question of whether there is a trade-off between financial returns and social impact.
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So this is one of the biggest questions in impact investing. Is there a tradeoff between financial returns and social impact? The reality is that impact investing is a spectrum. It encompasses everything from strategic philanthropy, to what we call muted returns investing, to market returns. Strategic philanthropy is, think of it as you know, returnable capital or returnable grant, you give money but after a few years its gets paid back. so you don’t generate return or there is zero percent return but you still get the capital back.
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Muted returns is when you are making anywhere between let’s say 5% and 20% annual internal rate of return or IRR, which is often the case in several of these business models because they are much harder to execute then traditional businesses or businesses serving the high end market. That being said there are enough examples and enough opportunities that we have seen in impact investing which do generate market based returns while creating enormous social impact. In this case we are argue that the social impact is often sort of embedded in the business model itself. A classic example of this is microfinance. So impact investing encompasses this entire range.
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So we actually believe that no, there isn’t really a tradeoff between social impact and financial returns, and the evidence increasingly, you know demonstrates that. We are going to hear now some different perspectives from some of the leading voices in the industry and hear what they have to say about this issue.
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A lot of people ask me this question would you compromise return for impact. I think the only thing I think we compromise for return on impact is that we are willing to live with unpredictable returns. If the company that we build in because it is dealing with a very mass market, if it becomes successful the returns are going to be extraordinary; but if it is not successful then you are going to get a zero return. Irrespective of whether you are a venture capital or a private equity guy given the markets and the risk that it takes, the returns always remain unpredictable.
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I think the only probable difference is that we are taking extraordinary risks and yet continuing with unpredictable returns, returns can be high and low. Unpredictability is really the risk that we are talking about. So impact investment on the broadest level if you look at the history of the asset class in India, if I were to call it an asset class, is that impact investment returns actually have been slightly better then the overall investment eco system returns. Now will that sustain its not clear and that’s not something that as an industry I think we should hunt for, but clearly what we are seeing is that the idea of doing good and doing well are not two separate things.
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If you back entrepreneurs who are solving the largest needs of society wants of them, and they are able to do that at scale, in most cases we found that returns and impact go hand in hand so it’s not really a choice. So I would say we have always followed an impact first approach. So the first test for an impact business is whether the product or the service it is delivering, is actually helping impact the clients’ lives. So whether it’s in education or livelihoods and soon after there is a very close test on are we delivering it at a price point that meets the client’s affordability levels? And also meets the enterprise’s own financial viability levels?
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And once those two are proven, I think then, you know, there is a very strong co-relation between impact and returns because the more you scale, you will create more impact and of course you will hopefully create more returns unless you are selling each new product at a loss. I think sometimes the challenge comes when we are taking a very short-term or a microscopic view of a business versus a long term view. So I would take an example in our EdTech solutions. We often ask the enterprise to measure impact because I feel you know measuring quality is important for your future sales, to get your loyal customers, to establish yourself as a brand.
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And unless you invest in measuring that quality, you also don’t know where the impact is. So in the short term it may look like a tradeoff that we are measuring impact, and therefore diverting profits to that purpose; profits or you know the business resources whereas we could have scaled up. But I think in the long term it just creates a much more sustainable and market friendly business. So yes we see those tradeoffs, but once you have the product right, once you have the customer segment right, and once you have the viability of the product right, I actually think in most cases there is a complementarity between returns and impact. It’s not a tradeoff between money and meaning, it’s a synergy.
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Businesses that pursue both profit and purpose achieve outperformance. They are able to focus far more on the end consumer, they are able to attract better talent, they are able to reduce the risks that come with corruption and with regulatory management. They are the owners of the future, because they see 3 billion customers coming online, they see that it’s not about serving them today or next week or what quick quarter results you can get. It’s about tapping an opportunity that is gonna run for the next decades and decades. We’ve shown that once you put this synergistic combination together of profit and purpose, the results you get on both sides are stronger.
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And that since the industrial revolution this notion of a tradeoff that has been practiced
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has actually been a fitter on humanity, and we can liberate businesses, and we can liberate investors, and we can really liberate societies to invest in a very different way because of this demonstrated performance of the purpose driven purpose.

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The debate has long brewed on whether there is an inherent trade-off for investors between achieving social impact and financial returns.
In the video, you will hear leading practitioners reflect on the debate as they work to create highly nuanced and sophisticated portfolios of impact investments that target different levels of financial returns, different types of social impact, and a broad spectrum of risk profiles.
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