This is a guest post from Colby Dailey. Colby manages the affordable homeownership initiative Cornerstone Partnership for NCB Capital Impact. She has been working in and alongside the philanthropy sector as a grantmaker and practitioner for over ten years.
By Colby Dailey
I believe that philanthropists’ willingness to pay for social returns positions them to play a unique, catalyzing role in scaling the impact investing industry. In a recent paper published by the Federal Reserve Bank of San Francisco, my co-author Ben Thornley and I laid out a new framework for understanding impact investors. Four aspects of that framework are helpful for thinking about what role we, as philanthropists, can have in scaling the industry:
1. Impact investors are best described as having a "willingness to pay for social returns" rather than, as they are more typically described, as having financial-first or impact-first motivations;
2. Investors themselves are the best drivers for improving performance measurement as they alone know their actual preferences for social returns;
3. By innovating broadly, investors can drive improvement in performance measurement; and
4. Social performance measurement is a key to drawing additional investment into the impact investment universe.
Rather than thinking about investors in the typical impact-motivated/financially-motivated categorization, we can describe them as having a "willingness to pay for social returns". I would argue that nearly all investors have some willingness to pay for social returns, whether it be the value they place on the return, such as meeting their mission objectives, or the price they pay, such as potentially forfeiting market rate returns. We see this at work any time an investor chooses not to invest in a company whose activities she disagrees with for social reasons; and the growth of social responsible investing demonstrates that such willingness to pay is a prevalent, mainstream investor behavior.
Thinking about impact investors in this way enables us to see the impact investment industry as a whole, having a diverse core of investors, rather than as a polarized industry locating investors with competing motivations at each end. In this framework, philanthropic investors, by definition, are the most willing to pay for social returns as they seek little to no financial return from their investments.
Impact performance tools and practices are the way by which investors can truly understand and express their own preferences for social return, i.e. their willingness to pay for it. By extension, the better investors understand the social return or the impact of their investment, the more able they will be to make informed – and more – investments. Thus more effective tools, practices and reporting of returns are keys to drawing investment into the industry. Because investors alone know their actual preferences for social return, they are the best drivers of improvements to performance measurement. In this vein, because donors prefer all or almost all social return, they can be a very powerful group of impact investors – they can bring substantial investment capital to the industry and drive and support efforts to better measure impact and report social return.
As diverse investors innovate broadly in social performance tools and practices, social performance measurement will become more effective and potentially more standardized. We are already seeing some convergence as investors in certain sectors – such as the environment or education, for example – use similar metrics to show impact. As investors improve performance measurement, they will be more able to disclose their impact, thus providing valuable information to the field, giving more investors what they need to gauge their own preferences for social return and invest accordingly. As donors begin to make more impact investments and disclose their presumably large social returns in those sectors, they will inform other investors’ preferences for social return.
Admittedly the challenge of measuring impact is daunting. However, I would posit that the philanthropic sector is uniquely poised to scale the impact investing industry and lead the field forward. Not limited by preference for financial return, donors can deploy capital as impact investors targeting a wider range of impact investments than other groups of impact investors. Moreover, by demanding, leading and supporting innovation in the social performance measurement tools and practices that disclose the large social returns of their investments, donors who make impact investments provide valuable information to the field, giving more investors what they need to invest in the efforts that change the world.
It would be interesting to see how some of these ideas could be put to use with low income families and the hundreds of thousands of bank owned homes which sit empty…maybe there’s a happy medium waiting to be found.
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Very nice angle on this–thanks! Look forward to reading the full paper and seeing where this all goes… One version may be within how one thinks about the structuring of Social Impact Bonds.
Thanks, Jed, I agree. Would be great to see Social Impact Bonds effectively catalyze the impact investing universe, drawing investors with myriad and diverse preferences for impact.
Thanks Colby. I agree that philanthropy has a critical role to play — particularly in two areas: more robustly measuring and disclosing their own non-financial performance (particularly through MRIs and PRIs); and funding the practice of impact evaluation by investors, where a) a lack of capacity and resources prevents investors from rigorously measuring impact, and b) the investors in question are similar enough (have a similar ‘willingness to pay’, such that they can coordinate the methods and practices they use to measure impact being to create the standardization and resulting economies of scale and benchmarks needed to reduce costs and provide “market-level” information to latent sources of capital.
Colby and I discuss these ideas in more detail in the paper. But as an example, a group of investors that might be tempted to consolidate a more rigorous form of impact evaluation (with support from philanthropy), might include:
A particularly influential investor might include an especially large CDFI, family office, or pension fund/insurer.
(Sorry, my previous post was cut short)
Thanks Colby. I agree that philanthropy has a critical role to play — particularly in two areas: more robustly measuring and disclosing their own non-financial performance (particularly through MRIs and PRIs); and funding the practice of impact evaluation by investors, where (a) a lack of capacity and resources prevents investors from rigorously measuring impact, and (b) the investors in question are similar enough (have a similar ‘willingness to pay’, such that they can coordinate the methods and practices they use to measure impact and begin to create the standardization and resulting economies of scale and benchmarks needed to reduce costs and provide “market-level” information to latent sources of capital.
Colby and I discuss these ideas in more detail in the paper. But as an example, some groups of investors that might be tempted to consolidate a more rigorous form of impact evaluation (with support from philanthropy), include: a group of double bottom line equity funds, CDFI loan funds, or foundation PRIs targeting a particular social objective.
There are already numerous efforts to consolidate impact evaluation in this manner – for example through GIIRS, for DBL/TBL equity funds; CARS, for CDFI loan funds; and the Ford Foundation’s Wealth Matrix.
The challenge is that, in many cases, the ability of investors to report impact rigorously (consistently and quantitatively, over time) is hampered by resource constraints. A carefully targeted campaign of philanthropic funding directly to investors for measuring and reporting impact (rather than for particularly tools and methods) has the potential to be catalytic.
Thanks, Ben. In addition I would say that the philanthropy sector will have more impetus for funding measurement and reporting as it becomes more actively engaged within the impact investing sector.
The opportunity for scale is tremendous, and as donors make impact investments they also likely will drive efforts to better measure and report their investments’ social return.
We agree the standardization and measurement of impact investments is critical to driving the market forward. Can you imagine a board meeting at BofA where they say ‘business was up 10ish percent for the first few months of the year.’ hurammph!
We are working a platform where all investments and impacts can be measured and displayed easily, then ranked against custom indices specific to that project.
Rob, I look forward to learning more about the effort! The “10ish percent” problem is a good example of the persistent ambiguity around nonfinancial returns that can stymie investors. Innovations, such as the one you mention that you’re working on, chip away at that ambiguity to give investors the clarity they need. Thank you for the comment!
I think your and Ben’s conception of a continuum of impact investors is a tremendous improvement on the old idea of “return first” and “impact first” investors. That conception, in its day, was also a great insight. So already I think you are contributing to the innovation that you call out in your paper.
I think a way to take that insight a step further, would be to find ways to group investors at points along the spectrum of “impact” and “return” to see if there can be incentives for those investors to collect and share social impact measures. Philanthropy could certainly help with providing some of the funds that are necessary to collect that information. Philanthropy could also help create a market for the information by demanding it from their impact investees.
It would be exciting if one or more of these philanthropy-motivated experiments could provide the breakthrough for measuring social impact on a large scale that might bring in government to help its development. In that way, it would be something like the Ford Foundation’s Gray Areas program that became a model for the Great Society and still inspires the work of community development today.