Impact Investments, Impact Investing Advisory Services
Impact investing is on the rise. Since the term was first coined at a convening hosted by The Rockefeller Foundation in 2007 at their Bellagio Center, it has blossomed from a nascent idea into a market expected to reach $6 trillion in the next decade. But with growing skepticism about impact-washing and politicization of concepts like ESG, many questions remain around what impact investing is, how and where to use it, and its full potential for our society.
This spring, Social Finance and The Rockefeller Foundation gathered practitioners and thought leaders from philanthropy, impact investing, and wealth management and advisory to delve into these questions. We kickstarted the evening with a fireside chat featuring Social Finance board member and impact investor Laura Lauder and Social Finance CEO Tracy Palandjian. Moderated by Zia Khan, The Rockefeller Foundation’s Senior Vice President of Innovation, the conversation explored the market potential for the under-utilized segment of the impact investing market: “impact-first” investing.
What is impact-first investing?
At Social Finance, we differentiate two broad types of impact investing strategies. To date, the market has been fueled and dominated by “finance-first” impact investing, an approach stemming from traditional investing. Rather than make investment decisions with only financial returns in mind, practitioners argue that you can achieve market-rate returns while having a positive impact. This type of investing is increasingly common, largely led by global private equity firms targeting companies whose products and services aim to generate social and environmental impact.
Increasingly, market-based impact solutions are emerging that are unable to attract commercial capital—either because investment strategies are unproven or because market rate financial returns are not possible given impact goals for the communities they aim to serve. In these cases, “impact-first” impact investing is more appropriate. Rather than finance these solutions via grantmaking (i.e., with a -100% financial return), impact-first investing enables the achievement of deep impact while generating some financial return. As returns are recycled for future impact opportunities, impact-first investing offers a pathway to sustainability—and ultimately scale—in a sector with infinite need and limited resources. But the strategy remains sub-scale, with significant potential for impact left untapped.
Barriers: Why Don’t We See More Impact-First Investing Today?
Laura started the conversation by sharing her and her husband Gary Lauder’s philosophy of the “four buckets” of investing and philanthropy. Historically, Gary focused on investments (making money) while Laura focused on philanthropy (giving it away). They call these buckets one and four. Now, they incorporate buckets two and three into their portfolio—in bucket two, Gary seeks investment opportunities that also pursue social and environmental objectives, while in bucket three, Laura continues to pursue impact as the primary objective, but seeks opportunities that recycle capital or offer some financial return.
Laura and Gary’s approach reflects an intentional and collaborative allocation of capital and definition of strategy across these buckets. Most families and institutions, however, take a bifurcated approach to investing and philanthropy, with different and at times uncoordinated pools of capital, decision making frameworks, and often, decision makers. Doing so leaves little space for impact investing, and particularly impact-first investing; any consideration of financial returns is considered the purview of the investment side of the house, where optimizing financial returns disallows impact-first investment opportunities that require catalytic, sub-commercial capital.
The bifurcated mindset, which has governed the worldview of investors and philanthropists for decades, is that one maximizes wealth creation through for-profit activities in order to make the world a better place through pure philanthropy.Tracy Palandjian
Even where the siloes between investing and philanthropy have been broken, challenges remain. The landscape of impact-first investment opportunities is undeveloped and fragmented. These models often stay sub-scale due to reliance on philanthropy. Enterprises and funds are often led by first-time entrepreneurs and managers with limited ability to access risk capital. Sourcing these opportunities is a challenge in and of itself, largely conducted through word-of-mouth. And once sourced, conducting the necessary impact and financial diligence is time- and resource-intensive and cost-inefficient. Investment teams seeking to evaluate an impact-first opportunity may lack expertise to evaluate impact; philanthropic teams may lack expertise to conduct financial due diligence.
