Rethinking an All-or-Nothing View of Impact Investing
December 17, 2018 | Perspectives | Impact Investments

Last year, as part of MacArthur’s program reflections on progress and challenges, I wrote about the Foundation’s history of catalytic capital investments and how the lessons learned have helped fuel new solutions to capital gaps, while at the same time strengthening the ecosystem for impact investing.

I was optimistic about the future, but I worried about the often-binary characterization of impact investing, the notion that it should be approached from either a purely commercial or purely philanthropic investment perspective, when most opportunities fall somewhere in between.

Certainly, those concerns remain. Market surveys consistently cite a lack of appropriate capital across the risk-return spectrum as one of the top barriers to progress. And, with the world’s largest financial firms making splashy entries into impact investing, there has been a genuine concern that we could end up migrating toward a commercial-only approach.

But the past year also yielded signs that are both surprising and hopeful. Rather than growing more bifurcated, the conversation about risk, return, and impact has deepened. Influential leaders in the field are helping others rethink an all-or-nothing view, sharing unique, sophisticated strategies and frameworks that accommodate a range of approaches.

We've taken a catalytic approach, prioritizing impact and tailoring our capital so that it can effectively seed, develop, and scale organizations focused on the world's most pressing needs.

One example is the Impact Management Project, whose Investor’s Impact Matrix encompasses the full spectrum of impact investing practices, while helpfully differentiating among them. Reports issued by the Blended Finance Task Force and Convergence greatly expanded our knowledge about blended finance, both why it matters and how it works. At the 2018 European Alpbach Forum, 10 principles were forged to bring more clarity to the field, recognizing that impact investing can take many forms.

A new series from Omidyar Network on The Economist’s digital platform called Beyond Trade-Offs, advances today’s evolving, nuanced view of impact investing with contributors that include Ford Foundation, the Bill and Melinda Gates Foundation, Goldman Sachs, Big Society Capital, Access—The Foundation for Social Investment, and Elevar Equity and The Rise Fund. One contributor, the Indian venture capital firm Lok Capital, describes the progression of its strategy to connect grants to equity investments in order to build the capacity of sectors in which it invests and thereby fuel long-term strength in both financial returns and impact. Prudential explains how it segments its impact investing portfolio so that 80 percent of its assets target market-rate or better returns, while 20 percent are catalytic (supporting promising but higher risk enterprises) or philanthropic (supporting nonprofits). And Blue Haven Initiative, a single-family office, discusses why it expanded its approach from market-rate investments to operate across a continuum of returns, recognizing that family offices are able to be more flexible in pursuing impact than are many institutional investors.

Taken together, the perspectives lay bare how difficult and often uncertain this work is. It is possible to acknowledge the need for a range of capital solutions, but then what? What constitutes a smart subsidy? When is it most effective? How much is needed to drive deeper impact? Even those of us who have deployed catalytic capital for decades mainly rely on our experience to make key judgment calls. But if we want to extend our reach, this is not good enough; we need to do new research and cultivate new tools and frameworks to inform and guide us all.

Of course, the fact that there is a serious conversation underway about the interplay of risk, return, and impact is, in and of itself, a breakthrough to be applauded. The challenge will be to translate this dialogue into new products, platforms, and practices. There is no way for the world to reach the United Nations Sustainable Development Goals without a rapid expansion of commercial investments and blended finance. By accelerating catalytic investments—what some refer to as sub-commercial or concessionary investments—we can help fuel that broader market growth while bridging capital gaps for enterprises that struggle to attract appropriate financing.

For our part, MacArthur will help advance that agenda through impact investing grants and investments. In the coming year, we will build on our $517 million track record in ways that we expect to be transformative—collaborating with new investors and testing new vehicles to unlock financing for sectors not well-served by traditional approaches.

It is clear that many voices will still migrate toward the absolutes of impact investing. But the prospects for the future are encouraging. Our field has clearly demonstrated its potential to improve the lives of millions of people around the world and safeguard the planet. The emergence of more flexible investment strategies will yield even deeper, more sustainable impact in the years to come.

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