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.