Giving Compass' Take:
- Jim Bildner explains that impact investing must focus more on outcomes than returns. Even a financial break-even impact investing strategy can work well.
- How can you shift your impact investing strategy to center impact?
- Read about the power of outcome and purpose for impact investing.
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In 2012, more than a decade ago, in response to a growing wave of impact investing obsession, Kevin Starr warned that impact investing was doomed to fail: “Few solutions that meet the fundamental needs of the poor will get you your money back,” he observed, and “overcoming market failure requires subsidy.”
These realities have not changed since Starr wrote “The Trouble With Impact Investing.” In fact, if anything, the cost of solving for inequity has only increased. Yet the fascination with impact investing has only gotten stronger, even as achieving true impact—let alone a market investment return—remains vanishingly rare. To be blunt, the data is in: Few problems have been truly solved by impact investing, and returns have been nominal at best. Proof of this abounds, like the so-called “Opportunity Zone” investments, which research has shown to be “costly and poorly targeted and (have) done little to create jobs or improve conditions in poor communities while providing massive tax benefits to wealthy investors”; intended to spur investment in low-income and undercapitalized communities, they have instead subsidized investments in communities with relatively higher incomes, home values, and educational attainment as well as stronger income and population growth. Most practitioners working in community development have accepted this as the reality of impact investing: The harder you drive for social impact in disadvantaged communities, the farther away you get from unbuffered full market return. But the hype persists.
After 20 years and more than 220 investments made supporting early-stage frontline social organizations, Draper Richards Kaplan Foundation—the organization I have the privilege to lead—we have adopted a simple true north: What matters most is creating an impact in the lives of the most vulnerable populations—whether it’s addressing food insecurity by providing meals where needed, providing housing to the homeless, making medical care accessible, making social justice a reality for all or providing pathways to employment opportunities, to name just a few of the problems our portfolio organizations are trying to solve. And while the majority of the investments we have made have been grants, roughly a quarter of our investments have been Program Related Investments (PRI) in for-profit entities, so we know a thing or two about impact investing. By definition, PRI regulations ensure that there must be an “impact” in investing.
Our experience has been crystal clear—just getting our principal back (and being able to recycle any return into another social enterprise) is a huge win—one we are absolutely comfortable with. Why? Because the impact from these for-profit investments is exactly the same as the impact from our nonprofit grants: More than half of the organizations are directly impacting more than 10,000 lives, more than 40 percent are impacting 50,000 lives, a quarter are impacting 500,000 lives and more than a fifth, millions of lives. We attribute the similar impact from our for-profit PRI investments as our nonprofit organizations to the fact that we never compromise our focus on social impact, regardless of the form of the entity. Without the pressure of seeking market returns, we are free to focus on true impact in our for-profit investments. And without the pressure to deliver market returns, these for-profit entities do not have to compromise their focus on those most in need.
Read the full article about impact investing by Jim Bildner at Stanford Social Innovation Review.