Undoubtedly foundations are uniquely positioned to provide patient, catalytic capital in the form of grants, debt, equity, and loan guarantees, as well as non-financial support to enable social ventures to scale. And with the arrival and mainstreaming of impact investing, many are recognizing that solutions to social and environmental challenges also lie in the for-profit sector, and they are looking to broaden their toolkit to better support all kinds of approaches to change.
In the United States, funders are largely practicing impact investing in the forms of program-related investments (PRIs) and mission-related investments (MRIs). Legislation provides a impetus to the growth of PRIs and MRIs, as they count toward the 5 percent annual foundation payout requirement. Ford Foundation, for instance, will allocate $1 billion over the next 10 years to impact investing, and Kresge Foundation has dedicated $350 million.
Partially due to the lack of a similar legislative incentive, PRIs and MRIs seem to be gaining less momentum in Asia-Pacific. While Asia-Pacific foundations are intrigued by impact investing, they combine a range of approaches to create impact in different ways. At a conference our organization hosted last June, one plenary discussed the wide array of activities Asia-Pacific foundations are undertaking—including and beyond impact investing. For example, Lopez Group Foundation, Khon Thai Foundation, and Sasakawa Peace Foundation all invest in nonprofits, social enterprises, and sometimes impact funds, as well as lead cross-sector, ecosystem-building initiatives in the Philippines, Thailand, and Japan, respectively.
The conference also included a workshop on foundations’ journeys toward impact investing. The workshop organizer, Sasakawa Peace Foundation, had conducted a survey of Asia-Pacific foundations and identified five common challenges they face in adopting impact investing: unclear regulatory environments, capacity and resource constraints, the lack of investment opportunities and management interest, and unclear linkages between impact investing and their social missions.
Notwithstanding these constraints, a recent study our organization conducted found that foundations in Asia-Pacific are adapting and implementing selected impact investing practices. The study looked at the different pathways five Asia-Pacific foundations—Social Alpha (an initiative of Tata Trusts) in India, The Happiness Foundation in South Korea, Narada Foundation in China, Japan Social Impact Investment Foundation (SIIF) in Japan, and Lord Mayor’s Charitable Foundation (LMCF) in Australia—have taken to introduce and build a market for impact investing in their respective markets. Each has successfully navigated the aforementioned constraints, and some have had early success in attracting mainstream capital from banks and institutional investors.
Asia-Pacific pathways toward impact investing
Compared to the United States and Europe, impact investing is still a new concept in Asia-Pacific. Hence, many Asia-Pacific markets need to bridge the global and the local. Foundations in Asia-Pacific are attuned to global activities and at the same time continually adapt selected practices to local contexts to create impact. Narada Foundation, for instance, pioneered impact investing in China by extending interest-free loans to its investees. SIIF serves as the secretariat for the Global Steering Group in Impact Investing, and disseminates global knowledge to dispel misconceptions around impact investing among both policymakers and the public. And LMCF, inspired by the Skoll Foundation and Rockefeller Foundation, launched a $1.54 million Affordable Housing Loan Fund in partnership with Social Enterprise Finance Australia (SEFA).
Local adaptation seldom happens without hitches. Constraints include aversion to the idea of funding for-profits, regulatory requirements, and public perceptions of foundation activities. Social Alpha has effectively pushed the boundaries of the possible through a three-tier funding structure, which fills the funding gap for high-risk, early-stage, social ventures in health care and science and technology. The structure includes a public charitable trust seeded by Indian investor Tata Trusts; a Section 8 registered entity (under the 2013 Company Act) that provides seed capital in the form of grants, equity, convertibles, and debt; and an investment fund that provides equity and equity-like instruments. While this financial structure provides a continuum of capital and allows organizations to scale, Social Alpha had to convince its board, regulatory institutions, the public that this the purpose of this activity was charitable and philanthropic.
As foundations in Asia-Pacific aim at scale, they are leading in building an impact investing market and increasing the amount of impact investing capital. SIIF, for example, provides risk capital and guarantees to local impact funds, in addition to setting up its own funds. The Happiness Foundation crowds in institutional capital from the Korea Growth Investment Corporation and KEB Hana Bank. Similarly, Narada Foundation engages the microfinance sector in making impact investments.
Three impact investing considerations for Asia-Pacific foundations
While Asia-Pacific is vast and diverse, and there is certainly no single model of practicing impact investing, we advise foundations to consider three main things as they embark on their impact investing journeys:
1. Clearly position your impact investing activities.
Defining impact and profit intentionality, and impact areas, is paramount in terms of producing consistent messaging, as well as seeking internal support—especially for foundations that have traditionally only made grants.
LMCF, for example, aligns its investment to grant-making along two impact areas: homelessness and affordable housing, and education and employment. In doing so, it tightly weaves impact investment into its overall mission and grant-making activity. Early on, LMCF identified a clear return expectation of 4 percent, and an investment horizon of five years for loans and longer for equity. It also determined that it would plough any financial return back into creating more impact.
India-based Social Alpha meanwhile established itself as a 100-percent-impact, nonprofit Alternative Investment Fund, a pool of capital from various investors following a pre-determined policy (under Regulation 2(1)(b) of the Securities and Exchange Board of India Regulations 2012). While it invests in for-profit health care and science, and technology-based social ventures, it does not stand to profit from the investments; all financial returns go to other, limited partners. Social Alpha also links staff compensation to impact rather than financial performance to attract the right talent.
2. Experiment and select appropriate tools.
Apart from equity investments, foundations can use loan funds, concessionary loans, guarantees for impact funds, and social impact bonds. The five foundations we researched took their time to assess the local contexts, understand local constraints, and find local strategic partners.
Narada Foundation, for example, issued its first interest-free loan in the form of a grant, which its investee subsequently repaid as a donation. It channelled its second loan via a microfinance institution. These arrangements helped Narada avoid public misunderstanding and potential legal complications around foundations investing in for-profits.
SIIF chose to provide guarantees for impact funds and launch social impact bonds to attract more capital for scaling impact. This was also due to the fact that the Japanese giving market is relatively small compared to that in the United States or Europe, while investment capital in the country is more widely available. With social impact bonds for instance, SIIF undertakes the highest risks and accepts the lowest financial returns among all investors. As a result, it has had some early success in involving institutional investors and high-net-worth individuals in making impact investments.
3. Partner with financial institutions and experts.
The Asia-Pacific foundations we studied place great emphasis on forging partnerships to increase funds for and scale up impact. They recognize the importance of collaborating with financial institutions, given their capital and reach, and in doing so, they infuse the impact lens into commercial investment considerations, thereby mainstreaming impact investing. The Happiness Foundation and SIIF have both successfully recruited large banks to invest in their impact funds.
Working with investment experts is also crucial. Co-designing the aforementioned Affordable Housing Loan Fund with SEFA, helped LMCF identify investment opportunities in line with its mission. It also sought guidance from Frontier Advisors, an investment consultancy, on strategic asset allocation.
In brief, by creating a clear and consistent positioning, dedicating resources to study local markets (including existing challenges and potential partners), and selecting the right tools and forging strategic partnerships, foundations in Asia-Pacific will be better able to leverage impact investing to achieve their social missions.