Tag: Impact Investing

Place-based impact investing is a burgeoning strategy to spark community development projects, create more just, equitable local economies, and build prosperous, vibrant communities. Place-focused foundations, like community foundations, family foundations and healthcare conversion foundations, are exploring ways to complement their traditional grant making with local investments that can catalyze positive community change. The LOCUS Impact Investing team has partnered with nearly 30 place-focused foundations – large and small – as they explore their role in community economic development, unlock more of their assets, and deploy dollars to amplify their impact and catalyze economic development in their communities. In many ways, their journey has become our journey, and we are learning along the way.

Through this work, we’ve observed a pattern to this place-based impact investing journey that we have incorporated into our fundamentals for designing and implementing an effective place-based impact investment strategy. These fundamentals include exploring a foundation’s place, opportunities and capacities for local impact investing; unlocking a foundation’s assets for this type of investing, ensuring the right ecosystem partners are aligned and the internal policies and processes are in place; and smartly deploying investment dollars to enhance mission while also mitigating risk. While this seems like a linear path, it is really an iterative journey.

Foundations step into local impact investing for many different reasons – a leadership change, an opportunistic investment, a donor push, encouragement from peers, or an endowment assessment. Whatever the genesis, exploring local impact investing requires education and learning with board, staff and community partners. Often that includes learning what others have done and connecting with like-minded foundations through peer learnings like the BALLE Local Economy Foundation Circleor through Mission Investors Exchange bootcamps. Regional area grantmakers may be a resource; both the Council of Michigan Foundations and the Minnesota Council on Foundations have internal resources dedicated to impact investing that are available to members. Place-focused foundations can also learn from the experiences of private foundations like the Surdna Foundation, Russell Family Foundation and the KL Felicitas Foundation, many of whom have documented their journeys and lessons learned.

An important step in this exploration phase is to understand the local impact investing ecosystem and build relationships with community investment partners, like community development financial institutions CDFIs, affordable housing organizations and developers, Community Development Corporations CDCs, microlenders, accelerators and incubators. LOCUS has helped several foundations and regional funders explore local impact investing, including the Greenville Partnership for Philanthropy, to broaden awareness of the area’s investment landscape and possibilities. We are also partnering with The Aspen Institute Community Strategies Group, with support from the Kansas Health Foundation, to facilitate a statewide peer learning cohort of Kansas community foundations to explore together how they can strengthen their role in economic development, including use of place-based impact investing.

A few years ago, the predominant question foundations asked about place-based impact investing was “why?” Today, the question is “how?” Once a foundation asks this question, there’s both internal and external work needed to unlock more of their assets. Internally, investment policies and processes need to be crafted, resources need to be allocated, and internal capacities built. Often, a foundation will engage an impact investment advisor, as Surdna did, to help them look introspectively and answer some tough questions:

• What community impact are we seeking?
• What are our expectations about investment type (debt, equity, guarantee), risk, liquidity and return?
• From where will these investment funds come?
• What will we do if the investment goes bad?
• How will we communicate about this new direction with partners, donors, and the community?

While this internal work is critical, relationships with capital providers and other intermediaries must be strengthened. As noted by the Urban Institute and the Center for Community Investment, foundations must understand their investment ecosystem – the partners, capital flows and capital gaps. Willing and able community partners help to create a pipeline of mission-aligned investment opportunities. Foundations also need to scan the landscape for possible co-investors, such as other foundations, anchor institutions, donors, community banks and credit unions.

As foundations seek to unlock their capital in this new way, more community development finance and investment skills (e.g., underwriting, portfolio management) are often necessary. Working with a trusted impact investment advisor, foundations can access these capabilities while also building internal capacity for this emerging work. For example, LOCUS is working with a large community foundation to build staff capacity for sourcing and pipeline development of mission-aligned investment opportunities.

