Solution-Driven Finance: The New Way of 'Impact First' Why Serving Organic Lobster on Titanic Won't Do the Trick

Abstract

The resounding successes in raising ever increasing amounts of capital for impact investing have never calmed the critics who maintain that much of this capital has nothing in common with an impact investing approach. These critics say that behind the figures is hidden a disguised form of return-driven investment strategies. How come the supposedly noble objectives of directing massive capital towards impact investing have not overcome the divide between the true features of impact investing and its perception in the eyes of its stakeholder community? The disconnect between, on one side, the impact investment capital raised and on the other, the impact that is needed to overcome the societal challenges we are currently facing is of concern: Whilst we are celebrating the ever-growing amount of capital going into so-called impact investing, we tend to overlook the limited impact this capital is actually having. We may very well raise an amount of USD 13 to 20 trillion USD, equivalent to what is needed to meet the SDGs. But how can we overcome the fact that most of these funds will seek risk/return profiles that can only be found in mainstream instruments targeted at some 40 countries which show political stability, functioning capital markets, high credit ratings and economic prosperity, while the bulk of challenges to be met in order to reach the SDGs lie in the 140 remaining countries, with high political end economic volatility, low safety standards, often unreliable legal systems etc. This article suggests a new form of “impact first” investing: rather than applying merely a negative screening filter that seeks to identify within a pool of random impact investment opportunities those that happen to meet a given risk/return profile, the focus needs to be on funding concrete impact solutions: Once identified, impact solutions shall be translated into financial instruments which combine the risk/return profiles of a sufficiently large spectrum of investors in order to get a given impact solution funded. DFIs, in applying their technical knowledge in funding projects in all types of sectors and their skills for developing innovative hybrid financial instruments can play a major role in this and prove their subsidiarity to the private sector. For players in the financial services industry, such new impact investing approach creates unprecedented opportunities to improve their competitiveness through the intelligence of their products. Finally, an investment approach targeted at concrete impact solutions, which are not only part of a two-dimensional investment decision but are actually placed at the very heart of the design of the financial instrument itself, would render a large portion of the debate on impact metrics redundant.