Every discussion about impact investment tends to includes somebody asking ‘what do you really mean by impact?’ or it focuses on the potential returns from impact investment compared to ‘conventional’ investment — the assumption being that there is a trade-off when you make social investments.

The first is a live issue for us at the moment because we’re designing something new at BGV and deciding who we should pitch it to and how. So I’ll be having lots of discussions about this in the coming months. I’ll come back to the other one in another post.

At one extreme, impact investment is providing capital to (usually) charities that have a proven track record of delivering social impact and when you put money in, you get social benefit out. The difference to a grant or donation is that you look for a model that means you also get money back, usually because there is some third party who is willing to pay for that social impact.

At the other extreme of the scale you tip into what you might call positive investment where you really just screen out ‘evil’ investments. Something like an SRI fund for example.

The distinction between impact and positive investment is whether you decide upfront what kind of social or environmental impact you are trying to achieve and then set out to measure it. Do you have a specific goal (or small number of goals) in mind? If you do, then that’s impact investment. If you don’t then it’s positive investment.

This matters because it determines who might provide the capital for your fund. There is a spectrum between the two but different investors will have different cut offs as to where they will invest.

For me this is the real debate about the future of impact investment. It’s got nothing to do with the legal form of the organisations you invest in (that’s a red herring) but is about the intention of the investors and the founders of the ventures and then how you measure and improve the realisation of that intention.

Luni at Fledge has written a great blog post about what doesn’t make it into their programme over in Seattle. We could have written an almost identical list for Bethnal Green Ventures (applications are open for our Summer cohort by the way!). The only thing I’d add is that you can greatly improve your chances by getting in touch before you apply and having a chat with one of our team either face-to-face or on the phone. Just by talking it through with one of us, you’ll get a feel for what our selectors are looking for and things you definitely should include in your application.

David Brooks wrote a great op-ed in the New York Times this week about impact investment. I think he’s right that it’s one of the most interesting and exciting sectors to work in at the moment. He contrasts it with working in finance or government:

“The big debate during the 20th century was about the relationship between the market and the state. Both those institutions are now tarnished. The market is prone to devastating crashes and seems to be producing widening inequality. Government is gridlocked, sclerotic or captured by special interests. Government is an ever more rigid and ineffective tool to address market failures.”

Of course, they’re both still important, but neither is growing or really capable of radical innovation. Certainly watching where smart people go after university or after they’ve been working for while, they’re heading towards social ventures or impact investment in much greater numbers.

Initially I have to admit when people told us what we were doing with BGV was impact investing, I was a bit resistant to join a bandwagon. In the UK it’s been called social investment but now is usually called impact investing or social impact investing. The one problem here is that some people see it as just a way of funding existing charities. That’s important too but is only a fraction of a percent of the opportunity. There’s huge amounts of capital available and a vast reserve of talent that wants to help create the ventures. The challenge for impact investors is to bring those together in an intelligent and ethical way and then prove that it had a positive impact.

We shouldn’t jump in uncritically but it’s starting to look promising. As Brooks says:

“Impact investing is not going to replace government or be a panacea, but it’s one of a number of new tools to address social problems. If you want to leave a mark on the world but are unsure of how to do it, I’d say take a look.”