Common obstacles include ‘I don't know how to do the due diligence,’ ‘the minimums are just too high,’ and ‘I don't have enough capital to get close to achieving something meaningful.’Laura Lauder
Opportunities: Why We Are Excited About “Impact-First” Investing
Outsized impact per dollar:
Philanthropy is fundamentally not sustainable, with new dollars deployed each year to maintain services. Impact-first investments have the potential to recycle capital, which can then be redeployed for future impact efforts. Over time, each dollar invested can have multiple cycles of positive change.
Accelerating new solutions:
Impact-first investing creates an opportunity to catalyze new business models for social good that do not fit into traditional investment or philanthropic frameworks. By expanding the pool of available impact-first capital, we enable entrepreneurs and changemakers to explore new approaches to societal challenges faster and at a larger scale.
Tapping into passive capital:
Impact-first investments offer an opportunity to unlock massive amounts of capital that have been designated for impact but sit dormant. The donor-advised fund (DAF) market is currently valued at approximately $260 billion. Most of this capital sits in cash, money markets, or other traditional investments. What if, while waiting to deploy this capital, DAF holders and philanthropists had the option to recycle a portion of funds through impact-first investments? The charitable pool would continue to persist and grow for future giving, but it would also have an impact today. By the time dollars were deployed as grants, the pool would have already generated impact.
Moving forward: A One-Stop Shop for Impact-First Investing
In 2019, The Rockefeller Foundation provided grant funding to Social Finance to better understand the market for impact-first investments in the context of DAFs, launching one of the largest-ever survey efforts of DAF donors and sponsors. And we found huge demand. Overwhelmingly, donors expressed that they would allocate funds to these opportunities—and even grow their DAFs to pursue these types of opportunities. 72% of donors indicated interest in making impact-first investments through their DAFs. Those donors indicated they would allocate ~26% of total DAF assets to impact-first investments, including net new contributions to their DAFs, representing a potential 5% growth in AUM for sponsors.*
The idea that the money can come back and be reinvested to have more impact has resonated with philanthropists, with the promise of compounding impact over time. We are even seeing interest in making a permanent allocation to impact-first investing to generate a perpetual impact report card.Tracy Palandjian
In response to these findings and subsequent pilots with DAF sponsors to offer donors customized portfolios of impact-first investment opportunities, Social Finance launched the Social Finance Impact First Fund. Since the Fund invests across social and environmental issue areas, Social Finance is laser-focused on impact, deploying a rigorous impact framework that seeks to measure and monitor the outcome of each investment—and understand the additionality of this impact-first capital in unlocking sustainability and scale.
There's no product out there that allows someone who really isn't an expert in this area to invest in a diversified portfolio. The Social Finance team has put together an extraordinary array of opportunities into a fund. What an extraordinary—and long overdue—idea.Laura Lauder
The Rockefeller Foundation’s impact investing initiative supports innovative products and structures that are replicable and scalable and demonstrate how new solutions may drive needed financing for global good. The approach seeks to generate proof points to demonstrate that these vehicles can achieve deep impact while also meeting institutional investors’ risk-return preferences. The Foundation spearheaded these efforts through their Zero Gap Fund, which invests in innovative financing products and solutions to catalyze new capital to help meet the UN’s Sustainable Development Goals (SDGs).
Ultimately, Social Finance and The Rockefeller Foundation are working towards the same goals:
- Demonstrating the use-case for impact-first investment across the industry to mobilize larger pools of private capital, and
- Supporting the next generation of entrepreneurs to develop innovative solutions to social and environmental problems.
As we develop proof points that catalytic capital can generate its intended impact, we hope to see impact-first investing fuel the impact investing field’s next wave of growth. By accelerating this under-utilized approach, we hope to accelerate positive change, expand the pool of capital mobilized for impact, and ultimately unlock opportunities to address social and environmental challenges at scale.
* Social Finance interviewed more than 20 DAF sponsors and surveyed 270 DAF donors at community foundations, national charities, and single-issue charities across 40 states.
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