The boundaries between private investors, nonprofit charities, and government agencies are getting blurrier – and that may be a good thing.
That’s one way to describe a shift under way in the world of finance, called “social impact investing,” which the Obama administration and others sought to boost this week.
A new White House report calls it a “fast-growing movement” that blends measurable gains on problems like hunger or crime with positive financial return for the investors.
The idea isn’t new, but it’s expanding as more people get involved – from government policymakers to banks and wealthy investors with a do-good streak.
The Obama administration announced new backing for the “impact” ventures on Wednesday and Thursday.
“There’s incredible excitement” about the idea, said Jonathan Greenblatt of the White House domestic policy council at a meeting on the topic Wednesday.
The White House initiatives coincide with private investors announcing $1.5 billion in funds to support new impact investments over the next five years. Investors including charitable foundations hope to put the money toward missions such as affordable housing.
Unlike a charitable gift that is given and then gone, the idea is to earn a positive return and redeploy the money over time. As they explore an often vague middle ground between philanthropy and investing, the investors' approaches span a wide range of profit expectations and loss tolerance. Some are eager for market-matching returns, while others are willing to accept considerably lower rates of return – and risking the loss of the capital they put in – in the name of pursuing a higher good.
Earlier this month lawmakers in Congress announced a bipartisan bill to promote a specific form of impact investing designed to help government get the best bang for taxpayer bucks.
The “pay for success” bill would enlist private money to help achieve desired social outcomes; for example, increasing the adoption rate of teens in foster care. The government would then give those investors a positive return – a share of any savings reaped as costs for taxpayer-funded social programs decline.
If the private investments don’t deliver measurable positive results, the government doesn’t have to pay any profit to the investors.
Here’s one example of how such a formula, sometimes called a “social impact bond,” is already being tried in New York State.
In December New York Gov. Andrew Cuomo announced a “pay for success” initiative designed to reduce recidivism by providing employment training and job placement services to 2,000 former prison inmates. The funding for the venture – $13.5 million – came from wealthy or institutional clients of Bank of America Merrill Lynch.
If the effort succeeds in saving the state money by lowering crime and incarceration rates – assessed after some five years – the state will reap some of those savings while doling out some as a return to the investors.
Much “impact investing” can also occur without the government as a partner.
Revolution Foods is a young for-profit company that attracted socially conscious seed money for its goal of improving the nutritional value of public-school lunches. The company hires people to make school lunches and sells them to public schools. Co-founder Kristin Richmond said at the Wednesday event in Washington that the company’s financial success has gone hand-in-hand with its social mission.
Impact investing isn’t the answer to all social needs. It’s not going to supplant the roles played by traditional for-profit companies, charities, or efforts spearheaded by government.
Consider that an annual Giving USA report, released Thursday, estimated that Americans donated $335 billion to charity – important funds for social objectives that go out with no expectation of financial profit or return of principal. Most of the money came from individuals, with 15 percent coming from foundations and 5 percent from corporations.
Believers in impact investing expect it to have growing importance in the US and other nations.
Rep. John Delaney (D) of Maryland, a sponsor of the “pay for success” bill alongside Republican Todd Young of Indiana and others, said the approach appeals whether you care about budget efficiency or humanitarian results.
“You should run toward these initiatives” for either reason, he said at the Wednesday event.
The US National Advisory Board on Impact Investing – a group representing various proponents from foundations to entrepreneurs – released a major report Wednesday arguing that government should take new steps to promote the idea of socially focused investment.
The recommended steps include removing regulatory barriers, such as by clarifying and adjusting IRS rules about foundation investments in for-profit enterprises.
The report also points to existing successes that could be expanded or replicated. The Community Development Finance Institution Fund, for example, “marshals $20 of private capital for every $1 of federal funds invested.”
The Obama administration applauded the report. Mr. Greenblatt, director of the Office of Social Innovation and Civic Participation, called it a “playbook” for government and the private sector to follow.
The administration also announced new efforts of its own:
• An effort to use an existing “impact fund” within the government’s Small Business Investment Company more effectively.
• Plans for US Agency for International Development (USAID) loan guarantees to businesses that sell things like solar lamps and clean cook stoves in developing countries.
• An $11 million fund for competitive grants to help cities, states, and nonprofit groups develop “pay for success” projects, announced Thursday by the government’s Corporation for National and Community Service.