The concept of impact investment, which has the explicit purpose of supporting economic and community development, is receiving a growing amount of attention from an increasingly diverse set of financial players.

The goal of impact investment is to have a social impact while making the kind of returns that conventional markets provide. Tweet This Quote

This is one of the most exciting, and potentially problematic, trends I’ve seen over the last decade. As with any new field, impact investing raises many questions and issues—and the answers and intended results remain up for grabs. J.P. Morgan has projected close to $700BN in profits from impact investment, but who do these profits benefit?

I am concerned that in a drive for global scale in impact investment, we will lose the voices that should matter the most—the billions of people directly affected by the enterprises funded by our investments. I am advocating for the establishment of effective mechanisms to empower “beneficiaries” to be actively involved in the planning, execution, governance, and ownership of enterprises, and in the flows of capital connected with them.

Below are several dynamics at play in the current impact investment market, many of which have proven problematic.

1. Investors and entrepreneurs profit at the expense of communities

The goal of impact investment for many is to have a social impact while making the same kind of investment returns that conventional markets have provided. If that remains the case, and if the ownership of social enterprises remains limited to the privileged, then it is difficult to imagine that impact investments will ultimately benefit communities, or facilitate any sort of resource transfer from the global north to the global south (or in the US context, from rich to poor).

Impact investment needs a balance of risk and return between investors, entrepreneurs, and communities. Tweet This Quote

If ownership structures are not addressed, then by definition, these investments must be extracting value from the communities they affect, repeating the cycle of exploitation we have seen under so many different names. This is particularly apparent in the context of projects that see poor communities singularly as consumers rather than as participants in all aspects of the economy.

There is an implicit, yet often unacknowledged, tension in impact investment between how producers are paid, how steeply consumers pay for products, and how much entrepreneurs and investors can make or expect to make over time.

2. A misaligned definition of impact

Some of the large financial institutions jumping on the impact bandwagon have made public statements defining impact as simply any investment made in a developing country. The many communities who have suffered from natural resource extraction, displacement and poor labor conditions know this is not the case. Similarly, well-meaning entrepreneurs tend to define community involvement as product research, rather than creating infrastructure for long-term engagement and community leadership development.

This is largely due to the fact that impact investment has evolved as a “top down” industry—with investors setting the criteria for impact and returns with the consequences filtered down from entrepreneurs to communities.

Poor communities need to be seen as participants in all aspects of the economy, not only as consumers. Tweet This Quote

3. A major “capital gap” for community-run projects

Although many investment projects are executed in the global south, they are generally run by the privileged—these entrepreneurs and their investors are the ones who will receive the $183-$667 billion in profit that J.P. Morgan projects. It is exceptionally rare to impossible for communities, organizations, or individuals from the global south to receive access to funds if they do not speak English or have advanced degrees.

4. Capacity-building is lacking

Capacity building programs for entrepreneurs to receive training and access to funding are plentiful, but similarly limited to a global elite. The Unreasonable Institute is a rare exception. Additionally, there is a need to explore methodologies that will respect community leadership models already in place, rather than asking communities more accustomed to collective structures to adopt Western business models.

Ideally, the entrepreneur would do more leading from behind than carrying the torch his or herself.
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5. Lack of community organization

Finally, there is an urgent need for capacity-building programs to integrate a broader understanding of community organizing alongside traditional business education. The entrepreneur indeed has a crucial role to play, but ideally would do more leading from behind than carrying the torch his or herself.

Signs of hope—innovative impact investment that ensures assets stay in communities. At the same time that I see the potential greenwashing in the impact investment industry, I am deeply encouraged by the emerging group of entrepreneurs and investors who are finding ways of placing community needs first.

Innovative impact investment ensures that assets stay in communities. Tweet This Quote

Reflecting broader trends in the establishment of the solidarity economy globally, I see the emergence of what I call transformative finance. Key tenets of projects supported by transformative finance are as such;

  • Projects designed, managed, and owned by those affected by the projects
  • Local assets that support long-term sustainable development on the community’s own terms
  • Projects designed to add, rather than extract value from communities
  • A balance of risk and return between investors, entrepreneurs, and communities

Transform Finance projects are thoughtful about how to engage communities not just as producers or consumers, but as leaders and change agents. They create explicit ownership structures that reflect this appreciation and intention. In their structural makeup, they create mechanisms of direct accountability to the communities they serve.

