In the same way that there’s a growing recognition that governments and NGOs can’t solve social problems alone, so goes the argument that neither can pure philanthropy. More and more donors are exploring ways to combine their philanthropic efforts and financial investment. Enter the nascent field of impact investing. Some foundations are putting a share (or all!) of their foundation’s endowment into social enterprises, and others like the Rockefeller Foundation have spent $40 million since 2009 to develop the field. And we’re not just talking about some of the edgier donors, like Gates and Rockefeller, but some traditional development players, like DFID, are also trying their hand at “kick-starting private investment” to lift people out of poverty. In 2011, USAID announced a $25 million African Agricultural Capital Fund with JP Morgan Chase to provide much needed capital to Africa’s agricultural sector. While impact investing has been around for a while, it’s becoming a hot topic that we’ll likely hear more about this year, and another example of the continued blurring of lines between the non-profit and for-profit sectors.
What is Impact Investing?
According to Global Impact Investing Network, “Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.” Basically, it’s using creative investments to make positive social gains.
Potential Market
A 2009 report from the Monitor Group estimated the industry could grow from approximately $50 billion in assets to $500 billion within the next decade. This capital could include equity, working capital lines of credit, and loan guarantees. Microfinance, community development finance, clean technology, and global health are popular investment areas. For example, the Gates Foundation has used impacting investing to make deals with pharmaceutical companies to reduce the cost of some vaccines.
The recent rise in impact investing in international development is said to be in part a response to criticism of more traditional fundraising, which is viewed by some to be unrealistic, unsustainable, and driven by the goals or fancies (depending on who you ask) of donors, especially government donors. Although given how DFID and USAID are embracing the idea that may just be an excuse to find new creative ways to raise capital for projects.
Is Development just dancing to Wall Street and Silicon Valley’s tune?
And this, readers, is the hook for next week’s post. There are a number of arguments that development goals can’t be reached through donor grants and GIK alone, and that development funding was naturally heading in this direction, but there’s also the argument that at least some of the challenges the non-profit sector is addressing are already the result of market failures in the first place, and additional investment from the for-profit sector won’t necessarily help. Impact investing is still an emerging field – but it is worth looking at its success so far, and where it plans on going. Stay tuned for Part 2.
(Photo Credit: 401(k) 2013)
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Audrey Bruce says:
I wish this was the industry standard for philanthropy. After sitting in on a few business school classes about philanthropy and business, I left frustrated at the models they were providing. Each of the case studies boiled down to ‘produce income and give a percent to charity.’ In my opinion, that’s a nearly broken model, and one that can’t guarantee stability of charitable impact over time. What we need are people who can devise business models that integrate social goals into the models themselves. It looks like impact investing might be the tip of the spear on a drive toward better philanthropic models.
Lorea Russell says:
Thanks for your comment, Audrey. I do think it will eventually become an industry standard – more and more of the big foundations and government donors are dedicating portions of their portfolios to impact investing. Working for a social enterprise myself, there are a lot of great things about it, but as I’ve mentioned in a few of my posts it’s not a cure all for development challenges. Impact investing, like social entrepreneurship absolutely have a role to play, but there will always be need for grants and more traditional development models as well.