What is known as the current Impact Investing movement emerged in the mid-to-late 2000s. A driving force behind this emergent field has been the Rockefeller Foundation with investments of more than $50 million to date.
Some of their key investments have focused on supporting the start-up of the Global Impact Investing Network (GIIN), B Lab and its Global Impact Investing Rating System (GIIRS) as well as pioneering work in launching social impact bonds in the UK, which is ahead of the US in number of deals deployed, though the US is quickly catching up.
The motivation behind many funders of this effort is an acute awareness that the resources philanthropy has available to solve intractable social and environmental challenges are completely insufficient. In comparison, there is $210 trillion available in private markets to fuel impact projects.[1] In the US, there are estimates of $999 in the US capital markets untapped for every $1 invested in an impact framework.[2] The challenge is how to align that private capital with public need – either through building the framework for traditional interventions (NGOs and charities) to perform to financial and and outcomes-driven metrics and/or building new businesses and enterprises that are investor-ready and impact-driven.
An interesting and underappreciated intersection in this field in the US is the work of Community Development Financial Institutions. The CDFI Fund was started with the US Treasury in 1994 as a bipartisan act of Congress to promote access to capital and promote local economic growth in low-income communities.
CDFI focus over the past 20 years has been primarily around economic/social impact. In 2003 however, 12 CDFIs banded together as the “Triple Bottom Line Collaborative” to add an environmental focus to their work as CDFIs. This included a detailed metric to assess the impact of the loans the organizations made for affordable housing and businesses. As well, they analyzed federal funding sources that could capitalize their lending, and proposed federal legislation to capitalize energy efficiency loan funds serving low-income communities.
More than ten years later, Impact Investing hits the scene with virtually no crossover between the instigators of Impact Investing and CDFIs, despite having very similar missions and structures. As well, Impact Investing has its own measurement and ratings systems (GIIN’s IRIS and B Lab’s GIIRS).
Expected returns and sources of capital are two areas where the fields currently diverge. Traditionally, CDFIs source low-cost capital from the Federal Government (US Treasury & SBA) and from Banks (who are seeking credits under the Community Reinvestment Act). On average their cost of capital is below 3%. They then lend the capital at market or slightly higher than market rates to higher risk borrowers who are working to achieve a social/economic impact, usually around housing or business development.
Impact Investments tend to be much more varied, and include more early stage equity investments in companies with high growth potential as well as social/environmental impact. However, Impact Investing also encompasses deals that resemble traditional CDFI lending, with lower returns and higher social outcomes. Another key development within Impact Investing are social impact bonds – leveraging public or private capital for early interventions into a defined, measurable social problem that government is paying for, such as prison recidivism.
In institutional work within a more traditional CDFI space and immersion in the Impact Investing in a UK-based program, I have seen virtually no cross-over between the two approaches. I do predict that CDFIs will voice frustration at the attention (and capital) the Impact Investing new kids on the block are getting, Impact Investing will reach some new levels of innovation that CDFIs have not, Impact Investing will realize CDFIs have some wisdom and experience under their belts and ultimately, SEC investing rules will open a much wider and more flexible range of private sector investment capital, and these impact worlds will more seamlessly blend. Time will tell.
[1] Rockefeller Foundation
[2] Nonprofit Finance Fund
By Jessica King @BardMBA ’15