Impact Investing: the Benefits and Challenges of an Emerging Field

October 19, 2012

This is the first post in a series by Morgan Simon on the trends, challenges and opportunities of impact investment, focusing on an exploration of the mechanisms which allow affected communities to lead and shape investments.

The concept of impact investment that 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. This emerging trend 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 consequential questions and issues with the answers and intended results remaining up for grabs. Let’s consider the following questions to start:

1. How is impact being defined, and by whom?

2. How are strategic opportunities being identified and defined, and by whom? How will impact capital be deployed, with what objectives, and toward what ends?

3. Under what conditions shall profits be made from impact investment? Who should govern the agreements about use and distribution of the profits?

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 who will be affected by social 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. This is a topic we recently covered in a panel at SoCap called “Creative Financing for Community Wealth,” the main points of which I’d love to share for you in this post.

Current problematic trends in impact investment

There are several dynamics at play in the current impact investment market:

Investors and entrepreneurs profit at the expense of communities.

The goal of impact investment for many is to have a social impact while being able to make 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 the rich to poor). If ownership structures are not addressed, then by definition, these investments must then be extracting value, thus repeating the cycle of exploitation that we have seen under so many different names over the decades. 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.

Impact is being defined by investors and entrepreneurs instead of beneficiaries.

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, but they are not being consulted in the process of defining goals for impact investment projects. Similarly, well-meaning entrepreneurs tend to define community involvement as product research, such as holding marketing-based focus groups, 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 social entrepreneurs to communities. In this approach there is no room for letting community needs guide the field.

There is 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, at this point, exceptionally rare to impossible for communities, organizations or individuals from the global south to receive access to funds if they do not speak English and have advanced degrees. Communities are simply the resource base for projects; or, moreover, their involvement is generally limited to the consumption of specific products like solar lanterns.

Capacity-building is lacking.

Capacity building programs for social entrepreneurs to receive training and access to funding are plentiful, but similarly limited to a global elite. Further, there has been no effort to engage these programs in a broader conversation about the structuring of opportunities that would create access for people without a university education. Additionally, there is a need to explore methodologies that will respect and fit community leadership models already in place, rather than asking communities more accustomed to these collective structures to adopt Western business models. Finally, there is an urgent need for capacity-building programs working in developed countries to integrate a broader understanding of community organizing in their work in order to balance out the traditional business education social entrepreneurs tend to receive with a deep understanding of what community engagement looks like. The social 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 that is finding ways of placing community needs first. Reflecting broader trends in the establishment of the solidarity economy globally, I see the emergence of what I call transformative finance, or what Marjorie Kelly refers to as stakeholder finance in her recent (and highly recommended) book, Owning our Future: The Emerging Ownership Revolution.

Transformative Finance provides resources to projects that:

  •  are primarily designed, managed and owned by those affected by these projects
  •  build local assets that support long-term sustainable development on the community’s own terms
  • are designed to add, rather than extract value from communities; and
  • balance risk and return between investors, entrepreneurs and communities.

Transformative 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 community development. These enterprises are still often led by dynamic social entrepreneurs, but in these cases they see their role as community organizers rather than top-down leaders.

One such leader is Brendan Martin, who shared the stage with me at SoCap. He is the founder of The Working World, an organization based in Argentina, Nicaragua, and New York. The Working World provides 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 five years they have recycled $3M over 80 times into 600 investments, with a 98% repayment rate. Recently, The Working World raised capital from a number of investors (including a Toniic member) to finance a sustainable green windows cooperative in Chicago. More information can be found here:

I look forward to sharing with you a number of models on community-centered financing models from within and beyond the Toniic network through the next few posts, and further exploring some of the questions and challenges articulated above.

What are your views on these topics? How do you achieve community accountability in your investment activity? Feel free to post any comments here, or to reach me at

Morgan Simon is the co-founder and CEO of Toniic, a global network of early-stage social investors. Toniic members share deal flow, due diligence and monitoring on global investments in this action-oriented community looking to move $100 million into global social enterprise. She is also the co-founder of Innovacion Investments, the first community development venture capital fund in Texas, and was the Founding Executive Director of the Responsible Endowments Coalition, leveraging the $400B managed by US colleges and universities. In all her work, she emphasizes community empowerment, leadership and ownership.

RSF Social Finance is a proud sponsor and member of Toniic.

Note: The opinions expressed in this article are the authors alone and do not claim to represent the opinions of Toniic at large or any individual Toniic member.


  1. want to thank you brave morgan for lifting up issues that many of us from communities of color (i.e. the beneficiaries) have observed. in your eloquent voice i hear the passion of an organizer..while i believe there are many well-intentioned organizations and individuals involved in lifting the banner of impact investing it is still the purvue of the economic elite..i don’t necessarily believe this to be all bad as there is much we can learn across these artificial and only perceptual barriers..capacity across all sectors that bridges some of these divides is a process..thank you for lifting up your warriors voice..i would as you know like to see more investment in cros-border populations as the diaspora of immigrants in the U.S. can accomplish a great deal..but too often impact investing is seen only as global with domestic concerns not addressed at all and while social entreprenuers are great..they can take a page or two from the “unglamorous” work of community development corporations and community development finance institutions..this is especially true domestically and thanks for the information on working world..te mando un fuerte abrazo, un guerrista a otra..gloria guerrero

    Comment by Gloria Guerrero — October 22, 2012 @ 11:30 am

  2. Brave, beautiful, and brilliant Morgan. You are an inspiration in a time of deep moral and institutional crisis. Thank you.

    Comment by Dana Lanza — October 26, 2012 @ 10:06 am

  3. I could not agree more! It is time we were honest about what super-high returns to investors mean with respect to workers, customers, suppliers, community, the environment, etc. The fruits of successful enterprise should be shared among ALL stakeholders.

    Comment by Jenny Kassan — October 26, 2012 @ 1:21 pm

  4. Agree with many of the points. I share your concern that the South- the intended beneficiaries of impact investment- would have no voice in this new wave of interaction b/w the North and the South, just like what happened in colonialist and post-colonialist eras.
    At the same time, the dominance of capital in the global North pushes some social investors to be affiliated with sources of capital. Thus we see a half-forced, half-self-initiated process of aggregation of capital and the involvement of large corporations.
    keep writing!

    Comment by Chloe Zhu — October 29, 2012 @ 3:22 pm

  5. Nice job framing the conversation around a difficult issue–the inherent tension of making a profit while serving people at the base of pyramid. I appreciate the locally focused, balanced approach (sharing of risk and return) described by transformative finance. Richard Hoops in Boulder mentioned your organization to me recently during a conversation in connection with the Unreasonable Institute. Sounds like you are doing great work in addition to sharing valuable wisdom. Thanks!

    Comment by Steven Ellis — November 6, 2012 @ 4:00 pm

  6. Excellent analysis, especially in raising the topic of who defines the terms of success and ownership between entrepreneurs vs. investors (I’d put these two as separate often) vs. communities.

    Comment by Kevin F. Adler — March 18, 2013 @ 5:34 pm

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