Rockefeller Philanthropy Advisors explains the premise of impact investing, and outlines the benefits and challenges
Traditionally, philanthropy and investing were seen as separate disciplines, but this is no longer the case. This guide, written by Rockefeller Philanthropy Advisors, outlines how impact investing integrates these two approaches, allowing them to achieve social good as well as generate financial returns.
The guide provides an overview of impact investing and its potential to address societal challenges by harnessing capital markets. It also discusses the history and growth of impact investing, the different types of impact investments, and the risks and benefits of using this approach to advance philanthropic goals.
In addition to case studies, the guide also contains a glossary to help donors navigate through the sector jargon, and some additional web resources for further reading.
Overall, the guide provides valuable insights, examples, and considerations for donors and philanthropists interested in incorporating impact investing into their philanthropic strategies. It helps them understand the potential of impact investing to achieve social and environmental impact while aligning with their financial goals and values.
Nevertheless, it is important to remember that impact investing is only one tool among many to achieve goals, which can be integrated into an overall portfolio strategy. Donors and philanthropies will need to consider their own values, goals, and opportunities, before determining if impact investing is a good fit for them.
An abridged summary of the guide is shared below with permission (and is also available in Arabic here). You can download the full guide from RPA here.
What is impact investing?
Impact investments are defined as investments made into companies, organisations, and funds with the intention to generate social or environmental impact alongside a financial return.
While this definition leaves room for a broad set of investments, two key elements should be present: intentionality and measurement. The investor’s intention should include some element of both social impact and financial return. And while there is more consensus on metrics for financial return on investment (ROI), an impact investor should also aim to measure the social impact.
In essence, all investments make an impact on society; some positive, some negative. Impact investors intentionally pursue investments that lead to measured positive social impact (for the purposes of this guide, we include environmental impact in the broader header of social impact).
How does impact investing help further impact goals?
- It’s a powerful tool for leveraging philanthropic dollars. Investment returns can be reused over and over again to compound the impact.
- It allows donors greater freedom and flexibility to test innovative ways to achieve a financial return as they seek impact.
- Donors use it to breathe new life into or complement their philanthropic strategy. Many report great satisfaction after incorporating impact investing in a redesign of their approach to social change.
How does impact investing help further financial goals?
- Strong environmental, social, and governance (ESG) practices embraced by many social good projects may lead to financial outperformance.
- Merging investment and impact efforts can streamline strategy and help achieve returns (as well as impact) with larger pools of money.
- Investors can bring market-based approaches to bear on the social causes they care about while avoiding making investments that are in opposition to their values.
How can philanthropy help advance impact investing?
- Philanthropy can pave the way for promising investments that don’t yet attract pure investment capital due to higher risk, an unproven track record, or an uncertain return timeline. In this case, philanthropy can provide risk capital, early capital, or patient capital. One example is a loan guarantee allowing a social enterprise to access credit at a favourable rate.
- For over a century, philanthropy has honed one of most challenging aspects of impact investing: impact measurement. Philanthropy can coordinate with impact investors to appropriately evaluate impact, which can then be measured along with the desired financial return.
- Philanthropy can help develop, scale, and professionalise the impact investing field through education, training, research, and infrastructure building.
Benefits of Impact Investing
Donors and investors say they are attracted to impact investing for a variety of reasons, including:
- Return on investment
In general, an impact investor can reinvest the same money in a series of socially beneficial projects or organisations. Even a simple return of principal creates philanthropic leverage unattainable through traditional grantmaking.
- More assets can be aligned with philanthropic goals
Foundations are required by law to disperse at least 5% of their assets each year in order to achieve charitable goals. The remaining 95% of foundation assets have traditionally been focussed on seeking market returns. Impact investing allows more of that philanthropic money to be leveraged for social or environmental change.
- Investors don’t work against themselves
When investments are in line with philanthropic values, donors don’t find themselves in the awkward situation of holding public ownership in companies that conflict with—or even actively undermine—their grantmaking strategy.
Challenges of Impact Investing
Donors note that other aspects of impact investing can pose difficulties:
- Investments can carry significant risk
As with traditional investments, impact investments come with various levels and types of risk, and it is arguably more ambitious for a company to aim for impact along two dimensions rather than one. For example, some social enterprises seeking impact investment may operate in underdeveloped markets, where a business or nonprofit faces the challenge of helping to create infrastructure as well as provide a service.
- Lack of deal flow and exit strategies
The supply of investment opportunities offering scale, impact and financial return sometimes falls short of demand. As a result, impact investors can experience frustration finding deals that fit both their investment criteria and their philanthropic orientation. Once an investment is made, it can be challenging to find an attractive exit strategy. For example, the first IPO of a benefit corporation only occurred in early 2017. In the international context, when investing in markets with government currency controls, it may be more complicated to get one’s cash back.
- Lack of expertise and market fragmentation
Many financial advisors lack expertise in the social aspects of impact investing. At the same time, many philanthropic advisors lack expertise in making financial investments. A new breed of advisors with experience in blending philanthropy and investment (as well as related legal issues), although growing, is only just emerging. Thus it can be difficult to build a team with the requisite expertise in both impact and financial return.
- Difficulty of measurement
While there have been great strides in standards for impact investment performance, coordinating an industry standard of impact measurement has proven difficult. Traditionally, investments and social impact occupied different spheres of life, approaches, and sources of capital, and social impact and assessment approaches are investor-specific. Accordingly, it can be quite challenging to break down these barriers, then decide how to integrate the two.
