While we agree that granting and providing loan guarantees are a form of impact investing, we highlight that the trade-off to generating this impact comes through “investments” earning -100% returns! The decision to leverage the endowment by targeting return-driven investments pursuing impact was an important step in extending ‘catalytic capital’ alongside other like-minded investors towards impact-generating initiatives.
When combined with granting initiatives, impact investing serves as a powerful means to generate social and environmental change.
We highlight some important considerations applying to impact investing at foundations, both public and private:
Impact Investing vs. Granting: Both approaches achieve positive social and environmental outcomes, but they differ fundamentally in their expectations, and relationships with recipients. Impact investing involves making equity, debt, or hybrid investments into profit-generating companies, organizations, or funds with the expectation of generating a financial return alongside social and environmental benefits; essentially aiming for the “double bottom line.” There is a focus on accountability, with recipients required to demonstrate how the investment has contributed to the intended social or environmental outcomes, alongside financial performance. In contrast, grants are extended to non-profits, community projects, or social initiatives that do not have profit-generating business models with the aim of helping these organizations fund operations, programs, and projects that may not be financially self sustaining. Reporting requirements are less stringent than those for impact investments and the primary focus is on achieving a social or environmental outcome without the need for financial repayment.
Types of Investments: Mission-Related Investments (MRIs) are market-rate investments aligned with a foundation’s mission and allow them to support broader impact goals while maintaining and growing their endowment (the Foundation’s impact portfolio largely consists of these types of investments). Financial returns from impact investments can be reinvested into foundations’ endowments, providing a perpetual source of funding for future initiatives. Serkan Altay, an impact investment advisor whose previous experience includes the management of financial assets at prominent foundations such as the Victoria Foundation and Rally Assets.
Risk Tolerance: Serkan Altay say’s Foundations should be have a higher risk tolerance than traditional investors, allowing them to fund innovative and high-impact projects that might not attract conventional investment. A timeline of perpetuity aligns with this notion of elevated risk-tolerance. By investing in early-stage or high-risk ventures, foundations can catalyze additional investment from other sources, amplifying the impact generated alongside other like-minded investors.