Impact Investing: An Overview

This spring, five graduate students at the George Warren Brown School of Social Work at Washington University in St. Louis worked collaboratively to research and report on the rapidly growing field of impact investing.

Under this framework, charitable assets are used to invest in projects that generate revenue (financial return) as well as providing direct community benefits.

Thank you to Jennifer Dilley, Sarah Fisher, Michelle Mowry, Delilah Papke and Gulcan Yayla for their work.

A blog post based on their research follows.

GWB Students

Impact Investing Overview

Impact investing is an investment strategy where “investments [are] made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return” (Global Impact Investing Network, n.d.). This strategy merges the financial and philanthropic sectors and allows investors to “do more” with fewer dollars (Kathuria & Murray, 2013). Impact investments can be made across asset classes and generate below market-rate and risk-adjusted rate returns (Global Impact Investing Network, n.d.). There are five main impact investing vehicles: mission-related investments, program-related investments, social impact bonds, enterprise philanthropy, and hybrid models. Success is based on both social and financial returns, which are often measured using the Impact Reporting and Investing Standards (IRIS) metrics as a standardized form of measurement.

Program-Related Investing

Program-Related Investing (PRI) is an impact investment vehicle in which a foundation finances charitable organizations or commercial ventures for charitable purposes. PRI involves financing methods often associated with banks or other private investors—such as loans, loan guarantees, linked deposits, and equity investments—requires principal return, and earns a below-market, risk-and mission-adjusted return varying from 1-3% (Emerson 2003). To be program-related, the investments must significantly further the foundation’s exempt activities. The Internal Revenue Service defines PRI as any investment by a foundation that meets the following three criteria: (1) Its primary purpose is to further some aspect of the foundation’s charitable mission, (2) The production of income or the appreciation of property is not a significant purpose of the PRI, and (3) It may not be used to support any lobbying or political campaign activities (Internal Revenue Service, 2015). Between 2000 and 2010, the Foundation Center tracked 427 foundations that provided 3,757 PRIs totaling $3.39 billion.

PRI allows foundations to achieve their program-related goals, such as allowing the Rockefeller Foundation to increase asset ownership, accessing financial services and creating jobs for marginalized individuals. It also benefits foundations by helping them generate earned income, gain access to new funding, and develop new financial management history. However, PRI includes many challenges for smaller foundations that lack knowledge of PRI and expertise in PRI management. First, PRIs entail significant transaction costs that disadvantage smaller foundations. In addition, appropriate opportunities for smaller foundations may be difficult to find because of necessary due diligence and having programmatic, financial, and legal skills on staff (Raymond, 2010). Although PRI is a viable investment vehicle with the potential to generate financial and social returns, it is not an appropriate strategy for all investors.

Mission-Related Investing

Mission-related investing advances an organization’s mission and align its fiscal policies with its social objectives (Trillium Asset Management Company, 2007). It reduces disparities between funding and mission by using up to 100% of an organization’s assets to promote its mission and carry out fiduciary duty (Rockefeller Philanthropy Advisors, 2008). MRI is feasible for foundations, nonprofits, and for-profit corporations and can be made through cash deposits, fixed-income securities, private and public equities, and real estate (Aspen Institute, 2015). A key aspect of MRI is generating a satisfactory financial return. Optimally, MRIs earn a market-rate return (Richter, 2010) large enough to fund grants (Trillium Asset Management Company, 2007). Resources like the US Community Investing Index or the Calvert Mutual Fund can help organizations identify MRI opportunities.

MRIs’ strengths are their ability to align a foundation’s mission and fiscal policy by using the endowment to advance the mission. The return on an MRI can be used to fund grants, increasing the impact an organization can have on a social issue. Furthermore, as MRIs can be made at various rates of social and economic risk, organizations with both large and small asset portfolios can engage in MRI. Challenges include concerns about the risks to fiduciary duty, which requires the leadership to preserve the endowment by investing prudently (Rockefeller Philanthropy Advisors, 2008). Some organizations may feel forced to choose between social and financial returns in MRI (Aspen Institute, 2015). Furthermore, as it can be hard to recruit financial advisors who are well versed in MRI, these concerns can be difficult to resolve (Kramer & Cooch, 2007).

