In emerging economies, money has a choice. Money is often in short supply and there are a great number of people willing to spend it. The consequence of this is that it is attracted to the lowest risk and highest reward investments. The majority of the time, the lowest risk and highest reward investments are not those that deliver the greatest social return. And those that deliver the greatest social return tend not to be those that deliver the greatest financial return.
Consequently, there is a role to play for those who want to achieve a social end in as efficient a way as possible, sacrificing the rate of return or the time to return in the process. The fact that there's a financial commitment from the investee increases the likelihood of sustainability - in theory, they have 'skin in the game'. Further, the fact that the capital is returnable (and will possibly grow over time) means that more investments can be made and the overall impact increases.
These are, in theory, pathways to sustainability and scale - the two foundation stones of a systemic approach to development. However, impact investors face a number of challenges in achieving their goals.
1. They're often have little field presence, which makes assessment of investment opportunities very difficult. A firm's track record is not a great indicator of future performance in such rapidly moving markets.
2. The likelihood of assessing what's realistic in terms of the type and scale of impact tends not to come from the financial sector 'types'. The nuances of how to understand, create, and measure different type of social impact are very different to business valuations and measuring asset growth.
3. How do you avoid distorting 'thin' markets? There are countless examples of firms that know and exploit their position in relation to the development community, and the money spent on such firms is rarely impactful or additional as expected. The number of investment-ready firms that know how to market their development impact is often so small that they have different development actors courting them with ever more attractive terms.
4. Expectations are rarely aligned - even with patient capital, impact investors often want to tackle some of the world's most complex and difficult challenges, delivering as close to a market rate return as possible. Such wishful thinking is not uncommon in development programmes either, but the idea that someone can profitably deliver goods and services to refugees in a way that reduces carbon emissions, and is inclusive of women, youth, and any number of other excluded groups is, at best, optimistic.
So if impact investment done well has a shared objective with systemic change, how can a systemic approach help to improve the chance of impact investment achieving these goals? Firstly, bringing a systems lens to the understanding of markets and trends and gives a more realistic picture of a particular firm's place within them. Secondly, a systems lens allows for an appreciation of the wider institutional environment and how changes in it might affect the success of the firm in future. This includes key government actors, policy changes, but also cultural trends and norms which might affect a firm's success as it enters new markets. Thirdly, as an approach grounded in development, a systemic analysis allows for the development impact of interventions to be accurately projected and contextualised amongst other development programmes and trends. Finally, and most importantly, a systems lens allows for investment decisions to be made based solely on the returns that the investee can deliver, but for the systemic impact that the innovation they introduce can deliver. So the 'impact' of investment can be compound and strategic if a systems lens is used to determine it's wider impact on constraints faced by other actors.