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Foundations and Impact Investing: What Is Really Going On?

Date: April 2, 2013

Phil Buchanan

President, CEP

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Impact investing has been hailed as potentially transformational by nonprofit sector, corporate, and foundation leaders. Elizabeth Littlefield, President and CEO of the Overseas Private Investment Corporation, has called it “the game-changer we need in the quest to end poverty” that will allow us to “solve many of the world’s social problems while making attractive financial returns.”

The difference impact investing will make has been compared to venture capital’s impact on the private sector, something that Ronald Cohen and William A. Sahlman argue “will bring much needed change to the social sector.”

I’ll admit that, though I am excited about the promise of more capital deployed to do good, I find myself looking for some hard data to back up these assertions.

At this point, I simply have too many questions. What is impact investing, exactly—and where is the data on its performance? And, given that it sounds almost too good to be true, should we be worried that maybe it is?

Perhaps most relevant for us at CEP, what is the role of foundations?

In many of the accounts heralding impact investing as the potential solution to the world’s ills, foundations, with their more than $300 billion in assets, are featured prominently. They are portrayed as leaders, or likely leaders, in this new realm. A story on American Public Media’s Marketplace reported:

Private foundations have always been legally allowed to invest their considerable endowments in social causes. It’s just that most of them chose not to, preferring to separate the Wall Street side of the organization that handles bank accounts from the Skid Row side that handles charitable giving. That’s done in the form of grants, usually around five percent of assets each year because that’s what the IRS requires. The Wall Street side earned money, the grants side gave it away. That’s changing. Foundations increasingly see for-profit investments as a tool to do their social good, sometimes as a better tool than grants.

But it is unclear to what extent the claim in the Marketplace story is true; that is, whether there is a broader trend among many foundations to practice impact investing, or simply media interest in a few important, but isolated examples?

Clearly, there are some major foundations that have taken significant and important steps into impact investing, such as the W.K. Kellogg Foundation (see CEO Sterling Speirn’s excellent post on Kellogg’s experience for the CEP Blog) and The Greater Cincinnati Foundation. But, beyond a handful of much discussed examples, it is unclear how much of the talk about impact investing is just that—talk—and how much is reflected in actual practice. (Disclosures: Kellogg is a grant funder and client of CEP’s; Greater Cincinnati Foundation is a client and its CEO, Kathy Merchant, is our board chair.)

On the other hand, I have heard many foundation CEOs and board members eschew the idea that they’d ever seek anything other than maximum returns for their foundations’ endowments.

A little hard data would be nice, at this point, to bring the prevalence of this practice into focus.

CEP has been gathering some data on this, most recently in a broader survey of CEOs we will share results of at our conference next month and in a report we’ll publish later in the year. What we know at this point seems to indicate that a majority of our respondents (foundation CEOs with grantmaking budget of $5 million or more; 45 percent response rate—total of 211 responses) are either doing “impact investing” or considering it. Thirty-five percent say they are doing it; 23 percent are considering it. And 42 percent say they aren’t doing it and aren’t considering it.

So perhaps my skepticism is misplaced and the Marketplace story’s idea that the practice is becoming more widespread is correct. But, frankly, we don’t entirely know what to make of that data—because definitions of “impact investing” vary so widely and because this was a broad survey that covered a range of equally important topics covering a range of topics.

To be sure, the responses to our survey question seem to indicate that something is happening—meaning there is much more still to understand. That is why we at CEP are planning a major study on foundations and impact investing. In it, we’ll ask much more granular questions, about definitions, about whether impact investments are coming out of the grants budget or endowment investments, and about amounts deployed. We’d also like to get a sense of their performance, both in impact terms and with respect to financial terms. In short, are impact investments living up to the hype?

That’s also the question that will be at hand during a session at our national conference May 21-22, which will bring together leading thinkers and practitioners, as well as a skeptic, for a robust discussion. Kathy Merchant and Sterling Speirn will be a part of the session. Also speaking will be Nonprofit Finance Fund CEO Antony Bugg-Levine, and co-author of the book Impact Investing: Transforming How We Make Money While Making a Difference, and Social Finance CEO Tracy Palandjian.

Just how big is the impact investing trend and what difference will it make?

To us, the answers remain unclear. But we’re working toward clarity, and we hope you’ll help us get there.


Phil Buchanan is President of CEP. He is also a regular columnist for The Chronicle of Philanthropy. Follow him on Twitter at @philCEP and join the conversation on Pursuing Results at #CEP13.

Editor’s Note: CEP publishes a range of perspectives. The views expressed here are those of the authors, not necessarily those of CEP.

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