Impact Investing and CSR

Impact investing and Corporate Social Responsibility (CSR) have much in common. Both are founded on a belief that business can be used to affect positive social and environmental change. Both use market mechanisms and harness business expertise, though in different ways. And both are reflections of a global trend for aligning the goals of enterprise and with the needs of society.

These similarities are bound to make impact and CSR natural allies in the years ahead. Yet the two sectors have important differences, too. And in these differences lie opportunities as well as challenges for both sectors.

THE BENEFITS OF MATURITY

Impact investing is still the new kid on the block while CSR, with its origins in the corporate culture of 1950’s America, has been around for some time. With decades to mature, CSR has had time to grow its infrastructure and consolidate its working models to a degree impact can only dream about. Its workforce of CSR managers and consultants has professionalized. This body of professionals has honed the practice of CSR, helping to integrate it into day-to-day business processes worldwide.

Crucially, these professionals have also developed the art of communicating about CSR to a range of stakeholders including the public. Corporations, especially large ones, have become adept at using CSR to manage reputation. At the same time the public and government have come to expect them to have comprehensive CSR programs. In a paradigm shift that has seen the practice of CSR move from fringe to mainstream, CSR today forms an integral part of corporate culture.

THE CORE DIFFERENCE

This widespread acceptance marks a triumph for those who believe in CSR’s social aims; and it should be an inspiration to a young impact sector, which has yet to reach this level of recognition. Yet there is a fundamental difference in the way they relate financial and benefit goals.

For all its popularity, CSR remains voluntary and self-regulated. This means that businesses define “social responsibility” for themselves and practice CSR in very different ways. There is a movement toward establishing CSR standards based on sustainability, and some companies are already reporting their results using guidelines such as those provided by the Global Reporting Initiative (GRI). One Maximpact-listed company, CSRHub, has created a research tool that aggregates information about CSR ratings for some 15,000 companies. Yet most companies don’t use any such standards and most don’t report. It’s also the case that many keep their social benefit activities (like employee volunteering or philanthropic grant making) entirely separate from their profit-generating ones.

This is where CSR differs significantly from impact investing. By definition, an impact investment must demonstrate a social as well as a financial return. This means that benefit is, at least theoretically, hard-wired into every impact deal. Admittedly, metrics remain an issue for the sector and questions will persist until some measurement methods prove their reliability. Yet the principles of yoking social and financial impact, and demonstrating outcomes with metrics, have been central to impact from the start.

THE CSR/IMPACT OPPORTUNITY

For the CSR sector, this innovative way of delivering benefit using market mechanisms presents an opportunity. Many businesses have already shown an interest in early-stage social enterprises through their CSR programs, for example those who work with venture philanthropy intermediaries like Impetus. Impact investment is a logical next step for such companies, especially those who would like to support later-stage development. With a wide array of sectors, new technologies and geographical areas to invest in, impact opens up a world of possibility for CSR capital.

For businesses whose CSR work has meant hands-on mentoring and grants-based philanthropy, a blended approach to impact is also possible. As recent studies suggest, a combination of grants with mentoring plus impact capital, each applied at the right time, can be just what a young venture needs to grow beyond the startup stage and become a viable business. With deep pockets and expertise to spare, corporations have all the elements needed to bring enterprise potential to fruition. With aims aligned tightly with a defined social mission, impact provides a new way to use all CSR resources for good.

It’s clear that CSR capital could bring much to the impact sector. Impact also may have something to offer the more mature CSR sector. Its triple commitment to profit and benefit and metrics provides a template for thinking about how business might do more to bring benefit. Ultimately, the tools developed for impact measurement may prove a boon for all types of social business projects, including those pursued by CSR programs. By taking impact’s cues and integrating their business goals with their social mission, CSR programs could take a huge step forward in creating a positive impact.