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Impact Investing
The supply of capital for Impact investing—investing that generates both social value and financial returns—is increasing. Sources of this capital are:
- Institutional money managers in insurance companies, mutual funds and pension funds responding to client interest
- Private banks which see the capacity to deliver a credible impact investment offering as an increasingly important customer acquisition and retention strategy
- Family offices with a tradition of civic engagement and long-term perspective on capital preservation and growth
- New, private foundations capitalized by living donors whose philanthropic capital comes from business success and which recognize opportunities to create social impact
- Traditional private foundations who are savvier about deploying program and endowment capital creatively
- Local commercial banks and pension funds in many emerging markets with liquidity they cannot deploy exclusively in traditional business models serving only wealthy interests
Matching these sources of capital to the entrepreneurs who can apply these funds effectively could create commercially viable solutions to a broad set of intractable social problems.
Despite the growth in the supply of impact investment capital and the increased demand for it, there is only a trickle of money flowing from investors to actual projects. Established financial services providers generally believe that all capital should either be invested to maximize profits, with little or no consideration for social or environmental effects, or simply donated charitably to maximize social or environmental returns. These standard practices do not serve emerging impact investors. Moreover, the absence of effective market mechanisms (such as rating agencies, market clearinghouses, syndication facilities and impact investment consultants) critically hampers investment.
- On the supply side, high sourcing costs and lack of information (especially on social returns) leave potential impact investors wary of entering the field and incurring disproportionately expensive transaction costs when they do.
- On the demand side, fragmentation of investment supply, along with the inability to syndicate start-up and expansion finance opportunities, sets off a highly inefficient capital sourcing process that stifles the launch and expansion of new projects; one result is to drive ventures back into the relatively safe (but ultimately capital insufficient) arms of philanthropy.
The current limited range of sub-sectors into which investments can be channeled lowers both financial and social returns. There is a genuine concern that investors will not pursue these opportunities because of frustration at the transaction costs and poor returns.
The OpportunityBuilding a system that will allow impact investment to flow into broader areas of public interest—such as healthcare provision for poor people in emerging markets, financing for slum upgrading, financial innovation for smallholder farmers— will enable the impact investment movement to expand opportunities for poor and vulnerable people and ensure the benefits of globalization are more broadly shared. To this end, the Rockefeller Foundation’s Impact Investing work is built on three pillars:
- Integrating Impact Investment
- Building Intermediation
- Fostering the Field
Integrating Impact Investment
The Rockefeller Foundation made its first Program Related Investment (PRI)* in the 1980s to support the development of affordable housing in U.S. cities. The Foundation subsequently invested $37 million in the National Community Development Initiative, now called Living Cities. These experiences were followed by a more systematic approach to building a portfolio of PRIs with the launch of the Program Venture Experiment (ProVenEx) in 1998. ProVenEx invested approximately $20 million in 15 investments (including debt and equity investments and loan guarantees in sectors from health sciences, financial institutions, and agricultural production in the United States and Africa).
At the conclusion of ProVenEx in 2007, the Foundation chose to include the PRI program as a potential tool within each Foundation initiative. Rather than a stand-alone activity, PRIs are now recognized as an arrow in the program officer’s quiver, alongside grant-making, convening and persuasion. The Impact Investing team will help colleagues working exclusively in particular initiatives to identify PRI opportunities. In addition, the Impact Investing team is assisting RF program officers engage the private sector broadly--and impact investors specifically--in the execution of their initiatives.
Anticipated PRIs and private sector engagement driven directly by initiative imperatives include:
- To support the Accelerating Innovation for Development Initiative, the Foundation is considering investment in a venture capital fund targeting companies in emerging markets that are commercializing and scaling up innovative products and services for poor customers.
- To support the Climate Change Resilience Initiative, the Foundation is assisting insurance companies and banks to pilot weather-based crop insurance in East Africa. The goal is to reduce the financial damage to smallholder farmers caused by increasingly erratic rainfall.
