There's been a big movement lately among foundations, high-net-worth individuals and family offices toward "impact investing" -- investments made with a specific environmental or social benefit intent.

This is great to see, and I've really enjoyed getting to interact (and even co-invest) with a bunch of impact investors, and to see even more teams entering the market with this strategy in mind. There's an ongoing debate, however, around how much return such investors should be willing to sacrifice in order to make that impact.

My answer? None. While I'm fine if anyone wants to sacrifice returns as part of their philanthropic efforts, I believe that targeting returns on par with broader market benchmarks is not only okay, but potentially an important part of an impactful strategy.

Even as impact investing grows in popularity, the pool of capital available is dwarfed by both the magnitude of the environmental and social challenges being tackled, and by the available capital on Wall Street and Silicon Valley. Impact investors trying to make a big difference in these challenges therefore often proclaim that they're doing their individual, smaller investments with an eye toward unlocking all that capital at scale.

If you want to make a big difference as an investor by getting others to follow your lead, you need to show how what you're doing makes a lot of money. You must therefore demonstrate replicable, attractive returns.

There's a reason why the traditional investors are sitting on the sidelines and not jumping into the investment areas that impact investors want to target -- they don't yet know how to get such attractive returns at scale by conducting such activities. Impact investors have a critical role to play, therefore, in establishing these new investment approaches. But the problem with sacrificing returns in doing so, unfortunately, is that the mainstream investors often look at sub-market returns and wonder when it's actually going to make money. Sub-market returns inherently undermine replicability.

So demonstrating market-level returns is actually a powerful factor for impact investors who want to unlock significant capital after them. But if such returns are available, why are impact investors needed? Why aren't mainstream investors already doing these investments?

There are many risks in doing things for the first time, and there are many points of execution that can trip up a new effort. Mainstream investors wisely understand this and are reticent to take on such risk in exchange for returns that they can access through more proven approaches.

Here's a real-world example: At my firm (although we wouldn't call ourselves an impact investor), we invested in a residential rooftop financing platform (OneRoof) at a time when the company was looking to raise its first project finance pool. Understandably, VCs wanted to see that the team could access project capital. Project capital providers, on the other hand, wanted to see that the back-office systems worked, that the leads could be generated, and that the overall performance of the project pool would be as advertised.

There was zero technology risk -- we're talking off-the-shelf panels, inverters, etc. But the execution risks alone presented the startup with a major chicken-and-egg problem. Fortunately, as a family office, we had the flexibility not only to play a VC-type role, but also to provide that first project pool. We had no intention of sacrificing our returns expectations in any way by doing so -- in fact, we hoped that solving the company's dilemma would enhance our returns. And in so doing, we helped set the company up for its next project pools, which were provided by the likes of Morgan Stanley and other traditional firms. 

An important aspect of successful efforts to "buy down the risk" must also take into account the replicability of the investment model. In the case of this project pool example, it was structured almost exactly like the follow-on pools would be structured. That was no accident. The test of replicability was something we had to get very comfortable with before we would do our initial investment there.

On the other hand, many angels and foundations (such as those engaged in the PRIME coalition) are also essentially doing this risk buy-down for early-stage technology development, but for time and technology risk instead of execution risk. They're trying to establish new models for successful venture investments into early-stage deep technology innovation.

These are new models that acknowledge and account for the longer gestation periods such commercialization efforts can face. But in talking with many of them, they also certainly don't expect to sacrifice returns on the winners they back. In fact, the opposite is true -- by tackling really big technology innovation opportunities, many of them are hoping for strong economic wins within a broader portfolio. But with a low hit rate at the individual company level, as they try to figure out the right models.

In both cases, the role played by the "impact investor" isn't to sacrifice returns. In fact, admitting as such upfront might be a major turn-off for getting mainstream investors to follow into the same models. But in both cases, the early-moving impact investor is taking on more risk -- execution risk, time risk, or technology risk, as appropriate to each case. 

Whether it's to help establish new scalable implementation platforms for clean technologies, or to help establish new venture financing models for the backing of clean technology innovations, there's a critical role for impact investors to play in unlocking big scalable capital. Bringing such follow-on capital is in fact a major, explicit goal for many impact investors. 

For those who do want to have that impact, however, this ongoing argument around how much returns-sacrifice to accept rather misses the point, in my view. Sacrificing returns often fails the test of replicability. Buying down risk, if done the right way, is, on the other hand, key to establishing replicability.

So impact investors, do you want your efforts to be amplified with follow-on capital? Then consider taking on more risk -- not sacrificing returns.