How do we define 'Innovation'? Does Impact Investing qualify?

Kimpacto, Inc.
By: Kim Kastorff

If you think of a new or creative idea, would you consider that 'innovation'?   Why do we sometimes say 'innovative idea' and other times we just say 'idea'?  How can we measure or understand innovation if we don't have a clear idea of what constitutes "innovation" in the first place?  It seems that often words are used interchangeably - idea, creativity, innovation - and that there is no clear boundary defining the innovative stage in the product cycle. 

So, I began to question - how do we define 'innovation' and how long is it considered 'innovative'?  For example, the telephone was once considered innovative, but probably nobody would consider that innovative today in the world of mobile apps and other technology.  That is an obvious example, but what about Impact Investing?  Is Impact Investing considered innovative? And, if so, is it still considered innovative or has it moved beyond to something more legitimized and mainstream?  First, let's define 'innovation'....

According to Hitt et. al (2001) innovation can be defined as “the identification and exploitation of previously unexploited opportunities.”  Innovative processes involve creating new resources or using existing resources in a unique way, in order to commercialize products or services, enter into new markets, or target new customers. 

Rogers defines innovation as “an idea, practice, or object that is perceived to be new by an individual or other unit of adoption."  Communication is an important element, defined as “a process in which participants create and share information to reach a mutual understanding” and ultimately, the innovation achieves diffusion through “certain channels over time, among the members of a social system” (Rogers, 1995). 
 
Now, let's compare these definitions to Impact Investing and decide if this field makes the Innovative List.  We are already seeing the transfer of resources through innovative financial instruments and indices, new tools for measurement and reporting standards developing globally.  Innovative solutions are offered in order to transfer capital (e.g. mutual funds, social impact bonds, private equity, internet-based lending, crowd funding) and to quantify financial + social measurement using new social metrics (e.g. IRIS). 

Many believe that impact investing is capable of reaching a potentially larger scale than donor-based philanthropic institutions.  For example, a subset of impact investing is the U.S. based “Community Development Finance”, which has seen significant growth since the Community Reinvestment Act (CRA) was passed in 1977, and additionally the Community Development Finance Institution (CDFI), which was initiated in 1992.  Resulting policies and innovative financial products have supported growth in excess of $23 billion in assets in 2006 (Fulton and Freireich, 2009).

Accordingly, the field has moved beyond the initial innovation phase, and has entered into a marketplace building phase where infrastructure is developing, along with centers of activity, and is achieving global scale.  A 2010 study estimates the European SRI market has reached nearly €5 trillion, as of December 2009, which represents roughly an 87% growth over the prior year (EuroSIF, 2010).  A more recent JP Morgan study shows that the UK, US, European, and Australian governments have made over USD $5 billion available for impact investment over the past few years (Saltuk, 2011), and the potential to grow to about $500 billion, including high growth sub-sectors of Microfinance ($25 billion in 2006), and Clean Technology investments ($148 billion in 2007) (Fulton and Freireich, 2009). 

This demand-side has been triggered in part by the public attention given to Muhammad Yunus, when he received the nobel peace prize in 2006 for his contributions in developing the Grameen Bank and this notion of ´banking for the poor´, which later became known as micro-credits (www.muhammadyunus.org).  Microfinance institutions (MFIs) range from very small non-profit associations to large commercial banks, both serving a mission to help the poor, unemployed or entrepreneurs who cannot obtain standard bank products. 

Social entrepreneurs have achieved scale based on their innovative and practical approaches, and long-term sustainability focus on social issues (e.g. poverty). Social business ventures have also made social impact a high priority, and operate as for-profit businesses.  Since 2008, the B Lab has certified 750 B Corp. businesses in 27 countries and 6 continents, as of the 1st quarter 2013 (http://www.bcorporation.net).  These firms consider both soft ethical and social values and also hard proactive measures.  Occasionally, social and impact firms may partner with other Corporations, angel investors or VC firms, in order to further drive change through their social expertise, large professional networks, and supply chains that scale social products and services.

Collectively, the impact investing movement is driving social change and greater awareness and momentum.  In the last few years, we have seen more actors, change agents, opinion leaders and network connectors for the impact investing field, including the Global Impact Investor Network, Investor´s Circle, ANDES, and Social Venture Network (Ashta, 2011).  The GIIN Investors´ Council is a “leadership group” comprised of more than 50 impact investors ranging from banks, pension funds, foundations and family offices and across various geographies, with a goal of advancing the learning and growth of the field (www.giin.org).

So, is Impact Investing innovative?  In contrast to the outdated idea of throwing money at a problem or other such short-term approaches, impact investing considers innovative solutions for helping businesses and communities become self-sustainable.  It seems that innovation is found at the core of impact investing, with proactive approaches to seeking greater social impact and sustainable systemic change.  We are experiencing a shift from short-term gratification to the idea of long-term solutions which carry forward and benefit generations to come. 

Is this a new idea for you? 

Doing good makes good business sense - Kimpacto (kimpacto.com).

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