As 2017 unfolds with a new administration in Washington, DC, foundations and other institutions are exploring how best to advance their social and environmental missions. Impact investing—making investments that intentionally seek social or environmental impact alongside financial returns—has become an increasingly important tool at their disposal.
Already, impact investing has shown an impressive ability to harness the collective power of philanthropy, the private sector, and government at all levels. Consider the Detroit Home Mortgage Program, a collaborative effort among the Kresge and Ford foundations, a cadre of local banks, the city of Detroit, and the state of Michigan. The program is rebuilding the city’s decimated single-family housing market by using a mix of grants, loans, and loan guarantees that will ultimately enable buyers to purchase and renovate once-vacant homes. Or consider the $100 million investment McKnight Foundation made out of its endowment to help Mellon Capital Management launch the Carbon Efficiency Strategy. This initiative now offers participants a way to tilt their investment toward companies whose practices reduce carbon emissions. These are just two examples of powerful new tools foundations are using to drive social and environmental change.
As more and more institutions deploy impact investing to meet today’s challenges, foundations are uniquely positioned to take the lead. First and foremost, they are experienced; foundations have engaged in “mission investing,” or “social investing,” for decades—long before the term “impact investing” originated. Foundations also have a deep understanding of and fundamental commitment to social impact. In addition, they can often provide more flexible, risk-tolerant, and patient capital than other types of investors. Indeed, foundations are increasingly using their catalytic capital to de-risk individual investments or markets, and attract other types of investors—including those from the private sector and government—who can bring much greater resources to bear. This leveraging of fellow investors is accelerating impact investing’s potential to drive big change.
At Mission Investors Exchange, we provide a platform for trailblazing and newcomer foundations alike to openly collaborate with each other on how to partner, innovate, and grow the field together. In that spirit, we are pleased to contribute to this series, in which 11 top US foundation leaders address what’s next for the impact investing community. Throughout, the leaders will reflect on four important and related themes driving the increased sophistication and growth of the impact investing field.
1. It’s not just “either-or” anymore: navigating the spectrum of risk, return, and impact.
Historically, impact investors have been placed into several distinct camps—either “impact first” or “financial first,” either focused on concessionary returns or market returns. These either-or tradeoffs no longer describe the reality. Instead, impact investors are increasingly looking at their overall portfolios and individual investments along a spectrum that takes into account varying levels of risk, return, and impact. In doing so, they are opening up new possibilities.
As Omidyar Network laid out in a recent article, having a sliding scale of impact and financial returns allows investors to strike the balance that makes sense for them. Omidyar and others are going even further by remaining flexible and open to modifying their risk-return profile during the life of an individual investment. In this way, they can respond to the real-time needs of the project or community being served.
This series will explore the David and Lucile Packard Foundation’s efforts to tightly integrate its mission investing and grantmaking, and thus sharpen its focus on impact; The Kresge Foundation’s focus on “off-balance-sheet guarantees,” which allow it to keep resources fully invested in the corpus while creating impact on the ground; and Heron Foundation’s move to align 100 percent of its endowment to impact. It will also spotlight how all 11 foundations are using a more flexible, multi-dimensional approach, resulting in diverse portfolios that may include: 1) grants to de-risk transactions, program-related investments to provide catalytic capital, and mission-related investments seeking competitive returns out of the endowment; 2) diverse products such as loans, equity, and guarantees; and 3) a wider range of return expectations.
2. Leveraging dollars and making markets
While it is critical that the philanthropic community deploys more of its capital for social and environmental good, foundations can’t go it alone. Solving today’s global problems will require much greater investment. That realization has led foundations to find ways to build on-ramps for new and unconventional partners in the private and governmental sectors. Foundations are brokering new ways to attract these other investors, who can bring the resources necessary to scale social enterprises and funds. When innovative foundations assume more risk so that other investors can assume less, they increase the capacity for impact. Cross-sector collaborations like these are driving the surge in impact investing. And more and more foundations have explicit mandates for leveraging additional dollars and enticing investors from other sectors to join them.
One of the articles in this series, by The John D. and Catherine T. MacArthur Foundation, will make the case that impact investing needs more “market-makers for mission,” a role MacArthur itself is taking on. These “market-makers” have a deep understanding of the social sector, and the distinct capital gaps social enterprises and funds are facing. They can help structure and deploy new investment platforms—from syndication services to managed funds—that minimize risk and produce a more efficient, effective entry point for other investors. These new investors bring far more capital than philanthropy alone, and thus have the potential to dramatically increase the social and environmental impact.
3. More than money: putting all available capital to work
Given the enormity of the world’s social and environmental challenges, it is also important to recognize that financial capital alone will not be enough to make ample progress. That’s why leading foundations are deploying all the capital they can leverage to accomplish their goals, including human, social, intellectual, and political capital. Harnessing people, communities, policies, and ideas can exponentially increase the power and the value of each dollar these organizations invest.
In this series, The Fink Family Foundation will chronicle its focus on human capital and describe how its support of emerging for-profit and nonprofit leaders has buoyed many early-stage, impact investing organizations. Incourage Community Foundation will explain how developing and unleashing “community capitals” is as important as financial investment in driving the economic revitalization of a rural area impacted by globalization and devastating job loss. And the McKnight Foundation will share how it has reimagined itself as an institutional investor, and stood side-by-side with the world’s largest pension funds, insurance companies, and asset managers to create a collective voice against climate change at the Paris Climate Talks. As McKnight explains, by viewing themselves anew as institutional investors, foundations can gain confidence, influence, and an entirely new perspective on their capital management and deployment for social impact.
4. Building the broader ecosystem
With the growth of the impact investing sector comes a discussion about definitions, standards, measurement, and broader infrastructure. Foundations have an inherent interest in and ability to develop the impact investing ecosystem. At their core, foundations are more open, transparent, and collaborative than conventional investors, and in sharing their learnings—from both successes and failures—they allow the field to build on their experience. Some are even publishing their portfolios and investment holdings for all to see. And with their focus on mission, foundations are particularly interested in understanding what’s working, and why, from an impact perspective.
Here, The Annie E. Casey Foundation and Omidyar Network will share the importance of impact measurement and tracking, which can help ensure that foundations’ core values and impact goals are at the forefront as the field grows. And the Case and Ford foundations will describe how they are broadening the ecosystem by drawing in emerging groups of impact investors, including women, millennials, and pension and sovereign wealth funds.
These contributors and fellow members of Mission Investors Exchange are pioneers in impact investing; they are reimagining their leadership roles and investment models in the pursuit of greater social and environmental change. This series offers a roadmap to what’s next in impact investing and an invitation to join us on a journey to deeper impact.
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Read more stories by Matt Onek.