“The world is on the brink of a revolution in how we solve society’s toughest problems. The force capable of driving this revolution is ‘social impact investing’, which harnesses entrepreneurship, innovation and capital to power social improvement.” So begins the report “Impact Investment: The Invisible Heart of Markets” by the Social Impact Investment Taskforce, set up during the UK’s presidency of the G8 and published on 15 September 2014. Let us take a closer look at the global impact investing ecosystem (more about the report >).

Despite the undeniable impact business has on society, for many years the question of whether this influence is positive or negative was ignored. However, this is changing.

Risk, return, impact

“In the nineteenth century people talked about financial return. In the twentieth century they talked about risk and return. In the twenty-first century we are now talking about risk, return and impact. And when you begin to bring impact into the picture, you bring motivations that are beyond profits.” That is the view Ronald Cohen expressed at The Future of Impact Investing: A Conversation with Sir Ronald Cohen and Top Leaders in the Field, held on 3 November 2014 at Harvard Business School. Sir Ronald Cohen is Chair of the Social Impact Investment Taskforce and co-founder of Apax Partners (an independent global partnership focused on long-term investment in growth companies). He is also Chairman of the Portland Trust (a British non-profit “action tank” whose mission is to promote peace and stability between Israelis and Palestinians through economic development) and of Bridges Ventures (a specialist fund manager dedicated to sustainable and impact investment).

Cohen also co-founded Social Finance Ltd in 2007 and Social Finance US in 2011, which he led until Big Society Capital was established in April 2012. Social Finance UK aims to develop a social investment market in the UK. It provides access to capital and advice to investors and social sector organisations that want to deliver social impact. It also created the Social Impact Bond (SIB).

Big Society Capital is the world’s first social investment bank. It was formally launched in April 2012, using an estimated £400 million of unclaimed assets left dormant in bank accounts for over 15 years and £200 million from the UK’s largest high street banks. Sir Ronald Cohen is Chair of Big Society Capital.

Patient capitalism

In the USA, in the late 1970s, pioneers such as Green Century Funds, Boston Common Asset Management and Calvert Investments made the first social impact investments.

“Sometimes a 7% return is better than an 8% return, when you put in extra analysis and other factors. (…) If we put just a few percent of our pension assets into ecological balance, social justice, opportunities and education, all at once, it will ultimately make more money than the 98% of our portfolio invested in traditional ways (even if initially returns are lower), because we are creating the investable society,” explains Wayne Silby.

Another pioneer, Jacqueline Novogratz, called this kind of strategy “patient capitalism” in her talk at TED Global in June 2007. In 2001, she founded Acumen Fund, a non-profit that takes a businesslike approach to improving the lives of the poor. “We raise charitable funds from individuals, foundations and corporations, and then we turn around and we invest equity and loans in both for-profit and nonprofit entities that deliver affordable health, housing, energy and clean water to low-income people in South Asia and Africa,” explains Novogratz. In her words, patient capital is money that can be raised early on and, although it brings below-market returns, can go the long haul. It can also be combined with management and strategic assistance, which for some companies is crucial for getting the business off the ground.

According to a Ceres report, a trillion dollars would need to be invested every year from now until 2050 to slow climate change. During Climate Week at the UN in September 2014, more than 70 foundations (including the Rockefeller Brothers Fund, the Educational Foundation of America, the John Merck Fund and the Russell Family Foundation), together with universities (including Stanford University), faith-based groups, schools, hospitals, individuals and cities, created a coalition called Divest-Invest Philanthropy, representing $50 billion in investments. They will withdraw their investments from fossil fuels and invest in new energy solutions across asset classes, such as renewable energy, energy efficiency, water purification and agriculture. For example, the Russell Family Foundation has invested in Ecotrust Forest Management using funds originally divested from coal holdings in its endowment portfolio.

A philanthropic revolution

Impact investments are investments in companies, organisations and funds made with the intention of generating social and environmental impact alongside a financial return. This definition serves as a guide for various investment strategies. It also involves a new strategy for philanthropy: instead of making donations and grants, philanthropic organisations can in some cases invest the money, measure how effective their investees are, and get some additional financial return. Impact investment also matters because the so-called “social sector” is huge worldwide. In the UK, 800,000 people work in it, and across Europe 11 million people work in non-profit organisations.

“As I analysed how our system works, I realised that the only part of the system that was there to help those who were left behind was the philanthropic sector. It used to be called the third sector, and we hated that name and I banished it; and here you hear about the social sector, not the third sector… how can anybody be proud of being third, right? (…) And the social sector had one characteristic everywhere in the world: having no money and no scale. So if you look at how many businesses in the United States over the last 30 years made it through 50 million dollars of sales, the answer is 50 thousand. How many non-profits made it through 50 million dollars of revenues? Anybody know? One hundred and forty-four. Why was that? (…) We realised that the reason was that nobody was measuring anything. You couldn’t tell who was doing a good job at delivering a social return,” Cohen explains. “When you begin to measure social return or social improvement and you connect it to a financial return, you can allocate capital to those who can deliver the highest social return, and those who have the ability to scale up can raise the capital they need in the same way business entrepreneurs can.”