B LAB A nonprofit organisation focussed on using business for good through its B Corporation certification, promoting new mission- aligned corporate forms, and providing analytics for measuring what matters.
Confluence Philanthropy A non-profit network of over 200 foundations that builds capacity and provides technical assistance to enhance the ability to align the management of assets with organisational mission to promote environmental sustainability and social justice.
Global Impact Investing Network (GIIN) & Research Center A network of impact investing professionals advancing the impact investing industry and offering information and resources to investors, including a global directory of impact investing funds (ImpactBase), a set of metrics to measure and describe social, environmental and financial performance (IRIS), an annual survey of impact investing trends, and a rating system for impact investing funds using B Lab methodology (GIIRS).
ImpactBase A searchable online database of impact investing funds and products, helping connect investors with investment opportunities.
ImpactAssets A nonprofit financial services firm dedicated to advancing the field of impact investing, publishing an annual database of 50 experienced private debt and equity impact investment fund managers.
Investors Circle An early-stage impact investor network made up of individual angel investors, professional venture capitalists, foundation trustees and officers and family office representatives.
Mission Investors Exchange (MIE) Network of foundations and mission investing organisations offering workshops, webinars and a library of reports, guides, case studies and investment policy templates – with the goal of sharing tools, ideas and experiences to improve the field.
The ImPact & The ImPact Library A network of families joined by a pact to improve the impact of their investments – providing education, inspiration, and tools to make more impact investments more effectively.
Toniic An international impact investor network promoting a sustainable global economy and offering peer-to-peer opportunities to share, learn, co-invest – including a searchable directory of impact investments, an impact portfolio tool, and multi-year studies of impact investing portfolios.
BLENDED VALUE: A business model that combines a revenue- generating business with a component which generates social-value; coined by Jed Emerson and sometimes used interchangeably with triple bottom line and social enterprise; sometimes referred to as blended return or blended finance.
CONCESSIONARY RETURN: Return on an investment that sacrifices some financial gain to achieve a social benefit (Source: SSIR).
CORPORATE SOCIAL RESPONSIBILITY (CSR): A form of corporate self-regulation integrated into a business model; CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms, and sometimes goes beyond to support or achieve social good (Also referred to as corporate conscience, corporate citizenship, social performance, or sustainable responsible business).
DOUBLE/TRIPLE BOTTOM LINE (DBL/TBL): Investments that deliver financial returns and social and/or environmental impact.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG): Factors which social investors may consider as part of their investment analysis as a way to evaluate whether their investments promote sustainable, fair and effective practices and mitigate potential risks; ESG may be referred to as “ESG investments” or “responsible investing.”
MARKET RATE IMPACT INVESTMENT: An investment designed to result in positive social or environmental benefits while generating financial returns that are comparable to similar conventional instruments.
MISSION-RELATED INVESTMENTS (MRIS): Investments from a foundation’s endowment that seek to achieve specific goals to advance the foundation’s mission while targeting market-rate financial returns comparable to similar non-mission focussed investments. MRIs are not an official IRS designation and are conventionally distinguished through the explicit advancing of the foundation’s mission and programmatic goals. Opportunities for MRIs exist across asset classes and issue areas.
NEGATIVE SCREEN: Avoiding investments in generally traded companies on perceived social harm.
PAY-FOR-SUCCESS CONTRACT (SOCIAL IMPACT BONDS): A contracts that allow the public sector to commission social programs and only pay for them if the programs are successful.
PROGRAM-RELATED INVESTMENTS (PRIS): Investments that provide (1) capital at below-market terms or (2) guarantees to non- profit or for-profit enterprises whose efforts advance the investing foundation’s mission; PRIs are counted as part of a foundation’s annual 5% distribution requirement; generally expected to be repaid, they can then be recycled into new charitable investments, increasing the leverage of the foundation’s distributions.
ROI: A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio. (Source: Investopedia).
SOCIAL ENTERPRISE: An organisation that applies commercial strategies to maximise improvements in human and environmental well-being, rather than simply maximising profits for external shareholders; can be structured as a for-profit, non-profit, or hybrid.
SOCIAL ENTREPRENEURSHIP: The process of pursuing innovative market-based solutions to social problems while adopting a mission to create and sustain social value.
SOCIAL FINANCE: An approach to managing money that delivers a social dividend and an economic return.
SOCIALLY RESPONSIBLE INVESTING (SRI): An investment strategy that seeks to consider both financial return and social good; socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity; also known as sustainable, socially conscious, “green” or ethical investing.
About this guide
“Impact Investing: An introduction” was written by Rockefeller Philanthropy Advisors (RPA), which accelerates philanthropy in pursuit of a just world. Continuing the Rockefeller family’s legacy of thoughtful, effective philanthropy, RPA is a global nonprofit that remains at the forefront of philanthropic growth and innovation, with a diverse team of experienced grantmakers with significant depth of knowledge across the spectrum of issue areas.
Founded in 2002, RPA has grown into one of the world’s largest philanthropic service organisations and has facilitated more than US$4bn in grantmaking to more than 70 countries. RPA currently advises on and manages more than $500m in annual giving by individuals, families, foundations, and corporations. RPA also serves as a fiscal sponsor for more than 100 projects, providing governance, management, and operational infrastructure to support their charitable purposes.
Download a PDF version of the original guide here. An Arabic version of this summary is forthcoming.