Posts Tagged ‘The Impact Investor’

Understanding philanthropic capital: How to invest in social causes and gain financial returns (Part 2)

In my first installment on this topic, I discussed why investors are combining financial and social goals and three social investment tools they could use to accomplish this union of interests: Pay for Success (PFS) or Social Impact Bonds (SIB), Program-Related Investments (PRI), and Mission-Related Investing (MRI)). In this final installment, I’ll explore two more tools: Impact Investing and Social Enterprise.

Millennial influence

The thinking driving the more diverse deployment of philanthropic capital is coming from a range of influences including shifting demographics. The receding idea of separate financial and social returns is largely being driven by the changing attitudes of younger generations.

A recent World Economic Forum report on impact investing cites a “study of 5,000 Millennials across 18 countries where respondents ranked ‘to improve society’ as the number one priority of business. This does not imply that the next generation of investors will not seek market returns … However, the emerging generation of investors is also likely to seek achievement of social objectives in addition to financial returns.”

Impact Investing

So just what is Impact Investing? A clear definition is one of the challenges of this emerging sector and the term can be described in many ways. According to the recently published The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism (2015) by Clark, Emerson and Thornley, “Impact Investing is capital management in pursuit of appropriate levels of financial return with the simultaneous and intentional creation of measurable social and environment impacts.” Many impact investors expect market rate and higher financial returns on their investments, noting that organizations that address social and environmental concerns in their business planning and execution will perform better over time as they reduce risks and create stronger workforces.

Examples of impact investments include a $3 million investment by the Colorado Impact Fund (coloradoimpactfund.com) into Bhakti Chai for expansion. The company sustainably sources fair trade, non-GMO ingredients and practices zero waste environmental standards. The company is growing, adding employment to expand its brand nationwide. Another project example is developing an app to help farmers in developing countries better predict weather patterns. This helps them plant and harvest at optimal times, increasing family income and improved food supplies for their communities. The app is easily accessible on cellular platforms, available to millions of customers worldwide.

Social enterprise

Social enterprise is also on the rise in the US and around the world. According to the Social Enterprise Alliance, a social enterprise is a business whose primary purpose is the common good. It uses the methods and discipline of business and the power of the marketplace to advance the social, environmental and human justice causes as well as earning a profit. Support for social enterprise can come in the form of investments, contributions and product purchases, with each form of capital needed at different times of the organization’s development.

The Colorado Nonprofit Social Enterprise Exchange strives to build the field for social enterprise by working with existing nonprofit organizations and engaging philanthropic, traditional and impact investments. Its Social Enterprise Cohort works to develop a business idea that supports both the mission and finances of the organization as well as creating employment opportunities when possible. Businesses in operation as a result of this program include: Art Restart, which supports homeless women through card sales; the Safety Store, which sells supplies and equipment for child safety; and Strong, Smart and Bold Beans, a coffee shop that teaches young women entrepreneurial and business skills as part of its youth development programs.

Complexity

There is a lot of excitement and energy surrounding all these tools to advance social change, and rightly so. These tools can allow for the engagement of more dollars to address big issues, to support organizations that prove their impact and to advance several goals at once.

However, the use of a diverse range of financing tools does not make problems less complex or easily solved. The development of the right deal with the right partners at the right scale takes time and resources.

But I look forward to the day when I can live in a state of optimism, believing both in our ability to make the changes we need as well as our ability to engage the right philanthropic capital to do the work effectively.

See Page to Practice summaries related to this article:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Model

Cash Flow Strategies: Innovation in Nonprofit Financial Management

Image credits: idpfoundation.org, justmeans.com

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Collaborative Capitalism: Positive social outcomes and competitive financial returns

As Millennials move into new leadership roles, they are demanding the opportunity to align every facet of their lives with making a positive difference in the world. A new capitalism, what the authors of The Impact Investor call Collaborative Capitalism, is focused on more than just financial returns to make an impact on the world’s issues.

One tool of Collaborative Capitalism is impact investing–investing that focuses on delivering positive social and environmental outcomes alongside competitive financial returns–is a response to this changing world.

Two years, 12 outstanding funds, four primary practices

In a two-year study, the most detailed release of information on impact investing to date, the authors of The Impact Investor examined 12 outstanding impact investment funds that met or exceeded the expectations of their investors.

