2014-06-25

Co.Exist

What's Holding Back Impact Investing?

Better government policy could supercharge the growth of investing for profit and good, taking it from niche to mainstream.

Over its eight year history, Revolution Foods, a startup that provides affordable, healthy school lunches to children in the U.S., has raised more than $70 million from a truly unusual mix of investors. Typical venture capital and private equity investors signed on, but so did DBL Investors—a firm focused on maximizing both financial returns and social impact—and charitable foundations looking to invest their capital in ways aligned with their mission. Today, according to cofounder Kristin Groos Richmond, Revolution serves a million healthy meals a week and is nearing $100 million in revenue.

Revolution Foods was an early beneficiary of the growing interest in impact investing, the idea that somewhere between the extremes of pure philanthropy and pure profit motives lies a massive middle ground that social ventures are only now just starting to tap.

With the unveiling of a new report at the White House today, the investors who have pioneered this movement are now urging the U.S. government to create policies that will turbocharge its growth. (Update: At the event, The White House announced today a series of executive actions to encourage the growth of this sector.)

"Little changes at inflection points can make huge differences," says Matt Bannick, managing partner at Omidyar Network and co-chair of the U.S. National Advisory Board on Impact Investing, a 27-member panel that formed following a meeting of G-8 nations on the issue in 2013. "Rather than being a potential constraint, government can be an accelerator."

Impact investing is not new, but it’s gained momentum in recent years. It can encompass a wide range of investors and investment vehicles, from early-stage startup equity to community development funds to the emerging area of social impact bonds that give off interest tied to the successful results of non-profit work. J.P. Morgan and the Global Impact Investing Network estimate that there are $46 billion in impact investments under management today, but while this figure represents growth, it’s only the tiniest sliver invested in the $210 trillion in financial markets around the world.

Seasoned impact investors say there is much more potential to direct private capital towards addressing the world’s pressing social and environmental challenges than what is done today—especially if a number of policies can be tweaked. "If you were to imagine a crew team on a river, it’s like we don’t have all of the oars in water, because private enterprise has, for the most part, sat on the sidelines," says Jean Case, CEO of The Case Foundation and an advisory board member.

The advisory board’s report details more than two dozen government actions that could both remove existing barriers to impact investing, increase the effectiveness of the government’s own programs, and proactively provide new incentives to encourage growth. Congress could approve the U.S. Treasury’s Pay For Success Fund and review the tax code to provide new perks, the report suggests. Or the federal government could loosen constraints on the U.S. Overseas Private Investment Corporation, allowing the international development agency to provide early-stage equity, not just loans. Other major changes would make it easier for foundation endowments and pension funds to consider social impact in their investments. For different reasons, both are limited in what they can do today.

There are tensions and risks in many of these recommendations, especially since impact investing is so new. Bannick says that some members of the advisory board wanted to be more aggressive with policies, and others would rather take it slow. And there’s the fear that social and environmental goals of good organizations will be diluted as financial interests blend with what is traditionally charitable work.

But advocates say there are safeguards and transparency will help in many situations, and the potential to do good far outweighs the downsides. What's needed are more standardized ways for people to access social impact investing opportunities. Today, it's mostly one-off and takes a fair amount of research. "We want to make it easier to identify the Revolution Foods of the world, to be able to get capital there more quickly and figure out what the vehicles are," says Paula Goldman, the Omidyar Network’s senior director of knowledge and advocacy.

With the release of the report, some advisory board members are also putting up additional cash for impact investing, a total of $184 million coming from Omidyar Network, the Case Foundation, the MacArthur Foundation, and the Ford Foundation.

Case, who started her foundation with her husband, AOL founder Steve Case, notes that there is $40 trillion in wealth transfer that will go to the next generation in the coming decades, and many hope for more than just a financial return from their money. She wants to see more opportunities for them to channel that wealth to social good, even if they don’t have the wealth to become big bucks philanthropists.

"When we write a grant, we expect to see nothing come back to us. It’s gone forever," says Case. "There’s a lot of room to play between 100% capital loss and market rate return. We think impact investing will bring some of those opportunities to investors who maybe aren’t going to have foundations...but also might give up a point or two [of return] where there's more social benefit."

[Image: Abstract via Shutterstock]

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