They also ensure that productive assets remain community-owned and that the use of those assets is determined by the community for continued development. These enterprises are still often led by dynamic entrepreneurs, but in these cases they see their role as community organizers rather than top-down leaders.

Transformative finance happens when projects are designed to add, rather than extract value from communities. Tweet This Quote

One such leader is Brendan Martin. He is the founder of The Working World, an organization based in Argentina, Nicaragua, and New York, providing innovative financing for worker-owned co-ops based on a co-determined business plan and revenue share that ensures value created stays primarily within the community. Over the past eight years, they have recycled more than $1.2M into 600 investments, with a 98% repayment rate. The Working World raised capital from a number of investors (including a Toniic member) to finance a sustainable green windows cooperative in Chicago.

It’s the efforts of founders like Brendan that serve as a beacon for the direction entrepreneurs and investors need to go in order to transform the world of impact investing.

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A version of this post originally published on in December of 2012. It has been updated and reposted to inspire further conversation.

About the author

Morgan Simon

Morgan Simon

Morgan Simon is a serial social entrepreneur, working at the nexus of finance and social justice. She currently serves as Managing Director of Pi Investments, building a 100% impact portfolio. She was instrumental in launching three leading organizations in the field of impact investment. She's the co-founder and chair of Transform Finance, a co-founder of Toniic, and was the founding Executive Director of the Responsible Endowments Coalition. In all her work, she emphasizes community empowerment, leadership and ownership.

  • Max Mantey

    It seems there is a large disconnect here between large companies using poor communities as consumers and profiting greatly. The numbers here are quite staggering reaching well over 100 billion dollars. That amount of money in my opinion could be used for many great community projects. It just seems that it will take the right people for the money to come in contact with for real change to occur.

  • Sierra Stein

    I completely agree with @maxmantey:disqus. In some aspects it seems as though the large corporations and wealthy investors are simply using impact investing as a ploy to increase their brand and come across as an ethically inclined company. The marketing that surrounds charitable donations and investments into philanthropic sectors are extremely profitable and are excellent marketing techniques that recruit more consumers to that brand. Granted not all companies are using impact investing or involvement in the various impact movements as a marketing scheme and simply have the best interest of society in mind. It’s hard to differentiate between decisions made selflessly and decisions made selfishly. I think the real change will occur on the basis of selfless decisions, but investing in a cause regardless of motive can still be beneficial for said cause. It’s such a fine line when it comes to ethical perspectives and business decisions it’s hard to predict how ethics will play a role in the coming years (hopefully its presence will be dominant in the market, time will tell).

  • David Kidd

    Transform finance projects appear to be a very effective way to combat the negative externalities of impact investing. With that, is the taking a role in developing these “dynamic entrepreneurs” through your global education labs? If so, does that mean as an institute you want to change the current role of impact investing in these foreign communities and openly support transform finance?

  • Hunter Ward

    When I first read about impact investments, I thought it sounded too good to be true. I knew that it was very beneficial that impact investments are gaining popularity but it didn’t talk about any of the problems about this new type community investment. This article really sheds light on these problems that I was wondering about, and for that reason, I believe this is a very useful article. I think that there is one question that arises from this article: is impact investment too corrupt to keep making positive impacts or could these problems be fixed and help make impact investments the future of community development?

  • Logan Coffman

    Hunter thanks for your response and insight. Your point brings up a good question. I’m curious what aspects of impact investment lead you to believe that it’s corrupt, any examples? Also check out this post by UNREASONABLE scribe Ross Baird on Impact Investment –

  • Robert Neville

    The large disconnect happens when we want to see change but at the same time also see profits. I do not think the two go hand in hand and in order for that to change we need to realize that the profits will not be nearly as high as we’d like but the change will be tremendous.