1. Pillars of Impact Investing
Pillar 1: Impact investing is a calculation of net effects, with impact equal to positive outcomes less negative outcomes
The existential critique of impact investing is that the industry lacks a single, comprehensive definition, disaggregating into a range of loosely related methodologies. Distinctions range from variations based on profit motive to something akin to Justice Potter Stewart’s “I know it when I see it.”
Pillar 1 attempts to define the space by first recognizing that all organizations create some form of negative outcome or externality. This includes even nonprofits (see, indirectly, Pillar 3) and the vanguards of socially responsible business (see Yvon Chouinard’s comments throughout David Gelles’ recent “Dirtbag Billionaire”).
As such, impact investing is investing where:
Impact = Positive Outcomes − Negative Outcomes
The main distinction between impact investing and traditional investing is that traditional investing focuses solely on financial drivers with no regard towards negative outcomes, while impact investing factors in all outcomes, including financial returns. This basic equation accepts that no organization is perfect, and highlighting trade-offs is more intellectually honest than pretending they don’t exist.
Pillar 2: Outcomes assessment evolves over time
The second fundamental challenge of impact investing is that what is considered "positive" and "negative" is not fixed but rather shifts alongside the culture and climate. Something hailed as a breakthrough in one generation may be viewed as a structural liability in the next.
Current frameworks are, by definition, temporally limited and measure impact as a static achievement. In reality, net effects evolve with evolving context. To invest impactfully and earnestly, practitioners should recognize that outcomes are influenced by changing scientific knowledge and social norms.
Plastic is a notable example, which began as (and still is) a vehicle for sanitation and access but has (first unknowingly, now knowingly) contributed to the systemic degradation of the environment. A more complicated example is the current moment for artificial intelligence, which we are still scoring as a collective amidst both productivity improvements (real and imagined) and societal disruption (imagined and real).
These are both technical shifts and moral ones,1 and an investment that begins as a net positive can become a net negative over time as the world changes around it. Ultimately, the most prudent approach is to continually re-examine all parts of our current system, holding at the forefront that “all we know is that we know nothing” – that our knowledge is perpetually incomplete and must be updated accordingly.
Pillar 3: The “fossil record” theory of capital implies that for-profit companies must be the core unit of systemic change
The “fossil record” theory of capital suggests that creating lasting systemic change requires tracing the life cycle of a dollar. Examining the origins of an organization’s funding reveals its financial sustainability and long-term capability as a driver of change.
In this vein, philanthropy, though a capable force for positive impact, is a byproduct of capitalism2 that exists due to surpluses generated by (activities with potentially negative net impact within) the existing system, making it unlikely to serve as a sustainable force for change. Funding sources (often individuals) are also volatile and may have motives adverse to broader social good. Charity, therefore, is a fragile form of reactive wealth distribution and a lagging social responsibility action, implying that a system of sustainable change requires self-sufficient organizations as the core unit.
The impact investing solution, then, is to support for-profit companies that engage in business practices that create net good for the society and consumers around it. Individuals, as consumers, accept in turn that businesses must sustain themselves to continue providing goods and services.
At its core, the thesis of impact investing as a field is that for-profit companies creating net positive societal outcomes also turn out to be more resilient and productive enterprises, in part due to evolution with outcomes assessment, structurally outcompeting those that treat people and planet as disposable inputs.