Spring 2018 – Weak Impact

The term “impact investing” is now a decade old, and the activity it describes totals over $100 billion and growing. What’s not to love about pursuing the mission of philanthropy via the mechanisms of capitalism? Seeking profit in tandem with other good societal outcomes? Alleviating poverty while also generating income? 

Well, it depends on what you mean by impact investing. In her new book Real Impact, investment professional Morgan Simon sets impossibly high ambitions for impact investing, while attacking the commercial disciplines it depends on. She argues that private business has caused harm through the centuries because of its “extractive practices,” and that ineffective charity is “covering up structural economic problems.” She wants to see impact investing “completely restructure the global economy.”


Simon is not only seeking a better way to help the needy and solve societal problems. She is also seeking a way to force capitalism into new forms. Hoping to appeal to other liberal critics of for-profit business, she apologizes that “engaging in the economy can sometimes feel dirty and complicated, and it may invoke negative feedback from peers who perceive such work as less radical. But to ignore this opportunity would be to turn our backs on the communities that must deal with the daily consequences of the economy as it is.” What follows is Simon’s playbook for an essentially socialized economy where allocating capital for the best returns is a thing of the past.

The author says an impact investment must “fairly balance risk and return between investors, entrepreneurs, and communities.” How that “fair balance” will be measured and judged is not clear. Simon believes good intentions, financial smarts, diligence, and an enlightened, progressive attitude will make it all work. But the verdict of history is that decreeing such things on the grand scale that Simon desires has inevitably required commissars, mass appropriations of property, and prison cells.

Is it reasonable to believe that morally excited impact investors will be better at improving communities, landscapes, and the economy of poor nations than the amoral free market? The experience of millions of Venezuelans and Cubans and North Koreans suggests it is likelier that the unintended consequences of benevolent manipulation of the economy through impact investing could create poverty, environmental decay, politicization, and cultural stultification that would make the “centuries of extractive practices” that Simon bemoans look like a garden party.

Ironically, Simon is clear-eyed about the unintended consequences that charity can have. She calls (somewhat magically) for “impact downside prevention”—which is her jargonish way of saying, let’s make sure we don’t inadvertently hurt the people we’re trying to help. Her solution is a mild tweaking strategy for avoiding unintentional harm here and there. Yet, somehow, when she aims for massive systemic impact rather than small victories, she’s wholly confident she and her comrades will avoid any nasty side effects.

To inspire acolytes, Simon cites a handful of small impact investments that she says produced successes: a wind farm, a worker co-op, a chocolate partnership. In a book that is unwilling to accept anything less than fundamental structural change as a mark of success, that’s pretty small beer. A reader could be forgiven for expecting a little more objective confirmation that her dream is within the realm of the possible before we commit the whole “global economy” to jumping off the cliff of impact investing.

Real Impact illustrates the many ways that well-intentioned efforts to help others can go wrong due to failure by the do-gooder to grasp the complexities of markets, the power of economic incentives, and the immutability of human behavior. Simon’s complete trust in the ability of investors to engineer radical global social change, despite zero examples of this ever being achieved even on a middling scale, is the book’s downfall. The blunt reality is that no human being will ever have all the information needed to successfully pull off such a feat of planning and control.

It is possible to defend a more modest and humble approach to impact investing—focused on changing a life rather than changing the world, and acknowledging that this may require sacrificing greater efficiency, higher returns, or other social goods in the process. But practical contributions of that sort will have no chance of being implemented if the kind of naïve utopia that Simon seeks is what people come to think of as “impact investing.”   

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