June 9, 2014
Originally published on the Stanford Social Innovation Review
By Cathy Clark, Jed Emerson, & Ben Thornley
Impact investing presents something of an existential challenge for foundations. Convention dictates that investors manage a corpus to maximize risk-adjusted financial returns, in the hopes it will underwrite philanthropic giving for social impact into perpetuity. By seeking to deliver a blended financial and social return, impact investing forces two culturally distinct practices be simultaneously pursued: money management and grantmaking.
At the urging of numerous provocateurs and pioneers many foundations are exploring the intersection of these two worlds and have begun to slowly change their practices; they are embracing mission-related investing, even while acknowledging strong financial performance is essential to financial sustainability.
But the understanding of how a foundation may interrelate its pursuit of social change with financial return is still limited. Despite communities of interest arising, such as Mission Investors Exchange and subgroups within the Global Impact Investing Network who site a handful of recent experiences, many skeptics still believe trade-offs between financial returns and social impact outweigh the opportunities to align them.
This is happening even as, outside of the walls of foundation investment committees, we see more and more individuals asking for new kinds of transparency regarding the impacts of their investments. Michael Bloomberg’s recent appointment as co-chair of the Sustainability Accounting Standards Board to help set corporate standards on environmental reporting, and the recent decision by the European Union requiring every public company with over 500 employees to report on environmental, social, and governance factors point to an clear trend: People want to know what impacts their investments are having on the world at large. How long can philanthropic foundations and charities—institutions given life in our tax code to promote justice, equality, education, and other “charitable” purposes and values—not work to find ways to align their investments with their values?
Luckily, there already are some concrete lessons drawn from deep experience that several foundations can share. The two new case studies from our “Impact Investing 2.0” series, on the experiences of the W.K. Kellogg Foundation (WKKF) and RSF Social Finance (RSF), provide prime examples. (The multi-year 2.0 project focuses on the factors that drive high performance in impact investing; it includes three published reports, 10 case studies to date, and a book to be released in the fall.)
One of our new case studies documents the impact investing experience of an endowed foundation, the other of an investment fund run by a public benefit charity. Each provides useful guideposts for other funders working to align money and philanthropic mission.
Cathy Clark has been an active pioneer, educator and consultant for 25 years in the fields of impact investing and for-profit and nonprofit social entrepreneurship. She is Director of the CASE i3 Initiative on Impact Investing at Duke University and co-leads the Social Entrepreneurship Accelerator at Duke, part of USAID’s Higher Education Solutions Network.
Jed Emerson is senior advisor to family offices executing Impact/Sustainable Investing strategies, has authored numerous pieces on impact investing and introduced the term Blended Value, and is Chief Impact Strategist with ImpactAssets.
Ben Thornley is the co-author with Cathy Clark and Jed Emerson of “The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism.” He is a consultant and strategic advisor to Pacific Community Ventures and REDF, two San Francisco Bay Area non-profit organizations investing debt and philanthropic capital, respectively, in social enterprises and small businesses.