Paul Brest and Kelly Born’s article brings clear and rigorous analysis to a field that is desperate to have the practice catch up with the rhetoric, and that until now has surrounded a provocative idea with too much wishful and fuzzy thinking. In addition to developing a very helpful taxonomy and terminology, Brest and Born raise a critical question: What is the nature of the impact created by the investment itself, separate from the outputs or outcomes produced by the social enterprise that received the investment?
They argue that investment impact—as distinguished from the enterprise impact—exists only if the quantity or quality of the enterprise or investee’s output is increased “beyond what would otherwise have occurred.” From the perspective of an experienced impact investor—the W. K. Kellogg Foundation’s $100 million Mission Driven Investing Portfolio (MDI) now has a five-year track record across multiple asset classes and sectors—I find this framework illustrative but in need of expansion if we are to fully describe all the returns and impacts that are generated in the relationships between impact investors and their investees.
To begin, it’s important to differentiate among investors, as I will argue that there is an investor impact that adds yet another dimension of additionality in any transaction, depending on the unique interests of the investor. Brest and Born define foundations or other investors who start with a philanthropic perspective to promote and stimulate positive social change as socially motivated investors, as distinct from socially neutral investors. And indeed, at the Kellogg Foundation we have found ourselves often in deals side by side with socially neutral investors, realizing or hoping to achieve market-rate returns.
The authors are right to be skeptical that much impact investing strictly defined can achieve both market-rate financial returns and social impact returns, but the likelihood of this happening increases if we take into account another potential return: what we at the Kellogg Foundation call the learning return. (There is also a corresponding learning return for socially neutral investors, who by specializing in an industry gain increasing expertise to optimize future financial returns.) For foundations, which for the most part have made only charitable grants, becoming impact investors in commercial enterprises brings new and different information and insights into social problem solving that would not otherwise be available to them through charitable grantmaking alone.
Brest and Born appreciate that value is added from the relationship between investor and investee (called nonmonetary impact), but they see this as occurring in only one direction, from the investor to the investee. There is, however, the potential for a “more than money” return from the investee to the investor that can make socially motivated investors smarter and more effective in their core philanthropic endeavors, increasing social impact in both conventional charitable grantmaking and impact investing.
Here are some examples from the Kellogg Foundation. With decades of work and experience in food systems and with longterm field-building efforts in farm-to-school, community food, and school food transformations, the foundation saw an opportunity to invest in a young company, Revolution Foods, that was dedicated to selling healthy, affordable, delicious food for schoolchildren. It has brought us wholly new perspectives on issues of public policy, school and community food systems, and family and child behaviors that we can use to inform our grantmaking and institutional efforts on the very same issues. Investing in a bank, Southern Bancorp, that does business in the Mississippi Delta region, one of the foundation’s priority places, creates a partnership and provides a unique perspective on the challenges of economic and workforce development with which our program staff continually grapple. With our investment in Wireless Generation, our intense learning return on how to bring technology and big data to real-time assessments, coupled with customized instruction for K-3 early grade literacy, was matched by our 26 percent return with an early buyout. And today, as more funders seek to promote and invest in prevention and wellness as opposed to disease treatment, our investment in SeeChange Health tells the same story in the health arena.
Traditionally, foundations have supported pilot and model programs in the hope that they will be replicated and then funded more broadly by government. Now we see that when our fieldbuilding efforts are successful, they can create new demands and ultimately new markets for entrepreneurs to take advantage of. In this way, foundations can enlist private sector forces in scaling up what works.
Impact investments are not stand-alone transactions, but pivot points on the continuum of grants to commercial investments that enable socially motivated investors to continue learning and to stimulate continued advancement of their missions across sectors. For any given transaction, there might not be investment impact additionality as strictly defined by Brest and Born, but there can be substantial investor impacts that will increase mission efficacy over the long term.