Micro-Credit Sector Scandal Reinforces Need for Impact Investment Standards

By Geri Stengel

The sky is falling! As a long-time advocate of impact investing, I am chilled by the news that debt collectors for SKS, an Indian publicly traded micro-credit corporation, may have pushed clients to suicide.

Add to that, the steady drumbeat of reports that charter schools in Georgia, Minnesota and other states are under-performing. Top it off with the scandals involving Kaplan and other for-profit colleges, and it really seems as if for-profit efforts to address social problems are doomed to failure.

If impact investors don’t find a way to define and police themselves, they’re going to be faced with draconian regulations that prevent them from operating at all, as happened in the Indian state of Andhrah Pradesh when news of the suicides first came out.

Yes, on one level SKS is just another example of the greed that fueled the recent economic collapse, but things have gone a step further, from taking people’s homes to taking their lives. Those served by impact investments are the most vulnerable, powerless, and desperate so the rules that govern these providers must be even more stringent.

With governments cutting away safety nets, nonprofits will not be able to handle the demand for services. There is a place for impact investment but only if it devises a way -- quickly -- to ensure that impact investments make clients the top priority and profit a secondary priority.

The Global Impact Investing Network (GIIN) is painfully aware of both the need for regulation and the potential loss if profit is always regarded as evidence of exploitation. “Irresponsible investment undermines the promise of impact investing and it should be exposed and condemned,” the organization said in a 2010 letter to its members about the events in Andhra Pradesh.

But it also pointed out -- and I firmly agree -- that without mission-driven, for-profit businesses, poor people will be left without essential services because governments and nonprofits can’t do it all.

“Being human, rather than being a business, seems to be the condition that creates the risk of greed and injustice,” Antony Bugg-Levine, chairman of the GIIN board and author of the book  Impact Investing: Transforming How We Make Money While Making a Difference.

Amen to that.

I think the building blocks for a strong, transparent, accountable social enterprise sector are already in place. Look at Benefit Corporations, now legal in seven states. Boards of B-corps are required to consider social impact as well as profit when making decisions.

The focus of B-corps is clearly on doing no harm, doing some good, and making, but not necessarily maximizing, profit. Investors know this up front. Already more than 500 corporations in 60 industries have become B-corps.

Then there’s the Global Impact Investing Rating System, which is already working with investors and fund managers to provide third-party assessments of impact investments.

The will is there; the tools are available. Let’s make sure SKS never happens again and that those who claim to fix any social problem are held to a higher standard. Let’s make sure that “impact investing” always means that the focus is squarely on the best interests of the client, not maximized profit.

“Impact investors need to police the boundary between true impact-focused enterprises and those using the impact label inappropriately to attract capital and support,” Bugg-Levine says.

As investors, consumers, and social activists, we must demand accountability, transparency, and oversight. No company should be able to attract “impact investment” money unless the business puts social good ahead of profit in its by-laws.

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Geri Stengel is founder of Ventureneer, which connects values-driven small business owners with the knowledge they need to make the world a better place and to thrive as businesses.