From the Field Series: An ongoing report of the Philanthropy, Policy, and Technology Project, which explores the use of private resources for public good.
Last week, the Treasury Department and IRS proposed new examples of Program Related Investments (PRIs)— investments made by foundations primarily to accomplish charitable purposes—as part of the federal regulations guiding these kinds of impact investments. This is the first time in 40 years that the government has updated the examples, and it is an exciting opportunity for donors, nonprofits, foundations, and impact investors to provide input on the federal policies that shape and catalyze these types of investments. The departments will accept comments and input until July; you can read the new examples and make your suggestions here. (Jonathan Greenblatt’s “Opening the Door for Program Related Investments” provides more background on the proposed PRIs.)
We once looked to charitable giving and philanthropy as the primary, perhaps even exclusive, sources of private money for public good. The last half-decade has seen significant growth in impact investing, a phenomenon—some would call it a movement—that is fundamentally changing capital markets for nonprofits and social enterprises. These investment dollars, which can come from endowments, venture capitalists, angel investors, private equity, and institutional asset managers are geared toward expanding the capital pool available for socially productive, financially positive endeavors. Estimates of the total assets available for impact investing vary significantly, with ten-year projections ranging from tens of billions to trillions of dollars.
Impact investors use a range of asset classes from debt to equity. The managers of these assets are increasingly visible, organizing themselves in industry-wide associations such as the Global Impact Investing Network, promoting shared standards such as the Global Impact Investing Reporting Standards, and building publicly accessible databases of managers and funds such as ImpactAssets. Impact investing includes not only a focus on expanding the pools of available capital, but expanding the range of investable enterprises as well. Three new corporate forms—benefit corporations, flexible purpose corporations, and low-profit limited liability companies (L3Cs)—have been chartered in a limited number of states across the US to help build this movement and put the investment assets to work.
Expanding the pool of private capital for social good—from the current $300 billion per year in US charitable giving to a pool that would count both charitable dollars and impact investments—is potentially game changing. Some see it as a welcome innovation in improving capital funding for organizations that produce social benefits. Others see it as a welcome response to enduring and deep state deficits and drained public coffers that will limit, for the foreseeable future, the amount of public funding for organizations that produce public good. It is fair to say that the impact investing movement, both capital and enterprises, is one of the biggest forces of change currently shaping the new social economy.
So how do we see nonprofits and philanthropy, social enterprises, and impact investing fitting together to produce the greatest public good from these private resources? A new report from The Monitor Institute and Acumen Fund (“From Blueprint to Scale”) notes that philanthropic investments are key to catalyzing both the impact investment movement and the enterprises that impact investments can scale. Similarly, the Omidyar Network has spent almost a decade learning about and improving its use of a range of investments, from grant dollars to risk-adjusted equity investments, to achieve its social mission. One possibility is the emergence of a tested sequence of investment types and opportunities along which donors, philanthropic endowments, and impact investors will array over time.
But we must also ask if, and where, these different types of capital inputs either work at cross purposes or cannot be easily sequenced. For example, are enterprise structures developed to use impact investments—such as benefit corporations or L3Cs—valuable complements to existing nonprofit structures, or does they somehow shift what we need traditional nonprofit corporations to do? Are the governance requirements that exist to protect the public purpose of these new enterprises up to the task, and are they consistent across enterprise forms? Should they be? In our dawning age of big and open data, do we have similar expectations of information sharing across enterprise forms or investment pools, and should we? Most important, are we holding each of these enterprises and investment forms to a comparable, fair, and meaningful set of outcomes and outcomes reporting? Are we tracking where the dollars invested are coming from and where they are being invested?
Some of these questions can only be answered with time. Some may be best addressed through industry norms and practices. And some may require new policies and regulations that consider the entire social economy and its contributions to public good, not just the individual segments of philanthropy and impact investments. These are the topics for discussion at the next charrette on Impact Investing, tomorrow, May 15.
All materials from and information about the project can be found at ReCoding Good and Stanford PACS. We invite you to join our email list, talk with us on Twitter (#ReCodeGood), and to share your thoughts with us.