The largest international social value network, Social Value International, represents those working to understand, account for, measure, analyse and manage the wider value created and destroyed by organisational activity. “We have created a clear set of principles which will lead to the inclusion of social, environmental and economic value in decision-making across different organisations and sectors, and we develop guidance and tools to put these into practice,” says Jeremy Nicholls, CEO of Social Value International.

Apart from how to measure effectiveness, an important question for impact investors is how to choose the best initiatives to invest in. At the G2G Impact Summit “Insights on Impact Investing & Social Entrepreneurship”, organised by Atlantic Trust in December 2014, one of the panellists was asked how her company seeks out and evaluates the firms it invests in.

“All the groups of investors organise pitch events and networking events where entrepreneurs have the opportunity to present their work. And in terms of the actual investment process, it often comes down to spending a lot of time with the entrepreneurs and seeing what is really motivating them. Is this person’s heart really in it? Are they doing this because they are trying to have a social impact, or is it in reality about the financial return? And then working with them to meet their goals. (…) Ensuring that patient capital can last long enough to guarantee the mission of those companies,” answered Jenna Nicolas, CEO of Phoenix Global Impact, a social impact consulting firm from Washington DC.

Demand for impact

Like any other market, the impact investing market has a demand side, a supply side and intermediaries. According to the Social Impact Investment Taskforce report, the demand side includes governments, consumers, corporations and foundations, as well as all kinds of organisations with a long-term social mission. On the same side are impact-driven organisations such as social enterprises, all kinds of “profit with purpose” businesses and grant-reliant organisations (e.g. charities). All of them are looking for capital to finance innovative, high-impact solutions and ideas.

In recent years, we have seen a number of government initiatives that aim to help the impact investing sector function and grow. To mention just a few, following the GIIN and J.P. Morgan report “Spotlight on the Market: The Impact Investor Survey“:

• In the UK, a 30% tax relief for social investment was announced on 19 March 2014.
• In the UK, Prime Minister David Cameron launched the Social Stock Exchange in June 2014.
• In the USA, the Obama Administration launched the National Impact Initiative (NII) in 2013.
• The USA created a USD 300 million Pay for Success (PFS) Fund within the Treasury and a USD 195 million allocation for the Department of Labor.
• In April 2013, the European Union adopted a regulation establishing a new “European Social Entrepreneurship Fund”.
• The Social Impact Investment Forum set up by the G8 launched a Global Learning Exchange and the Social Impact Investment Taskforce.

There are also some interesting initiatives supporting impact investment in Australia, Japan, Italy, Germany and France.

The authors of the GIIN and J.P. Morgan survey asked investors which government interventions would help them most in making impact investments. Of the 117 investors surveyed, 65% found the prospect of credit enhancement, such as guarantees, very helpful. Roughly the same share would welcome tax credits or subsidies.

A breakthrough: Social Impact Bonds

According to the statistics, more than two thirds of young offenders released at the age of 21 go back to prison within 18 months. In September 2010, Social Finance created the world’s first Social Impact Bond, with the goal of reducing reoffending by 7.5% or more over the whole project, compared with a control group. Seventeen foundations and charitable trusts committed £5 million to the project. The Peterborough Social Impact Bond was designed as a seven-year pilot to test the premise that comprehensive, individual support for 3,000 men serving short sentences would help them stay out of prison and build a new life on the outside. To achieve this, Social Finance UK set up the One Service, which provides support with housing, family, health, employment and training, delivered by St Giles Trust, Sova, Ormiston Families, YMCA and MIND. The greater the reduction in the reconviction rate, the higher the return for investors, capped at 13% a year. If the reduction is less than 7.5%, investors do not get their money back and have in effect made a philanthropic donation. So far, investors can look forward to getting their money back with a positive return.

Today there are 26 Social Impact Bonds around the world. The latest one was recently launched in Chicago by the city’s mayor for children aged 4 and up from difficult backgrounds, who have high dropout rates. Social impact bonds are being used to tackle dozens of social issues, such as adoption, foster care, children from troubled families and many others.

A Social Impact Bond is an agreement between a government or foundation and an organisation such as Social Finance, which acts in a way similar to a venture capitalist: it identifies charitable and for-profit service providers, monitors them and measures the number of beneficiaries whose lives have improved.

“Impact investors have the opportunity to share 46 trillion dollars under the UN Principles for Responsible Investment,” says Sir Ronald Cohen encouragingly. “Where to invest? You can invest in impact-driven organisations. You can access these organisations through funds or through instruments such as a Social Impact Bond. I’ve invested in two Social Impact Bonds. You can hope to make 6 or 7% on your money, in a cause that you believe in. If you fail, it was a philanthropic donation; if you succeed, you get your money back plus 7% a year and you can reinvest it.”

Impact investing is a new invention and will probably grow, evolve and change in the coming years. Building a new market from scratch will take at least 20–30 years. However, nothing about its future is certain, and some people claim that impact investing will not grow.

So far, according to the three co-authors of “The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism“, there are over 300 impact investment funds working all over the world. On top of that, there are networks such as the Global Impact Investing Network (GIIN), the Intellecap Impact Investment Network and the Omidyar Network.

There are countless organisations of different kinds supporting the growth and development of the concept. Almost every week there is a conference or debate on the topic somewhere in the world. Given the effort and passion of social entrepreneurs, and the positive social results of many of their enterprises, one can only hope that impact investors succeed.

Paulina Wajszczak for socialeconomy.pl