Impactful Investing: Leveraging the Full Range of Philanthropic Resources
This session covered the 'other 95%' of a foundation's financial resources and how they can be unlocked to drive social impact. Impact Investing was defined for the session as an investment with social benefit that also returned the invested principal and an additional yield. Impact Investing is a growing opportunity to connect investors with underserved communities in a way that serves the needs of both groups. Over time this transaction can be a powerful way to build mutual respect between two constituencies that otherwise may not interact.
Lisa Hall, President and CEO of Calvert Foundation, served as the moderator for the sessions. Dan Letendre, Prosperity Now Board member, is the CDFI Lending & Investing Executive for Bank of America. Tony Berkley is Director of Mission-Driven Investing at W.K. Kellogg Foundation.
Impact Investing is separated into two major categories. Market Rate Investments including Socially Responsible Investing:
- Started as Negative Screening, moving funding out of investments that had direct negative social consequences, such as the disinvestment from South Africa by US agencies in the mid 1980s.
- More recently this includes Affirmative Screening, specifically choosing to invest in opportunities due to positive reasons that may include organizations that pay a living wage to their employees, diverse or client-centric board representation, and socially conscious board governance rules.
Below Market Rate Investments make up another major category where the investor opts to take an opportunity cost in order to have an increased social impact with their funds. Of interest, none of the speakers at the session actively pursue funding investments of this sort.
Impact Investing can include many different asset classes, ranging from local government bonds with a specific community development use to private equity shares in a firm designed to have social benefit.
Lisa thinks that the next stage in mainstreaming Impact Investing is to increase the uptake of 401(k)s by linking the investment with the community's improvement, greatly increasing the amount if liquidity used for impact while also giving a good return and further incenting retirement savings.
Impact Investing generally asks for a tradeoff between return and impact. Each individual investor needs to decide to focus on one of three variables: Impact, Return, or Risk. Bank of America specifically works to limit Risk in its loans to CDFIs, forgoing the level of the yield for a guaranteed return of their principal. Dan Letendre gave a wonderful example of this balancing act, "nobody has the emotional equanimity to balance greed, fear and desire at the same time." To resolve this problem he creates a synthetic investor, matching Bank of America with an additional funder with differing goals for their investments. This mixed demand on the funded organization he believes helps maximize the use of both partner's funds.
The current $86 Million Mission Driven Investment portfolio at the W.K. Kellogg Foundation had a 6% return in 2011 and led to 25,321 vulnerable youth receiving additional services, ranging from improved lunch programs in schools to real time assessment of individual student learning in the classroom.
During a lightning Q&A the attendees requested additional information.
Who else is practicing this sort of investing?
F.B. Heron Foundation was the early adopter and paved the way for many of the current practitioners. Omidiyar Network is a for-profit model giving equity capital to social ventures.
Is it worthwhile for someone to start a hybrid entity (L3C) to try to go after Impact Investing?
Tony mentioned that Kellogg does fund hybrids, but that they do not fund start ups. Lisa followed up saying that she sees the demand for startup capital in the market but that very few Impact Investors are looking to be the supply as equity funding is only being bridged by a couple of sources.
How are Social Impact Bonds looked at by Impact Investors?
Both Bank of America and the W.K. Kellogg foundation see significant potential in returning equity for outcomes but as of yet none of the speakers have actively funded this innovative model and are watching for early outcomes out of the recent New York City Bond.