No topic in philanthropy has generated as much interest and excitement in recent years as impact investing. And while talk has so far exceeded action by a wide margin, that’s starting to change as the steady drumbeat to join the party gains momentum. Yet the very one-sidedness of the discussion—and it has been entirely one-sided—gives me pause. For there are good reasons to hesitate before jumping down the for-profit rabbit hole, particularly for large grantmaking foundations like Hewlett.

I should acknowledge at the outset that impact investing makes a great deal of sense in theory. It simply cannot be that only nonprofit organizations can advance social good; there must be for-profit companies that can do so as well. Perhaps not so many as impact investment’s enthusiastic cheerleaders avow—after all, most of the problems philanthropy addresses reflect market failures of one sort or another, which makes market-based solutions an unlikely panacea. But surely market mechanisms can address some problems, partly or wholly. And while many for-profit companies probably can produce social impact only while generating below-market expected returns (so-called concessionary investments), some, perhaps many, may be able to advance social good while generating market or even above-market returns (so-called non-concessionary investments).

The distinction between concessionary and non-concessionary investments matters, by the way, because the considerations weighing for and against impact investing differ depending on which is in question.

Non-Concessionary Impact Investments

Start with non-concessionary investments: We can expect ordinary investors to put resources into these precisely because they generate market returns, which makes foundation support unnecessary. Actually, make that inappropriate: A foundation that puts grant dollars into non-concessionary investments (in the form of a program-related investment, or PRI) is imprudently squandering its resources. Funds to support nonprofit organizations are scarce, and we have not come close to exhausting all the good the nonprofit sector can accomplish with our support. Insofar as ordinary investors will not replace grant dollars diverted into non-concessionary impact investments, such investments, when made by foundations, weaken the nonprofit sector for no purpose at all—taking funds away from nonprofits (already half-starved from persistently inadequate project support) while producing no impact that would not occur anyway.

That’s grant resources. What about investing endowment resources in non-concessionary impact ventures? To the extent an impact investment is truly non-concessionary, the foundation deploys its endowment to achieve social impact, while still earning a market return it can use for regular grant making. Extra impact at no extra cost: an unambiguously good thing, right?

Not necessarily. From a financial perspective, one needs to know how large the returns from the impact investments are compared to what the foundation could earn by investing without the positive social impact screen. When advocates of impact investing say these investments can be made without financial sacrifice, they are invariably using a conventional 70/30 asset allocation for comparison. But that’s not how the large endowments of major foundations work. Their very size gives these foundations access to funds and fund managers that consistently generate returns significantly above a 70/30 benchmark—and consistently greater than the returns generated by even the best-performing impact investment funds. For foundations like Hewlett, in other words, there is a sacrifice in returns even with non-concessionary impact investing.

It still does not follow that large foundations should avoid such investments, because, unlike socially neutral investments, impact investments also generate a social return. The question thus becomes whether the social returns generated by our non-concessionary impact investments are greater than the social returns that would be generated by the grants we could make with higher returns on our endowment. That’s an empirical question that will be difficult for foundations to resolve, because we currently have no good data. Remarkably, very few of the impact investment funds (or investors) actually measures or reports social impact, leaving that to be taken on faith.

My instinct is that the net social benefits from maximizing the size of endowments through neutral investing will likely be greater, particularly after we factor in the effect of compounding value over time. I could be wrong, of course; or, even if I’m right, this might change with time. Perhaps impact fund managers will generate greater financial and/or social returns as they gain experience or as the universe of available impact investments expands. What’s striking to me now, however, is how little interest there seems to be in even asking the question.

Concessionary Impact Investments

The analysis of concessionary (below-market) impact investments is different. Here, there is at least an argument that foundation resources might be necessary. PRIs could be needed to prove a concept that ordinary investors regard as too risky (because, for example, they lack knowledge and expertise about the relevant social sector). Alternatively, a PRI may be required to subsidize the difference between the for-profit’s expected returns and market returns, making it possible to attract ordinary investors who otherwise will shy away. In either case, philanthropic support may be useful or even necessary to catalyze the achievement of social benefits.

Yet, even if philanthropic resources of some amount are necessary, should these come from the major grantmaking foundations? A large proportion of new and emerging philanthropists seem interested chiefly in market-based solutions and show little or no interest in supporting traditional nonprofits. That is their prerogative, of course, whether or not this lack of interest in nonprofits and enthusiasm for for-profit alternatives has more behind it than faith. It means, however, that there is considerably more money looking for concessionary impact investments than there are such investments. I gave a lecture at Oxford last year to a roomful of young, would-be philanthropists—high-net-worth individuals sitting on some $40 billion among them, all looking to do impact investing. And this was just a small subset of the folks trying to elbow their way into the field. Why else would so many of the big investment banks and hedge funds suddenly be rushing to create impact funds?

That fact obliges organizations like Hewlett to ask whether the diversion of our scarce grant dollars is necessary or appropriate. From the perspective of traditional nonprofits, the new philanthropy going into non-traditional alternatives is of no more use than if the wealthy used their money for personal consumption: It isn’t coming to the nonprofits no matter what. So what happens to these organizations if large grantmaking foundations follow suit and—as seems likely—no one replaces their support? Do we have sufficient reason to shift resources, and in so doing, to weaken fields and organizations that have done (and continue to do) good? Or are foundations getting swept up in an insufficiently considered enthusiasm?

It follows, at least as regards major foundations, that the same reason to hesitate before sinking money into non-concessionary impact investments applies to concessionary ones: We impair the nonprofit sector to do something for which we are not needed. We should pause, in other words, not because concessionary investments are not worth making—the jury is still out on that—but because there are more than enough other funders (who won’t support the nonprofit sector) already fighting to occupy the space.

And what about opportunity costs? In ordinary angel and venture investing, the vast majority of new companies fail. Venture capitalists count on making up for those losses with the occasional investment that returns 20, 30,100 times the original outlay. Certainly there is no reason to assume that analogous ventures in the social impact space are systematically less risky. If anything, the fact that expected returns are below market means they are, on average, riskier and more likely to fail. How, then, should we think about the aggregate opportunity costs of these investments? How many succeed? How many fail? Are the social returns from the ones that succeed great enough to justify the aggregate outlay of philanthropic dollars, as compared to the social returns that might have accrued from using the same resources for grants (some percentage of which will also fail)? Such questions are not easy to answer, but so far as I can tell, too few foundations are asking the questions, much less trying to collect the sort of data we need just to hazard an educated guess.

Building the Field

Even if all my concerns are correct, there could still be a role for traditional grantmaking foundations in the impact investing world, though it may not be investing our grant dollars or endowment. If new philanthropists and high-net-worth individuals are going to use their resources this way, we can at least take steps to make it more likely that they do so well.

This could take several forms. We could help develop investment opportunities in ways that maximize their social impact. We can use our expertise in energy, for example, to help cities develop transportation or housing plans that are appealing to investors while also maximizing the reduction in greenhouse gas emissions. Or we might make grants to help potential investors find the most impactful investments—supporting organizations like the Prime Coalition or Aligned Intermediary, which provide philanthropic investors with tools, information, and support to make smart, effective investments. We could, in other words, help build the infrastructure needed to grow and sustain a flourishing impact investment sector.

The Hewlett Foundation already makes grants for these purposes, which seem sensible and beneficial, but do not require that we divert a lot of resources from a nonprofit sector whose good work deserves—and depends on—our support. With limited resources to address monumental challenges, we need to be thoughtful about how and where and when we act, with an eye on the sector as a whole. Philanthropy should not be an exercise in change for the sake of change.