The latest investor survey by the Global Impact Investing Network (GIIN) makes it clear that the impact investing sector is no longer a philanthropic niche: With major financial services institutions entering the field, it has grown steadily to roughly $715 billion in 2020.

Yet even as impact capital grows, it has failed to fully address critical needs around the globe—many articulated by the Sustainable Development Goals (SDGs)—largely due to inflexible expectations for investment returns. Every year over the past six years, appropriate capital across the risk and return spectrum has been the top challenge for the industry, according to the GIIN survey.

To move forward, we must stop expecting investees and the communities they impact to always kowtow to established investor expectations. The contortions should instead become capital's responsibility. It needs to support—not hamper—solutions that work, and investors should be the ones adjusting their behavior.

Catalytic capital—which the MacArthur Foundation and Tideline define as capital that accepts disproportionate risk or concessionary returns to generate positive impact and enable third-party investment that otherwise would not be possible—has been at the forefront of this push. In the case of an unproven fund, enterprise, or innovation, catalytic capital might be the investment that helps things get going, building a track record that can attract other investors to risker opportunities in areas such as energy access. It has been a critical component of impact scaling efforts, such as community development financial institutions in the United States and microfinance around the world.

Despite these strengths and achievements, catalytic capital can and should do much more. However, knowledge gaps riddle investors' understanding of the concept, a weakness that the Catalytic Capital Consortium is aiming to correct with the launch of its market-building grants program.

Read the full article about catalytic capital by Harvey Koh at Stanford Social Innovation Review.