Once a foundation has identified their strategy and a potential pipeline of investments, it’s time to get the money out the door. Often foundations again turn to outside help from professional advisors to deploy and minimize risk. Unlike traditional investing, impact investment transactions are evaluated for both community impact and financial return, with the clear intention of earning both a social return and the repayment of principal plus some financial return. A foundation’s investment may be a small but critical piece of a larger capital stack in a community revitalization project. Regardless of the size of investment, community development finance or other investment skills are needed to conduct due diligence and structure the transaction in ways that mitigate risk and amplify desired social impact. A foundation may choose to build those skills internally or turn to an outside advisor or community partner. For example, LOCUS has helped foundations evaluate solar energy companies, health care start-ups, alternatives to payday lenders and intermediaries like CDFIs – all in support of philanthropic investments that address capital gaps and enable community development projects to move forward.

Once the dollars have been deployed, foundation staff, typically the finance team, needs to consider the ongoing servicing, monitoring and reporting for these investments (e.g., financial and social impact review, loan covenant tracking and annual portfolio assessments.) Proper portfolio administration helps mitigate a foundation’s risk and better safeguard community impact. In 2015, The Kresge Foundation committed to deploy by 2020 a $350 million pool of social investments (loans, guarantees and equity) to strengthen opportunities for low-income people in America’s cities. A social investment portfolio of this size had significant implications on the foundation’s back office operations. In a recent blog, Kresge’s CFO shares four key take-aways about how they manage operations when it comes to impact. Kresge partnered with LOCUS to provide outsourced servicing, monitoring and reporting for this social investment portfolio.

Conclusion

Experience suggests that local mission-aligned investing can be transformational for communities by enabling foundations to use more of their tools to catalyze positive community change. While creating an opportunity for greater impact, the journey toward community investing requires new skills and capacities. Fortunately, foundations don’t have to go it alone. They can learn from their peers and tap the expertise of partners to help build internal capacity to explore, unlock and deploy assets for these critical community investments. Later this year, LOCUS is launching a tool to help foundations assess their starting point on this journey and identify possible capacity gaps and ideas for addressing them. Yes, place-based impact investing is a new and different way of using philanthropic assets. Yes, it requires different skills not traditionally found at foundations. And yes, in the long run, setting out on this journey provides an opportunity for greater, more equitable impact in your communities.

Article by Teri Lovelace, President of LOCUS Impact Investing, a social enterprise empowering place-focused institutions to invest their assets locally to build vibrant and prosperous communities. LOCUS is a nonprofit consulting firm and a registered investment advisory firm helping clients engage in local impact investing. Teri has over 27 years in the philanthropic, mission investing and the nonprofit sector. She served as Chief Impact Officer for Virginia Community Capital (VCC), the parent company of LOCUS. At LOCUS, Teri is responsible for all aspects of mission impact consulting and capital deployment. Prior to joining VCC and LOCUS, Teri served in senior leadership role at the Community Foundation serving a greater Richmond working with high net worth donors on their complex charitable giving portfolios.

Teri has a law degree from the University of Richmond, her undergraduate degree from the University of Virginia and an MBA from Virginia Commonwealth University. She is also a member of the Virginia State Bar and holds her Series 65 license.

Philanthropy is rapidly transforming to incorporate advocacy and investing, presenting exciting opportunities to create change. Among a field of new players, vehicles and approaches, one strategy gaining significant traction is Sustainable Responsible Impact (SRI) investing. Yet, as many philanthropies broaden their activities from traditional grantmaking to incorporate SRI investing, they need to change how their organizations assess and allocate financial as well as non-financial resources.

Social investors are seeking new models not only for funding strategies, but also for impact measures, organizational design and management systems in order to guide these changes. Leaders are asking how philanthropies achieve impact as institutions, not just as sources of funding. In response to this surge of interest, Rockefeller Philanthropy Advisors launched a multi-year program of collaborative research called the “Theory of the Foundation”, co-developed and supported by more than 50 funders to date. The initiative was inspired by iconic management expert Peter Drucker’s seminal article “The Theory of Business,”[1] which called on business leaders to assess their fundamental assumptions in response to changing conditions. Drucker’s challenge is highly pertinent to philanthropy, and is particularly urgent in this era of innovation and reevaluation.

