From the United States we have much to learn from the experience with the Community Reinvestment Act and the New Markets Tax Credit, which together bring more than $20 billion of investment a year to poorer areas of the United States. The US federal government has also provided outcomes funding for SIBs and is actively engaged in promoting impact investment through the White House Office of Social Innovation and Civic Participation.
In France, capital flows into social organizations have benefited from allowing pension contributions to go to funds that invest 7 to 10 percent of their assets in tackling social or environmental issues.
And across the EU, the European Investment Fund is leading the effort to develop impact investment management firms running sizable funds.
Optimizing existing ecosystems to support social entrepreneurship and investment is one important role for government. A second is to be a constructive commissioner of impact investment, focusing not on the layers of cost that impact investment necessarily involves but on the cost per successful outcome. And a third focuses on international development, where $150 billion is expended every year in aid, and governments are looking for more innovative and effective approaches to tackling the challenges of economic development and the social issues that constrain it, such as literacy, child malnutrition, and illness.
Addressing Constraints on Economic Development
Social entrepreneur after social entrepreneur, investor after investor, governmental minister after minister, and countless business leaders and financiers all came before the Taskforce and argued that a revolution was needed in the way we tackle social issues. Government resources available for this fall far short of increasing social needs. This is why I think that impact investment's time has come.
But to make progress, we must clearly understand the challenges at hand, and focus considerable energy on removing remaining barriers so that the breakthrough in thinking that has enabled impact investing – namely, the measurement of social outcomes and their linking to financial returns – really does provide social entrepreneurs with the keys to the capital market.
Cathy, Jed, and Ben define and describe a practice of Collaborative Capitalism that is broad – with the power to influence all business and finance – yet driven by impact investment that is initially concentrated in private markets, just as tech venture capital was.
Impact investing is indeed both an “approach,” across asset categories, and also a part of the alternative assets class, where it offers a unique form of private investment that is largely uncorrelated to public markets.
Similarly, international economic development is a core objective for many impact investors – we are all for the incidental impacts of regular commercial activities in low-income communities, such as job creation – yet economic development is insufficient in and of itself. We must also address the constraints on economic development internationally, through the provision of services to tackle such problems as literacy and school dropout rates, the eradication of disease, training of the unemployed, and so forth. Driving capital through development impact bonds (DIBs) toward tackling these social constraints on economic development is one example of what the impact investing movement is all about.
Again, the lynchpin is the realization that social outcomes can be measured, for interventions on everything from recidivism, homelessness, foster care, and educational dropout rates, to malaria, early detection of diabetes, and sleeping sickness eradication.
I believe that within five years, we will know the costs of an intervention for most social issues, the savings government can yield from an intervention, the price a philanthropic donor or a government is paying in the market for the particular outcome, and the greater value to society – the secondary and tertiary effects – of someone being rehabilitated, for example.
The Taskforce is providing guidelines for metrics and benchmarks in dealing with key issues. Conventions will be set over time just as we have accounting conventions for, say, recognition of revenues in a software company. There will be professional firms carrying out independent verification, and organizations to gather information and make useful comparisons.
In the United Kingdom, we see, in private asset classes, financial products that strike directly at important social issues. SIBs are among them, representing a particularly innovative proposition by connecting financial performance directly to social outcomes. If average returns delivered are on the order of 7 percent, as expected, and these returns are “uncorrelated,” because recidivism rates, adoption rates, and other social measures do not fluctuate with the stock market, this low correlation will offer valuable diversification benefits. If these returns hold up over time, this should lead to allocations to impact investing of several percent of total assets in most portfolios.
The Contours, Challenges, and Transformative Potential of Impact Investing
The authors of this book trace the history of impact investing back to socially responsible investing and the impulse to integrate environmental, social, and governance factors in public markets. I too am enthusiastic about an increasingly impactful approach to investing in public companies and look forward to seeing investors reward strategies designed with a measureable social outcome in mind. Among the actors emerging in impact investing are larger corporations focused on specific impact projects. Group Danone, for example, has created Grameen Danone Foods, a yogurt factory in Bangladesh whose mission is to help reduce childhood malnutrition, increase children's growth, and improve their concentration in school.
I also see a role in impact investing for corporations as outcome funders and mentors for charitable service providers addressing issues relevant to a corporation's business. For example, a company selling health products might want to be one of the outcome funders alongside government and health maintenance organizations for social impact bonds that seek to reduce the number of prediabetics contracting Type 2 diabetes.
For what are becoming known as “profit-with-purpose companies,” sometimes known as “for-profit social enterprises,” an important challenge will be “locking in” mission through special-purpose corporate forms, such as the B Corporation in the United States. Socially driven investors want assurance that these businesses will not abandon their mission. Corporate structures that enable entrepreneurs and investors to know that the mission of the business will be locked in beyond a sale of the business are an increasing feature alongside the presence of measureable social objectives.
Impact investing may reach scale sooner by capitalizing for-profit businesses, but it is likely to be most transformative for nonprofit, charitable organizations. In the United Kingdom alone, there are 160,000 charitable organizations, including many service providers to the less well off. Most are small and have no money. In 2000, the UK Social Investment Task Force estimated that three-quarters had insufficient capital to look ahead more than three months; more recent annual surveys of the US nonprofit market by the Nonprofit Finance Fund paint the same picture.
Figures from the United States also illustrate the problem of inadequate resources. Despite three-quarters of a trillion dollars in US charitable foundations, and nine million people employed in nonprofits, very few US service providers have managed to raise the funding necessary to achieve scale. Over a period of twenty-five years, fifty thousand US businesses have successfully crossed the line of $50 million in sales. How many nonprofits have done so in the same period? Just 144.
The primary reason nonprofit organizations face this predicament is that traditional philanthropy has focused on the act of charitable giving rather than on achieving social outcomes. It has given charitable organizations money for two or three years and then, as a well-intentioned sanity check,