Dear Ms. Scott:
Many of us in the impact investing world were thrilled when you announced in December that you will start investing your fortune in for-profit businesses that match your philanthropic goals. Here’s how you put it:
“When I make gifts, rather than withdrawing funds from a bank account, or from a stock portfolio that increases the wealth and influence of leaders who already have it, I’d like to withdraw them from a portfolio of investments in mission-aligned ventures, with leaders from the populations they are serving, or from generally undercapitalized groups like women and people of color. In this way, the money can help address these issues twice.”
I count myself among the growing community of what’s known as impact investors and advisors — those of us who believe that investments in for-profit companies can generate both social good and financial rewards. We share your conviction that philanthropic money can support a funder’s mission twice, first through investments in these businesses and then when donated.
But going from impact investing intention to action is often hard. During my years in the field, I’ve identified six steps that can help philanthropic impact investing programs get off the ground. I hope these are useful to you and other philanthropists and foundation leaders inspired by your example.
Know why you’re taking this step. Successful philanthropic impact investing programs have a clear answer to the question: “How can impact investments contribute to our mission in ways we cannot achieve through grants or conventional investments alone?” Having a ready answer is the best inoculation against the inevitable pushback from both traditional investment managers who claim attention to social impact jeopardizes financial return and grant makers who argue that the pursuit of financial gain inherently means little if any social good can come from such investments.
Your answer to this question will depend on a range of factors. Some philanthropists use impact investments to encourage mainstream investors to support mission-driven work. They might, for example, provide the risky startup funding for an innovative low-income housing project, setting the stage for larger bank loans once the effort is underway.
Others seek what former Kellogg Foundation President Sterling Speirn referred to as a “learning return” on how private sector actions affect grantee work. In Kellogg’s case, investing in a company looking to provide healthy food in low-income schools provided insights about how the foundation’s own grant-funded policy work inadvertently undermined startup companies seeking to win contracts and provide healthier school meals.
Whatever your answer to the question above, ensuring all team members understand the rationale behind the move is crucial to quickly pushing forward.
Default to action. Much like philanthropy, there are always more compelling impact investment options than available funds. This can make deciding where to invest your funds challenging and stifle action. Here’s how to get unstuck: If you know that any one of a set of investment options is better than the status quo, start with that one.
One nonprofit I worked with wanted to shift some of its assets to a community bank that would lend the funds to underserved borrowers. But those funds stayed in a traditional megabank while the team tried to identify the best such bank to work with. Fortunately, the nonprofit settled on a compromise approach. It would move the funds temporarily to one of the community banks under consideration, then take the time to figure out a permanent home.
In many cases, the difference in impact between various options of this kind will be relatively small when compared with maintaining business as usual.
Progress not perfection. Many donors launching impact investing programs initially seek out investments that exclusively fit their narrow philanthropic mission. Given your interest areas, Ms. Scott, you may be looking to invest in companies focused strictly on education, health, equity and justice, and economic opportunity.
But even the best impact fund managers typically have a broader focus, which may lead them to present a plan that invests half your assets in companies closely aligned with your philanthropic priorities and the other half in less relevant areas. Donors looking to have a specific social impact often reject such plans and continue their search for the perfect alignment, leaving their money to sit idle in traditional investments.
Instead of seeking out a perfect match between investments and mission, which could delay action indefinitely, donors should ask how much more aligned their portfolio is this year compared with last year. Such a mindset, coupled with a default to action, can help you see the real progress you’re already making.
Don’t take “no” for an answer. Many investment advisors and lawyers reflexively reject impact investing because they believe that pursuing social impact and making money are mutually exclusive. This view, however, is not supported by the research. In fact, most impact investors achieve financial returns and social impact results that meet their expectations, according to the Global Impact Investing Network’s annual investor survey.
While discernment is appropriate, your investment advisors’ recommendations should be grounded in current evidence about investment performance that recognizes the field’s success during the last 20 years.
Avoid over-scrutinizing investment options. Because innovation is generally held to a higher level of scrutiny than traditional practices, impact investment options can be subject to unreasonable critique and analysis.
During one foundation meeting I attended, the chief investment officer suggested that a potential investment did not offer enough rigorous proof of social impact. In response, one of the program officers pointed out that the potential investee was more rigorous in tracking impact than many of the nonprofit grantees the foundation happily funded. That honesty helped the committee decide to approve the investment.
Impact investors should be upfront about how much they expect potential investees to focus on and measure their impact. They should also try not to overburden companies they invest in with reporting requirements that distract them unnecessarily from doing their important work.
Encourage collaboration. Launching a successful impact investing program out of a philanthropy requires navigating two cultural dynamics. First, grant makers may struggle to adapt to the relatively quick decision making needed as companies and investment funds seek cash in generally shorter periods of time than nonprofits pursuing grants. What’s more, many grant makers are accustomed to asserting some control over how the nonprofits they support spend their funds, something for-profit companies are less likely to be comfortable with.
Second, many investing teams for philanthropists and foundations are accustomed to putting money in investment funds and may lack experience investing directly in specific companies or projects — often the most promising route for those seeking impact. Fortunately, whatever challenges you face, others have likely overcome similar obstacles and would be willing to share their lessons and collaborate.
Other donors and foundations could also learn from how you implement your own impact investment vision. How, for instance, are you working with the fund managers and companies you invest in to measure and manage impact? Are you providing specific financial incentives to fund managers to encourage them to meet social impact targets as well as financial ones? And are you bringing your financial investment and grant-making teams together to deploy your resources in integrated ways that improve effectiveness?
By sharing your process publicly, you could create an easier on-ramp for others and make a real difference for those who believe that philanthropy dollars — whether invested in for-profit or nonprofit organizations — should always work twice to address societal challenges and improve lives.