Ellen Remmer

Many foundations share the frustration that philanthropy’s impact is limited relative to the big-dollar potential of the business and government sectors. When Wal-Mart decides to change to hybrid-fueled vehicles, the impact dwarfs most of what philanthropy can do. This is all magnified by the fact that most foundations only put 5% of their assets to social use through grants – leaving the remaining 95% sitting in traditional investments.

So, when the buzz around impact investing (also called mission investing, sustainable investing, patient capital, etc.) began really growing around eight years ago in the philanthropy sector, TPI decided it was time to listen and time for us to bring these ideas to the attention of our clients and network. Plus, clients were already beginning to ask about whether and how they could engage.

By definition, impact investing is intentional investing for social (including environmental) and financial return. It’s a broad term that can cover just about any program area – including health, agriculture, energy, economic development and education – and financial instrument – including debt, equity, real estate, etc., from below market to market rate.

Of course, impact investing is by no means new. The construct of socially responsible investment has been around for nearly half a century and groups like Investors Circle, which makes equity investments in double bottom line companies, have been around for over 20 years. In 1968 the Ford Foundation pioneered Program Related Investing. However, the scale of impact investment from foundations has continued to be very small relative to its assets. (Cumulatively estimated to total less than 1% of US philanthropy’s assets over the last 45 years.) More for Mission is trying to change that equation through a campaign calling for 2% of foundation endowments to go to these types of investments. There has been some decent traction and I, for one, think the time is finally ripe for more broad-based acceptance and practice.

Why?

• People see it as a way to increase the amount of resources dedicated to driving change – sometimes this is recycling charitable money, sometimes it is adding resources for social good from their traditional portfolios and often it is using their own investments to leverage more from larger, traditional sources.
• The next generation – and, frankly, the retired businessperson too – is showing strong interest in using capital markets for social good. They question the distinction we have traditionally made between social good and capitalism.
• Impact investing has a growing track record – showing that the risks can be quite low and the ‘relative return’ good. A number of foundations that make impact investments turn in overall financial performance in the top third or even top 10 per cent of foundations of similar type.
• The economic downturn has caused many to intensify their focus on investing close to home. Particularly with lower expectations from the stock market, some are asking how they can invest a portion of their assets to strengthen local economies, businesses and non-profit organizations.
• Finally, impact investing has proven to be a very effective philanthropic tool, often incentivizing organizations to become more sustainable and results-focused, and to scale their impact. The financial crisis suggested to many that our era needs a new paradigm for investing and that the experiments’ need to move from the periphery of activist investors to the centre.

However, a number of obstacles remain.

• The infrastructure is weak. It’s hard to find good opportunities and it can be costly to do the search and vetting. Although there are some good, strong intermediaries there is not yet an ‘industry’.
• The traditional bifurcation between philanthropy and investment is pretty embedded. We still don’t have good metrics for social return, so it’s hard to quantify what you are ‘buying’ or trading off in the case of below market rate investments.
• There are not enough highly qualified organizations looking for this type of capital – mostly because they are not aware that such tools may exist, or what they would need to do to qualify.

It’s clear that progress is being made on all fronts and awareness of and interest in impact investment is growing, but this is still an industry in the making.

Ellen Remmer is CEO and president of The Philanthropic Initiative

This post was first published on the TPI blog