INVESTING FOR IMPACT:COMBINING SOCIAL & FINANCIAL RETURNS

In our new series on investing for impact, Endeavor Group partner Ashley Allen looks at how foundations and individuals can leverage policy advocacy, public-private partnerships, data collection and analysis, social media, and the regulatory environment to maximize their philanthropic investments.

Combining Social and Financial Returns

by Ashley Allen

Social impact investing — a concept frequently raised but not clearly defined or understood — presents a compelling opportunity for foundations and philanthropists to maximize the leverage and impact of their work. Innovative philanthropists with higher risk tolerances such as Pierre Omidyar, Jeff Skoll, and Bob Pattillo, along with leading foundations and social impact funds like the Kellogg Foundation, Calvert Foundation,Acumen Fund, and Bill & Melinda Gates Foundation, are increasingly using social impact investing to expand their influence and introduce market-based solutions to the complex world of social change.

The increased interest of the philanthropic sector in social impact investing is driven in part by the desire of philanthropic funders and private investors to fuel sustainable interventions that address economic inequities and systemic, structural barriers to economic and social development. Leaders in the field believe that traditional charity often meets immediate needs but too often fails to enable people to solve their own problems over the long term. Accordingly, the social impact investment approach aims to catalyze the power of private markets to stimulate long-term social, economic, and environmental complex world of social change.

The increased interest of the philanthropic sector in social impact investing is driven in part by the desire of philanthropic funders and private investors to fuel sustainable interventions that address economic inequities and systemic, structural barriers to economic and social development. Leaders in the field believe that traditional charity often meets immediate needs but too often fails to enable people to solve their own problems over the long term. Accordingly, the social impact investment approach aims to catalyze the power of private markets to stimulate long-term social, economic, and environmental solutions.

Definition of Social Impact Investing

To date, no single definition of social impact investing has taken hold. TheGlobal Impact Investing Network, a group of organizations working to strengthen the field of social impact investing, defines it as investments that “aim to solve social or environmental challenges while generating financial profit.” This approach contrasts with “socially responsible investing,” which uses negative screens to avoid investments in companies whose behavior is deemed “bad” or “harmful.” We at Endeavor further delineate social impact investments as investments that actively seek to develop and prioritize market-based social and environmental solutions above financial returns. Accordingly, social impact investors have lower financial return expectations.

The field boasts a variety of investors, including high-net-worth individuals, foundations, community development finance institutions (CDFIs), private wealth managers, and commercial banks. It also encompasses several investment vehicles, with the core activities falling into four categories:

• microfinance loans and other financial services for the poor
• community development loans for small businesses or affordable housing
• loans or loan guarantees for the acquisition of real estate assets
• equity investments in clean technology, sustainable energy, health, education, and other social service sectors targeting low-income populations

Types of investments range from grants and endowment capital, to program-related investments (PRIs), to venture/equity capital and loan funds. In some cases, investors blend different types of capital with different requirements and motivations to achieve the desired social and financial returns. In the case of foundations, the lion’s share of social impact investing has been driven by grant capital, largely because strict investment policy stipulations limit (or are believed to limit) the range of investments appropriate for endowment capital. However, an opportunity exists for foundations to loosen these stipulations to allow for more creative and effective means of using all the resources at their disposal in support of their philanthropic goals.

A few illustrations serve to demonstrate this innovative approach:

Omidyar Network. Omidyar Network supports global poverty alleviation efforts through investments in the microfinance industry, a sector focused on providing small loans to the world’s poor. The organization addresses specific constraints to microfinance sector expansion by supporting efforts to improve lending practices, build out industry infrastructure, and expand loan volumes. Omidyar also strives to demonstrate the potentially self-sustaining and profitable nature of microfinance to traditional private-sector investors. Ultimately, ON believes that increased capacity and competition in the microfinance field will create economies of scale that drive down costs and improve financial services for the poor, breaking down a significant structural impediment to poverty.

Walton Family Foundation. The Walton Family Foundation has established itself as a leader in providing program-related investments to support charter school facility funds, fuelling the expansion of strong charter networks in more than thirty urban school districts, includingGreater Albany Public Schools, Detroit Public Schools, Chicago Public Schools, Milwaukee Public Schools, and District of Columbia Public Schools. From a structural perspective, the foundation pledges foundation assets as credit supports for tax-exempt bond issuances. The PRI comes in the form of a low-interest loan, which enables charters to access bond funding in a timely, efficient, and highly leveraged manner. A typical PRI loan guarantee allows charter operators to access five to seven times the amount of capital available without the PRI — and to do so at more attractive rates and with a less encumbered loan process.

Acumen Fund. Acumen is a nonprofit global venture fund that uses entrepreneurial approaches to address the problems of poverty globally. The fund was established in 2001 with seed capital from the Rockefeller Foundation, Cisco Systems Foundation, and individual philanthropists; it invests exclusively in businesses in the health, water, energy, and housing sectors directly serving the poor and that have economically sustainable business models. Capital commitments range from $300,000 to $2 million in equity or debt, with targeted payback in five to seven years. To date, Acumen has invested in more than thirty-five private enterprises providing services to over 36 million people across Africa, India, and Pakistan.

Conclusion

The emerging field of social impact investing continues to develop, with leading market participants aiming to define and quantify the approach while working to create efficient market mechanisms, ongoing deal flow, and commonly adopted analytical schemes that support an expanding capital market. The development of appropriate field infrastructure will require time and shared effort, as well as a greater openness to the social return construct on the part of those controlling major sources of investment capital. We believe, however, that as developments continue to unfold, philanthropists and private investors alike will be presented with compelling opportunities to expand their social impact investment activities.

(Ashley Allen is a partner in the Endeavor Group, an innovative consultancy offering an integrated suite of strategic, legal, and communications solutions to advance its clients’ complex global agendas.)