Giving Compass' Take:
- Harvey Koh, writing for Stanford Social Innovation Review, dispels the myths around capital gaps, impact investing, and the need for catalytic capital.
- How can individual donors leverage impact investing practices to enhance investments?
- Read more about the role of catalytic capital.
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The size of the worldwide impact investing market has now crossed the trillion-dollar mark, according to the Global Impact Investing Network (GIIN). However, together with that impressive scale it is increasingly constrained by the requirements and expectations of mainstream finance. As a result, impact capital largely lacks the flexibility to push into many of the areas of urgent need facing people and planet. Indeed, the GIIN itself continues to report that “appropriate capital across the risk/return spectrum” is the top challenge facing the impact investing market.
In late 2020, I wrote about the crucial role being played in impact investing by catalytic capital, i.e., capital that is flexible in pursuit of positive impact that otherwise would not be possible, typically because it accepts disproportionate risk and/or concessionary returns. 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 riskier opportunities.
In the same article, I wrote there was a pressing need to better understand the capital gaps across the market that give rise to the need for catalytic capital—without a clear understanding of these gaps, it is difficult for investors and advisors to develop sound strategies to address them. Since that time, the Catalytic Capital Consortium (C3) has been funding a range of efforts to remedy that lack of knowledge, building an evidence base on capital gaps around the world and, in many cases, how catalytic capital has already been deployed to meet those needs. This work has illuminated a diverse array of capital gaps and importantly dispelled a number of myths about them. Here are five of the most important of those myths:
- Myth #1: Gaps only occur in poorer, less economically developed parts of the world.
- Myth #2: Gaps are pretty easy to spot—just look for the absence of capital on offer to potential investees.
- Myth #3: Gaps stem from weaknesses on the part of potential investees, not anything to do with investors.
- Myth #4: The gap faced by innovative solutions is greatest at the outset and gradually narrows as they scale.
- Myth #5: Attitudes and values are not relevant to the discussion of capital gaps.
Read the full article about impact investing myths by Harvey Koh at Stanford Social Innovation Review.