Over the past decade, it has become impossible to ignore the conversation around impact investing as a tool for social good. Yet, even as impact investing has gone from niche to mainstream, a recent survey found that nearly 40 per cent of foundations say they don’t know enough about impact investing to incorporate it into their strategies. How can this be after more than 50 years of non-grant financing by pioneers like the Ford Foundation?

Philanthropic impact investing deploys a wide variety of financial tools to nonprofits and for-profits with a social mission. Since 1969, foundations have been able to make programme-related investments (PRIs) alongside grants to further their charitable purposes without having monetary gain as a primary motivation. Foundations also can use their endowments to make mission-related investments (MRIs) that aim for market-rate returns while advancing philanthropic goals. By contrast, most foundations continue to focus on grants to pursue programmatic goals and prioritise financial growth and prudence with their endowments.

Recent criticism of philanthropic impact investing masks a fundamental question: Are there situations where using approaches other than traditional grants could further foundation missions – both in the short- and long-term? The clear answer is yes, as documented in a recent Bridgespan report, supported by the Kresge Foundation.

It’s important to note that traditional grantmaking should remain at the centre of foundations’ work. Grants sustain countless nonprofits in pursuit of social and environmental goals.

Tools and strategies for impact investing

However, tools like loans, loan guarantees, and even equity stakes in for-profit enterprises can and should have a place alongside grants. Selecting the right financial tool depends on the problem at hand. Simple low-interest loans to individual organisations, small business, and community development financial institutions (CDFIs) have been the primary investment tool used by foundations that have tried impact investing. For instance, the McKnight Foundation extended a 10-year, $5 million loan at 2 per cent interest to the Greater Minnesota Housing Fund, a CDFI, to rehab existing apartment complexes for working people.

Foundations have also made place-based investments through collaborative approaches. The Minnesota Impact Investment Initiative (MI3), for example, is a joint effort among a group of Minnesota foundations led by the Minnesota Council on Foundations. The initiative helps participants pursue targeted investments in affordable housing, small business lending, and socially beneficial municipal debt. Similar types of place-based impact investing are happening all across the country, according to a 2018 Urban Institute report.

Impact investing for big, systemic problems

Impact investing can address big, systemic problems, too, such as racial equity. One of the most compelling stories we heard came from Shuaib Siddiqui, director of impact investing at the Surdna Foundation. He described how the foundation prioritised making investments in diverse fund managers, including backing Kesha Cash and her Impact America fund, which invests in tech-driven businesses benefiting marginalised communities. Where some saw risk – Cash is a Black woman and asset management firms owned by women or people of colour attract just over 1 per cent of global assets under management – Surdna saw opportunity and backed Cash with $1 million of her initial $10 million fund. Surdna’s efforts not only served its programmatic goals, it helped build a market to attract other capital to historically ignored spaces. For Cash, the success of her first fund led to a second, $50 million fund – one Surdna backed as well.

These examples don’t suggest that impact investing will solve all challenges a foundation may seek or address. They do, however, validate impact investments as an important tool foundations can deploy in service of their missions and programmatic goals.

There is no one-size fits all approach, nor should there be. Some foundations may make modest program-related investments as part their minimum 5 per cent annual payout required to maintain tax-favoured status. Others may seek to orient a significant part of their endowment toward mission-related investments that align with their philanthropic goals.

Clearly, ignoring these tools leaves impact on the table. The sooner the sector can move from ‘whether’ to ‘how’, the more impact these tools can have on the challenges we all seek to address.

Sridhar Prasad is a Bridgespan Group partner in the Boston office. Ben Morley is a director in Bain & Company’s Social Impact practice. They are coauthors of ‘Beyond the Grant: Foundations as Impact Investors.’