An increasing number of investors—individuals and institutions alike—are deploying capital in more socially and environmentally conscious ways. Under the present economic system, which endlessly extracts natural and capital resources, and leads to ever greater wealth concentration, that’s a shift worth celebrating. Yet even impact investments rarely stray from the conventional investment approach that prioritizes capital preservation and profits. As impact investing matures, it’s worth asking: Can we finance mission-driven enterprises in a way that shifts the core emphasis to regenerative environmental and social benefits?
Fixing the system means breaking out of it
Martin Luther King Jr. once said, “Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.” One could say the same of impact investing and social finance; it is incumbent upon those of us who steward and invest capital to both evaluate how we came into such a privileged position and consider the ways in which carrying out this role may perpetuate systems of resource extraction and inequity.
When capitalism is successful, money begets more money. And today’s vast wealth gap isn’t a sign that our system is broken; it’s a sign that the system is working as designed. Impact investors, unquestionably well-intentioned, have been eager to demonstrate that social value and competitive financial returns are not mutually exclusive. It is reasonable to wonder, however, if capitalist approaches can meaningfully address challenges created by capitalism.
A growing chorus of voices is beginning to ask: How do our loans and investments affect community wealth and well-being? How do investors and lenders ensure that we add more value to communities than we remove? How can capital serve people and not the other way around? And embedded in these questions are deeper ones: What does it mean to earn a return? What is our shared understanding of risk? How much money is enough?
Through a triple-bottom-line approach, businesses and investors have broadened the definition of “return” to encompass results beyond profit. In practice, however, investors rarely pursue social and environmental benefit in a return-agnostic or even capital preservation-agnostic way. We typically conceive of risk—an important factor considered in the course of due diligence—as risk to principal. Even for impact investments, financial gains and losses remain our primary evaluative prism. The marriage of “doing good” and “doing well” remains a servant-master relationship.
My intention here is not to point fingers. As an impact-driven capital intermediary, RSF Social Finance faces these same questions and challenges. We’ve taken some important steps by shifting to a community model for setting interest rates and by innovating the shared gifting model. And yet, we realize that other elements of our work—such as our social enterprise loan fund’s collateral requirements, risk-based pricing model, and requirement for personal guarantees—may be at odds with our intention to create long-term social, economic, and ecological benefits.
Regenerative investing for a regenerative economy
One way we’re trying to address this dynamic is through a shared-risk fund approach that engages investors in conversation about what it means to earn a return, take risk, and pursue transformative impact. Under this model, foundations and family offices contribute to a pooled fund whose capital is then deployed to social enterprises using a mix of financial instruments. The fund is structured such that investments into it are eligible for treatment as program-related investments, which can count, like grants, as advancing a foundation’s charitable mission. With the capacity to take more financial risk, RSF has the flexibility to make investments and loans to social enterprises that don’t meet our traditional criteria and may not otherwise have access to capital.
To this end, we recently launched the Regenerative Economy Fund (REF) as the second of two shared-risk funds. Out of this fund we support social enterprises that make clean energy more broadly accessible, create products with sustainable materials, and divert waste from landfills. We’re also using the REF to refine a suite of regenerative finance tools that employ non-extractive repayment terms and collateral positions, subvert the typical investor-investee power dynamic, balance the scales of economic control, and include more stakeholders in decision-making. In our view, there is a clear link between the issues of climate change and economic justice, and this fund exists at that intersection.
One of the first REF investments was a revenue participation agreement with software startup WattTime. With its machine-learning algorithms and software-as-a-service business model, WattTime resembles a Silicon Valley tech startup. And like an increasing number of startups, WattTime is mission-driven: Its technology has the potential to drive major reductions in near-term greenhouse gas emissions and accelerate the transition of electricity grids from fossil fuels to renewables. The organization’s product, installed as a software update on smart devices like thermostats, batteries, and refrigerators, delivers a signal that tells those devices when the grid’s electricity is cleaner or dirtier, allowing them to use energy when the grid is cleanest. WattTime has a different level of commitment to its mission, however: It incorporated as a nonprofit to focus its efforts on achieving the greatest possible environmental impact.
