Published in Partnership with Forbes.com
- The following three steps are critical to growing the field of impact investing in the US:
- Build on the nation’s existing ecosystems for investing capital for public purposes.
- Look for innovation where you may least expect it–the public sector.
- Clarify investment opportunities and potential returns.
Impact Investing is a growing area of discussion and interest – among investors and social change leaders alike. The aim is to unlock private capital seeking both social and financial returns and direct it towards investments that can achieve that. However, today, most potential impact investors, when imagining impact investment opportunities, think first of water filtration systems in Africa rather than a rail line in Detroit. By 2014, an estimated $500 billion of impact investments will have been made to address challenges overseas.
Despite the United States’ reputation for financial innovation, impact investing seems to be leaving us behind. We need a renewed commitment to catalyzing a greater domestic impact investment industry in order to fix some of the most pressing problems we face. The following three steps are critical to advancing this agenda:
1. Build on the nation’s existing ecosystems for investing capital for public purposes. Unlike some places in the world, the US has built an industry dedicated to innovating with capital — the community development sector. Since the 1960s, philanthropic, public, and private investments in the community development industry have produced astonishing returns: millions of affordable housing units built and the development of an extraordinary number of high-performing local, regional, and national nonprofit organizations. Community development financial institutions (CDFIs) and Low Income Housing and New Markets Tax Credits engage markets at scale. In fact, the Low Income Housing Tax Credit is the most successful private-public partnership the nation has ever seen.
What we need to do going forward is build on this unmatched track record. We should help the existing ecosystem to adapt to today’s opportunities. This includes traditional players such as foundations that have supported community development through PRIs and grants. A more intentional strategy of effectively using and aligning all of the tools at philanthropy’s disposal (grants, PRIs and endowment) would be an important step towards catalyzing markets to act differently.
This month, ImpactAssets and Living Cities released a paper that explores a multitude of ways that foundations and public funders can use grants to unlock dollars from the impact investing field. The paper draws from ImpactAsset’s wealth of experience, and Living Cities’ years of deploying a variety of different types of capital: grants; below- market rate flexible debt pooled from member foundations through our impact investing vehicle, the Catalyst Fund; and commercial debt from our financial institution members.
2. Look for innovation where you may least expect it– the public sector. The Great Recession of 2007 has accelerated changes in the way the public sector operates. With fewer resources and increasing needs, a growing number of cities are adopting new innovative ways of working. Bloomberg Philanthropies is helping build a new model by supporting ‘Innovation Teams’ in 5 cities. They are not alone in this work– Living Cities is proud to have 35 cities participate in our Project on Municipal Innovation where cities come together to share best practices across an array of areas. For example, governments in Massachusetts and Ohio are experimenting with new pay for success models that combine public and private grants and loans.
At Living Cities, we are looking closely at opportunities to apply our experience to this emerging local appetite for municipal innovation. Where possible, we want to see how impact investing and private-sector capital might be able to address pressing social problems and even long deferred infrastructure needs. We have seen foreign sovereign wealth funds and international financial institutions innovating in this area and see real promise in building on that innovation domestically.
3. Clarify investment opportunities and potential returns. Given the breadth of our country’s needs, we need to make it easier for impact investors to put their money into things they are passionate about — whether it be job creation, education or broadband. The diversity exists. Within our own portfolio, we have invested in real estate, small business, energy efficiency and education.
We also need to do a much better job of showing that domestic impact investing can be viewed as a stable asset class within a diverse portfolio. For example, many current investors in affordable housing tax credits view these as stable, not risky, investments that provide 5-6% returns. Our own Catalyst Fund’s returns have ranged from 2% to 5%.
Applying the power and potential of impact investing to the US condition has to be a national priority. We need to once again lead the world in harnessing the power of private capital to solve the larger challenges our country faces — to expand our current capacities so our methods are commensurate with the scope and nature of the problem.