Building Intermediation
Most impact investment capital is currently flowing into areas where intermediaries exist to help investors identify, execute and manage their investments. In the United States, government regulation has spurred decades-long investments in low-income housing and community development. Impact investors can place tens of millions of dollars into investments that support community development and housing goals. Impact investment capital is now diversifying into new areas, assisted by increasingly sophisticated and creative financial professionals with experience in mainstream markets.
Micro-finance, in particular, has blossomed during the past seven years, attracting substantial capital and developing the necessary professional network that a mature investment field exhibits. Similarly, a growing interest in environmentally-friendly investing in the U.S. and Europe is creating a proliferation of opportunities for “green investors.”
Similar marketplace development, however, remains outside the Rockefeller Foundation’s current focus. Grants and investments in urban housing and infrastructure in emerging markets, smallholder agriculture in Africa, and public health capabilities can address this gap in focus. And in doing so, the Foundation can spur latent impact investment capital to the areas in which we work. For example:
- To enable impact investments to flow into emerging market housing finance, the Foundation is exploring potential partnerships between impact investors, local commercial banks and community groups. The mission would be to create new models providing financing for housing and infrastructure service upgrades in slum communities.
- To spur the development of credible models for investing in rural-based agri-enterprises in Africa, the Foundation is working with the International Finance Corporation to launch a demonstration “Accelerator” in East Africa that will assist rural enterprises in preparing investment applications and connect these enterprises to impact investors.
- To support the engagement of retail investors in impact investing, the Foundation provided a grant to the Calvert Foundation, aiding Calvert’s involvement in the Microplace platform that facilitates retail investment in micro-finance projects. The Foundation also supported Kiva, an innovative online platform that connects microentrepreneurs in developing countries with retail lenders around the glove, to build out their social metrics and improve their risk management systems
Fostering the Field
As with any emerging industry, the impact investing sub-sector is beset by inefficiencies arising from poor coordination, sub-scale and duplicative activity, and confusion over language. Resolving these inefficiencies requires resources that individual investors and investment seekers may lack. Working in strategic partnership with private foundations, family offices and financial services companies, the Rockefeller Foundation is exploring making program-related investments and grants. It will also use its convening power to develop the public goods and service organizations that the impact investing field needs to flourish.
- To support the creation of an accreditation standard for socially-oriented enterprises, the Foundation has provided a grant to B Lab to support the organization in attracting a critical mass of “for benefit” corporations which embrace a rigorous standard of social and environmental impact.
- To help accelerate the maturation of the impact investing industry, the Foundation is co-sponsoring an effort, led by the Monitor Institute, to assist emerging industry leaders in undertaking a more intentional and strategic approach to develop the public goods and collaborative networks that the industry needs to function and grow.
- To enable charitably-focused companies greater access to expansion capital while preserving the ability to hew to their social mission, the Foundation is supporting research in the UK into the demand for and feasibility of creating a stock exchange for impact investments.
In addition, the Foundation also facilitated the launch of the Rockefeller Foundation Impact Investment Collaborative during a meeting in October, 2007 at the Rockefeller Foundation Bellagio Conference Center. The Collaborative is a global network of impact investing leaders, including investment managers of family offices, pension funds, boutique banks and intermediation innovators. Collaborative members represent tens of billions of dollars aimed at a range of impact investments. Despite their diverse backgrounds and investment philosophies, Collaborative members have united around a conviction that investment can target the creation of social impact. They have highlighted the need to improve syndication, to create a set of standards to quantify social impact and to develop targeted intermediation capabilities.
Collaborative members have currently launched three project teams that aim to:
- Create a coordinated approach to investments that provides environmentally sustainable economic opportunities for rural populations and to eventually catalyze the deployment of commercial capital into the sector.
- Design and promulgate accepted social impact standards to reduce the prohibitive transaction costs for impact investors, facilitate syndication, and increase the efficiency with which impact investment capital is deployed.
- Develop targeted investment banking capabilities for impact investors that can intermediate capital efficiently, structure deals and provide relevant research and evaluation functions.
*PRIs are investments that serve a primarily charitable purpose that qualify toward a private foundation’s charitable pay-out requirements under US tax law.
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