Based on the Theory of the Foundation initiative’s extensive research in the U.S., Europe, Asia, and Latin America, we developed the Philanthropy Framework, a tool to give emerging or established philanthropies, including those looking to grow their SRI practices, a structure to align resources for maximum impact. The Framework is comprised of three core elements:

Charter – the organization’s scope, form of governance, and decision-making protocol;

Social Compact – its implicit or explicit agreement with society about the value it will create; and

Operating Model – the approach to the resources, structures and systems needed to implement strategy.

Foundations in the U.S. and Europe have begun using this framework successfully as a practical, concrete tool for analysis, planning and decision-making.

As interest in SRI investing continues to grow in the philanthropic sector, we’ve given much thought to how a foundation can apply the Framework to strategies that use all of its capital in order to create positive impact. Each of the three Framework elements can help define an SRI investing strategy.

An organization’s charter tells its origin story and defines its intended scope, form of governance, and procedural guidelines. The charter encompasses an organization’s history, governance, decision-making processes, intrinsic risk tolerance, culture and values. Organizations considering incorporating an SRI investing strategy should consider these factors: Are there constraints within your organization — whether regulatory or cultural — that might be barriers to SRI investing? Or, does your history and values encourage the use of new approaches in order to achieve mission? Reflecting on your organization’s charter will help you decide if SRI investing is right for your organization and how to incorporate it thoughtfully and effectively.

A social compact is an organization’s agreement with key stakeholders about the specific value it will create in society. It covers accountability, legitimacy, transparency, direction of influence on society, independence/interdependence and approach to risk. Some philanthropies we’ve interviewed feel that their role in society obligates them to put all of their capital towards creating good, rather than simply parking it somewhere dormant. Others see it as their duty to provide risk capital or to make “big bets” on innovative approaches to amplifying impact. Conversely, an organization may feel duty-bound to safeguard its capital to ensure its ability to support mission-driven programs in perpetuity. When an organization shifts its investment approach, it may need to reassess and adjust its social compact.

The third component of the Philanthropy Framework is the operating model: the combination of resources, structures and systems that enable a philanthropy to deliver on its mission, strategy, and goals. An organization’s chosen operating model plays a significant role in a decision to implement an SRI investing strategy. Do you have the necessary staff expertise and operational systems? Some organizations choose to build deep internal expertise in-house, while others prefer to augment their capabilities with outsourced philanthropic or investment advisors. Do your finance and program departments operate in silos? If so, merging traditionally separate teams can be challenging. But it also presents an exciting opportunity to break down those silos and to think about your organization’s ability to maximize its impact as an institution.

An example of an organization that has thoughtfully incorporated SRI investing is the Nathan Cummings Foundation, which announced in 2018 that it would move its entire endowment, nearly half a billion dollars, into investments aiming to further its mission. The decision was made after a reflection of the causes the foundation cared deeply about (combating climate change and social inequality) and the tools the foundation had at its disposal to move the needle on those issues. Crucially, there was alignment and enthusiasm among the foundation’s board, particularly its fourth-generation family members, towards the strategic shift. A sense of urgency also enabled the foundation to take risks and use market-based solutions in addition to philanthropy — both to tackle these issues and to demonstrate to other philanthropies that such a pledge was possible. The Nathan Cummings Foundation has been testing its strategy and growing its expertise for several years, while continuing to build the necessary internal capacity. These charter, social compact and operating model considerations allowed for a successful strategic shift towards SRI investing.

