The Social Impact Investment Taskforce of the G8 group of industrialized nations today released a new report containing several recommendation to harness and grow so-called “double bottom line” investing, a term that encompasses investments with both a financial and social return.
The report covers a range of for-profit and nonprofit-related efforts. Much of the report is focused on international development, but it also covers other social investments.
For nonprofits, it discusses the growth of performance-based contracting and social impact bonds and the need to make investments to prepare social service organizations to meet the growing challenge. One recommendation, for example, is to provide additional capacity-building grants.
According to the report:
For-profit start-ups have traditionally received funding from venture capitalists and others that allows them the flexibility to finance their growth. By contrast, the vast majority of grants to social sector organisations are allocated entirely to a specific project. This constrains social sector organisations from investing in their organisation’s operational capacity – whether through hiring the right executive talent, or creating back-office infrastructure that improves efficiency. In the US, for example, only 16% of grants given out each year are for general operating support.
One promising development has been the emergence of ‘venture philanthropy’ firms that seek to apply many of the ‘hands-on’ capacity building techniques of venture capital to social sector organisation start-ups – including providing general operating support, mentoring, help with recruitment, strategic thinking and embedding a revenue model from the start.
The report notes that”$45 trillion are in mainstream investment funds that have publicly committed to incorporate environmental, social and governance factors into their investment decisions” and that “it would only need a small fraction of this money to start moving into impact investment for it to expand rapidly.”
In the United States, a report from J.P. Morgan and the Global Impact Investing Network (GIIN) found $46 billion in impact investments under management by 125 major fund managers, foundations, and development finance institutions. This represented a nearly 20 percent increase from the prior year, but still only 0.02 percent of the $210 trillion in global financial markets.
U.S. National Advisory Board (NAB) on Impact Investing
Shortly after the G8 taskforce was first announced in 2013, a similar taskforce was assembled in the U.S. to contribute to the international effort. This group, the National Advisory Board (NAB) on Impact Investing, released its own report at a June 25 event at the White House.
At that event, 20 private-sector investors announced commitments to make more than $1.5 billion in “investments that intentionally generate sound financial return as well as measurable social or environmental impact.” The group included both for-profit firms, like Prudential Financial and the Capricorn Investment Group, and foundations like The McKnight Foundation, Rockefeller Brothers Fund, the Ford Foundation, and The John D. and Catherine T. MacArthur Foundation.
The Center for the Advancement of Social Enterprise (CASE) at the Fuqua School of Management at Duke University has committed to tracking the progress of these commitments and to make that information publicly available.
In its report, the National Advisory Board report made five recommendations:
Remove regulatory barriers to unlock additional private impact investment. Innovative impact oriented businesses are in need of investment, and certain regulatory barriers stand in the way—leaving much private capital on the sidelines. For example, the IRS could further clarify and refine its rules about foundation investments in for-profit enterprises to help fill the funding gap between grants and commercial capital. This would be cost neutral.
Increase the effectiveness of government programs. Government agencies frequently lack the flexibility and range of tools needed to achieve social and environmental goals. For example, Congress could revise the longstanding investment restrictions under which the Overseas Private Investment Corporation operates, so that it could participate in a wider range of impact investments, reinvest its proceeds for portfolio growth, and develop next-generation financial instruments and models. These policies would increase the environmental and social impact of programs while lowering costs or potentially increasing revenue.
Provide incentives for new private impact investment. Some markets need a push to get off the ground. By putting the first dollar on the table, government can attract private investment to support important social and environmental goals. More federal agencies should have the authority to replicate successful impact investing programs, such as the Community Development Finance Institution (CDFI) Fund, which marshals $20 of private capital for every $1 of federal funds invested. These policies may increase agency expenditures, but they often repay their costs over time or attract considerable private funding.
Encourage and support innovative impact-oriented organizations and impact investment opportunities. Every entrepreneur needs support in getting off the ground. Congress, the White House, and government agencies command powerful public platforms for spreading the word about the benefits of impact investing. They can support the development of field-building organizations.
Standardize metrics and improve data access. Measuring impact is critical to the development of the impact investing field. The government can support and accelerate private-sector standards while promoting open access to data. For example, development finance institutions could coordinate to create a platform that enables data sharing and due diligence, modeling their efforts after the Department of Education’s Investing in Innovation (i3) fund.