In this book, they uncover the four primary practices that make these funds successful and outline the strategies that all investors, from corporate executives to change agents to philanthropists, can apply to their own organizations to achieve high performance in both social and financial outcomes.

We interviewed coauthor, Jed Emerson, about The Impact Investor and what you should consider if you want to take the first steps toward blending social causes with financial returns. We also asked about the most significant obstacles.

CausePlanet: If someone wants to jump into the field of impact investing, what does he/she need to focus on first?

Emerson: The first thing those interested in impact investing need to focus on is to get up to speed with what is already known about the field, its practices and the variety of ways one can become involved. For example, CASE at Duke has a great web site (http://bit.ly/casei3100) with seminal research and insight every impact investor should read. ImpactAssets has its Issue Brief series which presents a set of concise memos addressing various aspects of the field. Finally, The Blended Value website (www.blendedvalue.org) also has a host of resources worth perusing. Attending a few conferences would also be a good thing to do—SoCap or High Water Women are both good places to start. And Cathy just made a great 12-minute video intro to the field: http://youtu.be/zwGCKhTis5s

CausePlanet: What do you really want nonprofits to take from your book? For example, are you giving them ways to attract impact investors or become more of impact investors themselves?

Emerson: Nonprofits should take away many of the same principles as other types of organizations, namely that there is a shift taking place in both capitalism and the arena of how we address social issues, and this shift represents real opportunities for nonprofits to position themselves as providing a unique value to society that is distinct from traditional business or government. There is a growing universe of funders, investors and procurement officers who want to understand how best to leverage this distinct approach and bring it to scale, including through the provision of operating capital, which has been historically difficult to come by in the nonprofit sector.

Nonprofits also have an important role to play in driving the impact investing field forward considering two key attributes. One is their attention to stakeholders. Nonprofits are built on the premise that constituencies matter and much of the field of impact investing is taking this lesson into the arena of finance. The other attribute is heightened attention to social outcomes. Impact investors need to manage to specific, intentional outcomes and are often drawing on nonprofit practices to do so.

CausePlanet: What do you think is the most significant obstacle to becoming an impact investor?

Emerson: Perhaps the most significant obstacle is simple inertia, the challenge of overcoming analysis paralysis and actually making an investment. Some folks feel impact investing is new or that people must accept below market returns and so are waiting for it to become so mainstream that the actual investment opportunities may pass them by. The best way to explore and learn about the practice is to make smaller investments, to collaborate with other investors or take other initial steps to simply get going and learn by doing. And in fact, one can become an impact investor now with as little as $20 online, through a site called vested.org, where you can choose the places or impacts that are important to you.

Increasingly, financial institutions and corporations around the world are using Collaborative Capitalism as a tool to generate clear, positive social outcomes in addition to profits. This book will help nonprofits learn how capital can be used to drive social and environmental change as well as how to attract potential investors. Financial tools are increasingly being used to support community vehicles, including nonprofits, cooperatives and social enterprises. The Impact Investor gives a comprehensive overview of the approaches successful impact investors have used to increase their probability of success.

See other Page to Practice nonprofit book summaries related to this topic:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Model

Cash Flow Strategies: Innovation in Nonprofit Financial Management

Image credit: blendedvalue.org

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Understanding philanthropic capital: How to invest in social causes and gain financial returns

Combining financial and social goals

Being an optimist and a pessimist at the same time may seem contradictory. But, I believe we can make real progress on some of the big issues that face us today including poverty, the environment, education and equality among others. However, I don’t believe the way in which we have approached these issues in the past will make the progress we seek.

As the focus in philanthropy shifts from activities to outcomes, and we all expect more impact from change efforts, we can expand how we think about financing this change and what instruments will be most effective. The world is changing at a faster rate than ever before, and even though we have focused on these issues for many years, there is still much work to be done. Have we been looking at these issues and their solutions through too small a lens?

In the past, most philanthropic capital has been distributed in the form of contributions to nonprofit organizations. These have high social return but no financial return. And traditional investments often have high financial return and questionable social impact. By thinking in a one-dimensional way, we have limited the range of solutions available and squandered opportunity by not engaging the full capital markets in making change.

New partners in problem-solving

In order to address the more complex issues that now exist, it’s time to shift the paradigms of how to address these big, complicated problems. And those shifts are happening all around us. No longer is it the sole realm for nonprofit organizations to tackle social problems; social enterprises and businesses are proving capable as well. Many investors no longer separate social and financial return when looking at how to best deploy their dollars. As many billions of dollars as foundations have in their endowments (estimated to be $850 billion), these pale in comparison to the trillions in mainstream capital markets (estimated to be $34 trillion).