Many of the organizations we’re working with — whether as part of the Theory of the Foundation initiative or through our advisory work — are either already engaging in SRI investing or actively thinking about whether they should develop a strategy. For both new and experienced impact investors, it’s important to think about how SRI investing fits in with their organization’s charter, social compact and operating model. A thoughtful assessment and reflection of the financial and non-financial assets at your disposal will allow your organization to align all of its resources towards creating positive change.

Article by Melissa Berman, the founding President and CEO of Rockefeller Philanthropy Advisors, Inc., an innovative nonprofit philanthropy service launched by the Rockefeller family in 2002. Rockefeller Philanthropy Advisors’ mission is to help donors create thoughtful, effective philanthropy throughout the world. Rockefeller Philanthropy Advisors develops strategic plans, conducts research, manages foundations and trusts, structures major gifts, coordinates donor collaboratives, and provides regranting and fiscal sponsorship services.

As a widely-recognized expert in philanthropy, Melissa has been profiled in The New York Times and the Stanford Social Innovation Review. Recent articles she has authored appeared in the Foundation Review and in the International Family Offices Journal. Her ideas and views are featured in The Economist, Wall Street Journal, New York Times, Financial Times, and The Chronicle of Philanthropy. She has been interviewed on the Today Show, NBC Nightly News, NPR, BBC Radio, CNBC-TV, and Bloomberg TV. An adjunct Professor at Columbia University’s Business School, Melissa is also a director/trustee of Rockefeller Philanthropy Advisors, the Adrian Brinkerhoff Foundation and the Foundation Center. She serves on the Advisory Boards of the Marshall Center for Philanthropy and Social Entrepreneurship at the London School of Economics and the Tamer Center for Social Enterprise at Columbia University. Melissa holds a B.A. from Harvard University and a Ph.D. from Stanford University. She’s proud to have majored in Folklore and Mythology.

Article Note

[1] Drucker, Peter F. “The Theory of the Business.” Harvard Business Review, 17 Oct. 2016, https://hbr.org/1994/09/the-theory-of-the-business

Often, the most compelling impact investments are made, not found.

I have used that phrase over the years to describe how foundations and other impact-focused investors use “catalytic capital” to support social and environmental progress. These patient, flexible, “catalytic” investments are able to take on more risk and/or accept a lower return than commercial capital in order to finance gains that would not otherwise be possible.

Lessons learned have led to new solutions that fill capital gaps, while also strengthening the overall ecosystem for impact investing.

The timing is particularly valuable at this point in the evolution of impact investing. Today, there is a sense of great excitement about this work, spurred in part by the entrance of mainstream investment firms and asset managers into the arena. But there are concerns as well. Rapid growth might reinforce a binary view of this work as either purely commercial or purely philanthropic, when many impact investments actually fall somewhere in between.

In fact, market surveys consistently point to a lack of appropriate capital across the risk-return spectrum as one of the top challenges facing the impact investing field. Even the entry of the world’s largest financial firms into impact investing will not be enough to fill that gap. The market also needs more catalytic capital — also known as concessionary or sub-commercial capital — to seed innovation, scale up promising enterprises, and sustain organizations that serve impoverished people and places.

The good news is that this increasing realization is leading to deeper conversations about risk, return, and impact — and not just among foundations. The recent series Beyond Trade-Offs, from Omidyar Network, includes insights from influential organizations like the Ford Foundation, the Bill and Melinda Gates Foundation, Goldman Sachs, Big Society Capital and Access—The Foundation for Social Investment, Lok Capital, Elevar Equity and The Rise Fund. The series highlights strategies that are moving some investors beyond their traditional commercial or philanthropic roles.

One contributor, Prudential explains how it segments its impact investing portfolio so that 80 percent of its assets target market-rate or better returns, while 20 percent are catalytic (supporting promising but higher risk enterprises) or philanthropic (supporting nonprofits). And Blue Haven Initiative, a single-family office, discusses why it expanded its market-rate approach so it could operate across a continuum of returns, recognizing that family offices are able to be more flexible in pursuing impact than are many institutional investors.

