Charities and foundations are doing the less-than-sexy work of creating a mature, functioning market for impact investments — a market they believe is needed to turn the growing hype into effective social change.
These efforts suggest something more is needed than people and institutions eager to put their investments to work for good. New investment products are blossoming, but information about them can be hard to find. Also, measurement of social impact is imprecise and hard to compare. Deals are highly customized, which makes them hard to expand and standardize. And there simply aren’t enough to meet investor demand.
“Impact investing is very messy; it’s very fragmented,” says Ashley Allen, founder of i2 Capital, a company that advises foundations and develops conservation-related investments. “Emerging opportunities always are.”
Recognizing impact investing’s potential to unlock new money to solve critical problems, charities and foundations are tackling those gaps. Here is what some are doing.
Innovative nonprofits and foundations are turning to impact investing to attract commercial capital to their causes. But some observers worry the investments that blend social and financial returns could change the way donors think about charitable giving.
Increasing information available to investors: The World Resources Institute is taking on the dearth of easy-to-use information to assess environmental risks of investments. The environmental group created Aqueduct, an online tool that potential investors can use to create maps illustrating the health and availability of water globally as well as the risks an investment might face from 12 water-related threats such as floods and droughts.
One of the project’s key challenges was translating scientific data for financial professionals, according to Elizabeth Lewis, head of sustainable investing at the World Resources Institute. “The geological experts really don’t speak the same language as the financial experts,” she says.
To ensure companies and financial professionals would use the information, World Resources Institute persuaded financial-data heavyweight Bloomberg to include Aqueduct on its terminals, through which people analyze potential investments and place trades.
The nonprofit plans to create Bloomberg-ready tools to help investors analyze other environmental risks like deforestation and climate change. Says Ms. Lewis: “We know that investors aren’t going to go to a different platform.”
Exerting power as a financial-services customer: When the McKnight Foundation’s board started to think about impact investing, it examined its portfolio and identified its most carbon-intensive investment: $75 million in a stock fund that tracks the U.S. market. McKnight, a 20-year client, went to the fund manager with its environmental concerns and then worked with the company for 10 months to create a new product. The result, the Carbon Efficiency Strategy fund, provides low-cost, broad exposure to the U.S. stock market, like the old investment, but is heavy on companies that produce fewer carbon emissions than similar companies.
Foundations and nonprofits need to ask their financial advisers to consider how investments affect causes they care about, says Elizabeth McGeveran, McKnight’s director of impact investing. “Institutions respond to their customers.”
Helping organizations find investments — and sell them: The growth of new kinds of impact investments is hampered by investors’ fear that they won’t be able to find a buyer if they want to unload them.
The Housing Partnership Equity Trust is a real-estate investment trust formed by 12 nonprofits to purchase apartment buildings to provide homes to people with modest incomes. The MacArthur Foundation made a $10 million investment when it launched. As the fund gained momentum — but before it became profitable — it needed growth capital. To help the fund raise an additional $50 million from Citibank, Morgan Stanley, and the Charles Schwab Bank, the MacArthur Foundation committed to buy up to $12.5 million in newly issued shares if the trust lacks the funds to buy out one or more of the investors. Each investor has the right to seek partial redemption on a fixed schedule.
New types of impact-investment products will remain limited until it becomes easier for investors to get into and out of deals, says Debra Schwartz, managing director of impact investments at MacArthur.
“There need to be better on-ramps for investors in the high-impact part of the market,” she says, “and also better exit opportunities.”
Playing matchmaker: Investors who want to put their money to work for good often struggle to find the right investments. At the same time, entrepreneurs and fund managers have to talk with scores of potential investors to cobble together their capital. Often, they have to negotiate terms separately with each investor. Matchmakers are few.
The Calvert Social Investment Foundation aims to play capitalist Cupid with its new Capital Aggregation business, which brings together investors and social-purpose businesses and investment funds. The Calvert Foundation originates and structures deals from $10 million to $50 million and helps to raise the money from foundations, wealthy individuals and families, and banks. It also expects to invest in every transaction so both investors and entrepreneurs know it has skin in the game, too.
The business launched publicly last month, but the Calvert Foundation has tested the idea for the past year. So far, it has closed five transactions that totaled more than $70 million.
One of those deals: Capital Aggregation helped Greenline Ventures raise $20 million to provide loans to small businesses in low-income neighborhoods. The effort to raise the money was different than most in impact investing because the terms were nonnegotiable. Investors =just decided whether they were in or out.
Most impact investments have a lot of strings attached, says Jenn Pryce, chief executive of the Calvert Foundation. Investors often name the terms they want, demand customized reporting, and restrict how their money can be used: It can be invested in Chicago but not Cleveland, for example.
If Capital Aggregation can persuade investors to think more broadly about impact, it will cut the time it takes to raise capital and help money flow more smoothly, Ms. Pryce says.
“There’s still this desire to pet the bunny,” she says of investors who want to customize their investments. “Capital markets can’t work that way.”