Now more than ever, it is appropriate to bring a range of financial tools to create change and to think more expansively about how to support organizations beyond just providing monetary contributions.

Problem first, tools second

Grants and contributions will always be part of the funding portfolio to support organizations working on important issues, but they can be one tool in a toolbox full of options to provide capital and support the work that makes a difference. Thinking more about stacking capital instead of a one-size-fits-all model can be more effective. Additional tools include Pay for Success/ Social Impact Bond Financing, Program-Related Investments, Mission-Related Investments, Impact Investing and Social Enterprise development. Each tool has different applications and strengths. With a variety of tools, we can think about the problem first and the tool second instead of approaching every challenge with only one funding solution. I will cover the first three tools in this installment. Tune in to the next installment for an explanation of Impact Investing and Social Enterprise.

Social investment tools

Pay for Success (PFS) or Social Impact Bonds (SIB)

These financial instruments use private capital for upfront investment in social programs where a governmental entity agrees to pay for specific measurable results after they are achieved. This money is the bridge financing or working capital that allows prevention programs to prove their worth in saving government funds by using outside money. Most government resources are used to provide intervention, such as incarceration or remedial education. PFS switches the model and focuses on prevention services, such as housing and job training or early childhood education, that provide both more effective and compassionate services to people as well as providing cost savings once they are delivered.

This tool was originally developed in the United Kingdom with the first deal closed in 2010. Since that time, there have been almost 50 closed deals using this model (payforsuccess.org/pay-success-deals-united-states). For PFS projects to work, a collaborative group of partners must come together, including: a governmental entity willing to purchase outcomes, investors willing to invest for a risk-adjusted return, an intermediary that raises capital and manages the project, program provider(s) that scale up programs and deliver outcomes, and an evaluator that can play the auditing role by measuring the projected outcomes. Projects in the US include a $10 million program in New York to reduce recidivism by delinquents on Rikers Island, a $7 million program in Salt Lake City to expand high quality preschools, and a $8 million program reaching the final stages in Denver to provide supportive housing and services for the chronically homeless.

Program-Related Investments (PRI)

Program-related investments are another tool that foundations can use to support organizations, both nonprofit and for-profit. These are investments made by a foundation in support of charitable purposes with the explicit understanding that those investments will earn below-market rate returns adjusted for risk and mission. These investments can be applied to the foundation’s minimum payout requirement and become recyclable capital, being redeployed once they are paid back. PRI were made possible as a result of the Tax Act of 1969, but have not been widely used. That is beginning to change. The IRS outlines a few conditions for these investments, and there are many ways to apply them. The PRI option can save organizations significant dollars in interest payments while offering access to capital that might otherwise not be available.

A foundation can offer a below-market rate mortgage to help an organization purchase a building and save on interest expense over the life of the loan. In Denver, the Alliance Center (sustainablecolorado.org) received a PRI from a donor-advised fund at The
Denver Foundation that will save the organization $4 million in interest over the life of the loan and the original capital of $7.5 million can be used again for another investment. In another scenario, a foundation can make a loan to a company that works with poor farmers to help them create a cooperative and market for their products that will eventually generate enough revenue to pay back the loan.

Another way to use philanthropic capital to advance community change is through Mission-Related Investing (MRI). This tool takes the endowment or long-term assets and aligns investments with the specific mission and social benefits of an organization. For example, if a foundation was funding in health prevention and education, the investment portfolio might contain companies focused on health food production instead of tobacco companies. The same might be true for an organization working to improve the environment. Investments could be focused on renewable energy and weatherization instead of fossil fuel production. Typical investment portfolios at foundations are much larger than their charitable distributions, so investing to support the work being done instead of contributing to the problem can address issues using two different avenues of capital, thereby increasing impact.

See Cindy Willard’s upcoming installment to discover more about Impact Investing and Social Enterprise.

See Page to Practice nonprofit book summaries related to this topic:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Cash Flow Strategies: Innovation in Nonprofit Financial Management

The NON Nonprofit: For-Profit Thinking for Nonprofit Success

Image credits: qualitymatters.ie, eoi.es, metabusinessanalyst.com, charitable-nation.com, peakstravelelite.co.uk, colorado-construction.com

 

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