At MacArthur, we have likewise leveraged our capacity to be innovative and take on risk. Since the mid-1980’s, we have invested $517 million in catalytic capital to directly support enterprise-level progress, as well as drive large-scale initiatives and build collaborations that unlock new investments — all aimed at financing impact that would not otherwise be possible.

Often, that means we anchor blended funds in order to mitigate risk or provide a lower-cost layer of capital; that, in turn helps attract a diverse pool of other investors. We also play a priming role, investing in promising but unproven organizations or markets, and giving them the chance to build financial capacity and proof points so that they may become commercially investable in the future.

In all of this, we have seen the “but-for” additionality of catalytic capital prove its worth many times over. Thirty years ago, MacArthur supported pioneers in microcredit and the once-fledgling field of U.S. Community Development Financial Institutions. We were among early impact investors — including faith-based organizations and other nonprofits — that took a chance on the hopeful power of mission-driven capital. Our early bets helped build strong enterprises and intermediaries that now marshal billions of dollars for the benefit of low-wealth, under-served people.

To preserve and improve the too-scarce supply of U.S. affordable housing, MacArthur devoted over $200 million to the Window of Opportunity initiative. In addition to de-risking blended funds and investing directly in 22 leading nonprofit affordable housing organizations, we used catalytic capital to seed and launch innovations like the groundbreaking Energy Savers program, the largest unsubsidized multifamily retrofit effort in the U.S., created by Community Investment Corporation and Elevate Energy.

More recently, our $100 million Benefit Chicago collaboration with The Chicago Community Trust and Calvert Impact Capital, demonstrates multiple strategies in action. MacArthur provided $50 million in long-term, low-cost capital to help launch the fund and coordinated with partners to raise an additional $50 million from individuals, corporations, institutions and donor-advised funds interested in investing locally. Today, the fund is financing community-focused businesses that create jobs for hard-to-employ populations like ex-offenders and which would not, on their own, be commercially investable.

The diversity of investors speaks to the power of these collaborations. Praxis Mutual Fund, for instance, was among Benefit Chicago’s first supporters, providing $1 million as part of an effort to invest 1 percent of its assets in community development. , which is part of the faith-based financial firm Everence, focuses on socially responsible investing with products that sit at various points along the risk-return continuum, offering its clients the chance to balance their interests in impact and financial returns in various ways.

Going forward, how much catalytic capital will be needed to fuel innovative efforts like these and bridge global capital gaps? There is no widely accepted number; a handful of foundations like MacArthur are making grants that support market research to better quantify the need.

What is clear, though, is that today’s impact investment market cannot reach its full potential by focusing solely on commercial forms of investment. Catalytic capital must be part of the mix, and MacArthur will soon launch new strategies to inspire and inform its expanded use. By cultivating innovation, scale, and impact, catalytic capital can be a powerful force that improves the lives of millions of people and protects the planet for generations to come.

Article by Debra Schwartz, who is the Managing Director of Impact Investments and serves on the Executive Leadership Team of the John D. and Catherine T. MacArthur Foundation – a private, global philanthropy with approximately $6 billion in assets and annual grant making of roughly $250 million. A pioneer in impact investing, MacArthur has dedicated $500 million of its assets to this purpose. Debra’s group serves as a Foundation-wide resource and engages deeply with selected program teams to devise impact investments that advance key goals. Her group also makes investments and grants that advance innovation, knowledge and connection throughout the impact investment ecosystem, with a focus on fostering the use of catalytic capital.

Debra joined MacArthur in 1995, having previously worked as an investment banker at John Nuveen & Co., and as CFO for a nonprofit child welfare agency. A frequent speaker and guest lecturer, Debra was a presidential appointee to the United States Treasury Department Community Development Advisory Board and a founder of the Mission Investors Exchange. She holds a Master’s degree from the Kellogg School of Management at Northwestern University and a Bachelor’s degree from Yale College, summa cum laude.