Social Impact Bonds

Social impact bonds (SIB) are utilized through performance-based contracting in social sectors, where the government pays for the project financing only if predetermined goals are reached. There are four main with SIB: nonprofits, or service providers, are responsible for offering services to the communities; investors finance the project and expect to be repaid by the government with a rate of return at the end of the project; governments pay back the investors if the predetermined performance criteria are achieved; and finally intermediaries are responsible for the facilitation of the process and also may serve as an independent evaluator of the results. The evaluation process is the basis of SIBs. Defining the evaluation metrics and assigning targets to these metrics directly determines the success of a project.

Although SIBs are acclaimed to be innovative solutions that can potentially address high cost social problems while removing the burden of financing and the risk from government to private investors, real world applications are limited. The first SIB in the world (UK, 2010) was established with the goal of reducing recidivism among male offenders in Peterborough Prison by 7.5%. 17 investors raised £5 million for the 6-year project. Since the results will be evaluated at the end of 2016, it is too early to tell whether the goal of 7.5% reduction will be achieved. However, early official results indicate a possible success. Following the UK, the US started experimenting with SIBs. The pilot projects started in 2011, and last year, in 2014, the largest SIB in the US was financed with a total of $21.3 million in the Massachusetts Juvenile Justice Pay for Success Initiative. Goldman Sachs became the main sponsor of the project by investing $9 million. Although the official results of this investment vehicle are yet to be seen, SIBs can be potential tools to finance huge social problems, as long as the players do not sacrifice addressing the root causes of complex problems by favoring a few short-term performance metrics.

Enterprise Philanthropy

Enterprise philanthropy, also known as venture philanthropy, performance philanthropy, or high-engagement grant making (Fahmy, 2004), “applies the principles and tools of venture capital to the social sector” (Day, 2015). This type of investment strategy targets funds towards early stage for-profit and nonprofit organizations well suited to make a significant social impact. Venture philanthropy can be made across asset classes and recoup varying rates of return; however, many investments simply add more accountability to the traditional grant making process and do not achieve any return on the principal. This type of investment is catalytic, viable across sectors and very transparent to investors. However, it can also be risky, and limited data has made its overarching success unclear.

There are five key elements to successful enterprise philanthropy: 1) a long-term plan (three to six years); 2) a managing partner relationship; 3) accountability for results; 4) provision of cash and expertise; and 5) a well-crafted exit strategy (Center for Venture Philanthropy, 2014). The defining features of venture philanthropy are the managing partner relationship, the accountability for results and the provision of financial and nonfinancial resources. Investors and fund managers remain intimately involved with the investee for the duration of the investment. Because the investment is contingent upon reaching concrete goals, they also typically receive quarterly updates on the organization’s progress. Finally, investors and fund managers provide nonfinancial resources, often in the form of consulting resources, which help the investee implement successful management practices.

Hybrid Models

Created through classic non-profit and for-profit structures, hybrid organizations function as integrated models that create deep social impact and revenue, aligning social benefit and profitability. They achieve social goals through their business practices and extend into various sectors, such as career development, the food industry, healthcare, and technology. Hybrid models offer a bold, sustainable infusion of humanitarian principles into modern capitalism (Battilana et al. 2012) and should be led by individuals who can strategize, analyze, and operate a business while remaining devoted to a social cause. There are two forms of hybrid organizations: a Low-Profit Limited Liability Company (L3C) in the United States and Community Interest Companies in the United Kingdom.

The advantages of hybrid models are that they retain the integrity of the explicitly business and nonprofit worlds, can protect the non-profit status of an organization, and they offer flexibility and adaptability to change (Furr et al. 2014). Hybrid models encourage investors to engage in impact investing and collaborate with other investors. The versatility of the model attracts different types of investors on both the for-profit and the non-profit side. Hybrid models can grow out of either a for-profit or a non-profit, thereby making it an accessible and versatile impact investment tool.  However, special care must be taken to ensure for-profit funds go to non-profit efforts, and additional overhead may be required for both branches of the organization to thrive. Navigating the different forms of funding for hybrid models – and the difficulty of rigidly and completely defining hybrid models – can be intimidating for grant makers unfamiliar with the process (Muller, 2015). Finally, limited research on hybrid models may discourage traditional funders who seek low-risk investments from entering this investment space (Dichter et al, 2014).

Impact investing represents an exciting form of innovation within the philanthropic sphere, and the many different vehicles of impact investing make it accessible to various types of funders and philanthropists. Although its newness can seem intimidating to prospective investors, the potential for addressing social issues through collaboration and effective use of donor dollars renders impact investing an innovation worth exploring.


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