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  • Writer's pictureBjarne Eggesbo

The Limits of Traditional Social Impact Investing: Why We Need a New Approach for High-Risk Research

Introduction

Impact investing has revolutionized finance by merging the pursuit of financial returns with the goal of creating measurable social and environmental benefits. However, traditional impact investing models often fall short, particularly in funding high-risk, high-reward areas like pediatric cancer research. This article explores the limitations of these conventional approaches and underscores the urgent need for innovative funding solutions.


Successes and Shortcomings of Traditional Impact Investing

Traditional impact investing has seen success in areas such as renewable energy, affordable housing, and microfinance. These projects deliver tangible, easily quantifiable outcomes like reduced carbon emissions and increased access to essential services. However, when it comes to high-risk research areas, traditional models reveal significant limitations:

  • Uncertain Outcomes: High-risk research projects, such as those aimed at developing new treatments for diseases, often have uncertain outcomes. Many research initiatives do not lead to successful treatments, making it difficult to predict returns on investment.

  • Long Timelines: The timeline from initial research to a viable treatment can span decades. This extended period contrasts sharply with the shorter timeframes preferred by most impact investors who seek more immediate results.

  • High Initial Investments: The cost of conducting initial research and clinical trials is immense. Traditional impact investors typically avoid such high-risk, high-cost projects, preferring investments with more predictable and stable financial returns.


The Funding Gap in High-Risk Research

Given these limitations, several high-risk research areas remain underfunded. For example:

  • Medical Research: Particularly in areas like pediatric cancer, where the potential for groundbreaking treatments exists, but the financial risks are high.

  • Climate Change Innovations: Technologies that could mitigate climate change but require significant upfront investment and long development periods.

These areas are crucial for societal advancement but struggle to attract the necessary funding through traditional impact investing models.


The Need for Innovation

Given the constraints of traditional models, it’s clear that a new approach is necessary. Innovative funding models must accommodate the high risks and long timelines inherent in medical research and other high-risk areas. Such models should leverage stable traditional assets to mitigate risk while channeling funds to support high-impact, long-term research.

One promising idea is using the structures of traditional finance to fund these high-risk areas. For example, imagine a fund where the majority of the investment management fees are redirected to finance research initiatives. This way, investors can still receive the financial benefits of traditional assets while driving significant social impact.


Conclusion

Traditional impact investing has made significant strides in promoting social and environmental benefits alongside financial returns. However, its limitations are starkly evident when addressing high-risk research areas like medical research. The urgent need for innovative funding models cannot be overstated. By rethinking how we approach impact investing, we can bridge the gap between the need for intensive capital and the high-risk nature of medical research funding.

In the next article, we will introduce The New Impact Fund, a pioneering model designed to address these challenges by providing sustainable funding for groundbreaking pediatric cancer research while ensuring competitive financial returns for investors. Stay tuned as we explore how innovative investment strategies can make a profound difference in high-impact areas.


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