That decision meant WattTime also needed a different approach to raising capital, since nonprofits can’t raise equity. Through the REF, we collaborated with WattTime to design financing that allows it to retain control of its mission and applications of its technology. Under this revenue participation agreement, each dollar loaned earns RSF (and any other investors who participate) rights to a fraction of WattTime’s revenue from software and consulting sales over the next five years. These returns are capped, ensuring that any revenue in excess of the mutually agreed-upon repayment terms is reinvested in the organization and leveraged for impact. This structure provides WattTime with payment flexibility that matches the vicissitudes of start-up revenue models. And, without fixed payments tied to pre-negotiated schedules of principal and interest, the company is free to focus on its mission rather than on making enough money to meet debt obligations right away.
Rethinking risk and return
But while moving money in new ways is necessary, it’s not sufficient. And for too long, the world of impact investing has oriented impact around investing when it should do just the opposite. As part of this reconfiguration, we must accept the fact that financing transformative impact may not be profitable by traditional standards. This should inspire us not to give up, but to question those standards and set new ones.
Foundations, for example, are well-positioned to take the lead in reframing notions of risk and return given their unique ability to allocate capital using a variety of instruments. From a returns standpoint, grants “earn” negative 100 percent. The next mechanism on the returns continuum—below-market PRIs—target 0 to 3 percent. That leaves a yawning band of returns between negative 100 percent and 0 percent. Outside of grantmaking, most foundations are unwilling to cross the lower bound. But instead of thinking of it as the province of financial losses, what if they used it as a space to be creative and innovate? Instead of thinking of a negative 20 percent return as a loss, what if they instead set that as a target and thought of the unreturned capital—perhaps explicitly designated for technical assistance or capacity building—as an investment in systems change and progress?
I’m not suggesting negative returns are the holy grail of transformative change, only that we consider accepting some capital loss in exchange for higher social returns. After all, some social burden or resource consumption likely produced the capital in the first place. As social entrepreneur Rodney Foxworth asks in a recent op-ed, is it reasonable to expect a high-impact local investment to have the same risk/return profile as public equities or venture investments? Probably not, just as we wouldn’t expect an organic, fair trade-certified chocolate bar to cost the same as a Hershey bar. And we intuitively understand that it would be missing the point for socially and environmentally conscious consumers to make cost parity with conventional products the primary driver of what they buy. That’s a version of what we do, however, when we prioritize impact investment opportunities with significant upside potential or little financial risk. And as long as impact investing remains tacitly in service to the accumulation and preservation of wealth in this way, it will fail to deliver on its promise.
So what will work? At RSF we draw inspiration from existing models of non-extractive, regenerative finance such as The Working World’s Financial Cooperative and Thousand Currents’ Buen Vivir Fund. We also participate as a member of Shake the Foundations, a group of organizers and funders developing strategies to shift philanthropic and investment resources to build regenerative economies that increase economic and political power for workers and their communities.
All of us with the good fortune of influencing the allocation of capital have an obligation to consider whether doing so to further capital growth solves or perpetuates the challenges impact investing presumes to address. In doing so, we must confront the uncomfortable reality that meaningfully dismantling inequitable systems of power and privilege will require giving up power and privilege. Just imagine how different the world would look if most capital were governed by movements instead of by people who resemble me: white, male, and elite institution-educated.
It is only by naming the contradictions of our work that we can begin the process of reconciliation. Doesn’t the gospel of “do well while doing good” sound a lot like “have your cake and eat it, too”? As Ford Foundation president Darren Walker asks, isn’t there some irony to a system that creates vast differences in wealth and then assigns the improvement of the system to those holding that wealth? Can the master’s tools really dismantle the master’s house?
This is not an atavistic call for regression. We all also have the opportunity to begin weaving new, compelling narratives about money and investment. What if we redefined wealth not as how much financial capital you manage or gain, but as how much you channel to democratic, community control? What if we shifted our idea of capital from a unit we transact with to a movement-building tool? What if we thought of money not as an end unto itself, but as a means of engendering compassion, generosity, and interconnectedness? A different world is possible, one where impact investing solves problems without replicating the structures that created them.