As more investors seek to use their capital as a tool for social change, a group of asset managers and nonprofit leaders is working to spread the practice, and to ensure impact investing stays true to its roots as its popularity grows.
The U.S. Impact Investing Alliance recently announced the creation of two new advisory councils stocked with heavy hitters from the world of philanthropy to share ideas and push advancements in impact investing.
The Presidents’ Council on Impact Investing is composed of 20 foundation leaders, among them co-chairwoman Julia Stasch of the MacArthur Foundation and the heads of the Case, Ford, Heron, Kresge, and Kellogg foundations. The Industry Advisory Council is made up of organizations that support the development of impact investing, including the Mission Investors Exchange, Confluence Philanthropy, and the Global Impact Investing Network.
Foundations pioneered the practice of impact investing — in which investors try to generate both a financial return and a social or environmental benefit — decades ago. In recent years, Wall Street giants like Bain Capital, BlackRock, and Goldman Sachs have entered the field, pouring billions of dollars into investments in areas such as affordable housing, microfinance, and reducing carbon emissions.
And late last year, TPG Growth, a company with more than $8 billion under management, teamed up with Elevar Equity, a firm that specializes in impact investing, and nonprofit consultancy the Bridgespan Group to start a new impact-investing fund, the Rise Fund. Singer and activist Bono and Jeff Skoll, the former president of eBay, are also among the fund’s founders.
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.
Testing Results
The flush market is welcome, said Fran Seegull, executive director of the Impact Investing Alliance, but carries a risk that financial firms will market their investments as having a social benefit without rigorously testing results.
Ms. Seegull called it “impact-washing,” a play on greenwashing, a critical term applied to companies accused of faux environmentalism.
“As we start having bigger swaths of capital entering the field, we need to retain our commitment to impact measurement and transparency,” she said. “As we reach for market return, that’s something we want to keep our eye on.”
The alliance was created last year to encourage more impact investments and ensure that they actually provide a social benefit. Like its precursor group, the U.S. National Advisory Board on Impact Investing, it will push for public policies designed to increase social investing. In addition, the group aims to generate greater interest in the subject among investors and make sure finance professionals are well-schooled in how it works.
The meat of the alliance’s work is still being developed. Nancy Pfund, a member of the group’s board and the founder of DBL Partners, said she hopes the organization will generate common definitions of social and financial impact, develop best practices, and hold conferences on the subject.
“Finance people are used to being measured by financial return and have a way of looking at the world that is very disciplined and investment-oriented,” said Ms. Pfund, whose company makes early-stage venture investments in social entrepreneurs. “But impact investing is multidimensional and uses more robust criteria. We want to educate the world on the power of this approach.”
Focus on Transparency
Ms. Seegull said she would like to see further development of metrics for measuring impact and a requirement that public companies disclose their sustainability goals and achievements.
“Now, impact is largely self-reported and unverified,” she said. “There’s a tremendous opportunity to develop verification around impact.”
The arrival of big financial players in the market demonstrates the appeal of investing with both a financial and social mind-set, Ms. Seegull said. She expects the approach to grow as more female baby boomers take control of family estates and more millennials start to amass investment capital. Both generational groups have shown great interest in impact investing, she said.
This year, impact investing is poised for double-digit growth. Foundations, pension funds, private-equity firms and other investment groups plan to make nearly $26 billion in new impact investments this year, an increase of 17 percent over 2016, according to a survey of 206 investment professionals conducted by the Global Impact Investing Network.
Over the past three years, impact investing has benefited from several changes in public policy. For instance, the Treasury Department offered guidance on how foundations can invest their endowments with social benefits in mind while still adhering to their fiduciary duty. Darren Walker, president of the Ford Foundation and co-chairman of the Impact Investing Alliance, credits the federal move with helping him convince his board to commit $1 billion from Ford’s endowment to mission investments over the next 10 years.
Washington Concerns
Additional impact-investing opportunities might come with President Trump’s promise of a $1 trillion push to rebuild roads, bridges, and other U.S. infrastructure, which Ms. Seegull said would offer avenues for investors to support transit and jobs projects in underserved areas.
At the same time, the administration’s proposed budget-slashing has the alliance on the defensive.
“We as impact investors are concerned that programs that enable the flow of private capital for public good could be reduced or eliminated,” Ms. Seegull said.
And if the comprehensive tax overhaul under congressional consideration includes lower corporate-tax rates, she predicted, that would reduce the demand among corporate investors for the tax credits that are often used to fund affordable-housing projects. The prospect of tax changes is already affecting the market for such deals, she said.
“If there are lower tax rates, the appetite for tax credits may be less,” Ms. Seegull said. “The pipeline of new deals is reflecting that.”
