In the 21st century, industry took a pause. Post-Cold War growth marked capitalism as the most productive economic system, but some of its most fundamental practitioners were beginning to rethink their relationships with the communities they served. Corporations, banks, and private funds responded with initiatives as varied as corporate responsibility offices, sustainable business certifications, and social venture spin-offs, reflecting a reevaluation of success equally based on economic, social, and environmental value.
This triple bottom line has come to inform businesses from FedEx to local letter presses, but what is less obvious is how leaders actually quantify social and environmental impacts. Even when the goal seems clear (like carbon emission reductions or students educated), the monetary value of these “goods” can be difficult to pin down. In fact, social facing sectors like governments, nonprofits, and philanthropists often have entirely different rules of reporting than corporations, reflecting the often qualitative nature of societal change. Imagine a hedge fund analyst discussing project performance with the director of a women’s health nonprofit. Both have clear results to present (money earned, lives improved), but neither can integrate their seemingly disparate stories of change. The result is a fragmented landscape of companies, organizations, and funders working at cross-purposes to solve the same problem. Thankfully, Antony Bugg-Levine saw things differently.
THE ROOTS OF IMPACT INVESTING
In 2007, then managing director at the Rockefeller Foundation, Antony Bugg-Levine envisioned a symbiotic relationship between private investment and public good, which he referred to as impact investment. As founding chair of the Global Impact Investing Network (GIIN), he defines the partnership as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” Essentially, the investment creates one large boardroom, where decision makers from both funders and funded create a common vocabulary to discuss their project goals and risk analysis. Investors are able to report transparent social and environmental outcomes (such as gallons of water saved), while those guaranteeing the environmental or social benefit can access larger, more predictable streams of money—to the greater benefit of all.
Equally important, unlike a traditional philanthropic or governmental grant, impact investments provide a capital return for investors, with repayment based on the project’s reported success. If the project stalls or does not produce its agreed-upon outcomes, investors share the risk, and repayment can be delayed. Though there is no single definition for impact investing as an asset type, a 2016 GIIN survey estimated that the impact investment market stands at $74 billion, with projections of $2 trillion in growth over the next decade. At only about 1% of global investments, the field of impact investing remains small, but players in many sectors are beginning to create their own niche models to implement the philosophy, such as social impact bonds, rate cards, and Pay for Success transactions.
PAY FOR SUCCESS: EARLY CHILDHOOD EDUCATION
At the genesis of this movement is a preschool program in Salt Lake City, Utah, where the Pay for Success model passed an early test. The United Way of Salt Lake wanted to increase the number of low-income children benefitting from quality early childhood education. Unable to mobilize the upfront funding, the nonprofit turned to investors J.B. Pritzker and Goldman Sachs for a $7 million investment, supporting up to 3,500 children over five years. The investment was to be repaid based on the number of preschool students that did not use special education support services during their K-12 education, as compared to estimates established before students entered preschool. In the program’s first year, 110 students tested as likely to need educational support, but only one student used the extra services upon entering kindergarten. At approximately $2,470 per student, the state of Utah was thus able to save $281,550. Simplifying the contractual specifics, the United Way and (later) the state of Utah were able to use these savings to begin repaying J.B Pritzker and Goldman Sachs’ initial investment, plus 5% interest. Had the program not succeeded, J.B Pritzker and Goldman Sachs, as investors, would have shouldered the entire cost – and more children would still have attended preschool.
Beyond the numbers, what did this Pay for Success transaction amount to? By using private capital, the United Way of Salt Lake was able to pilot an innovative educational initiative without risking taxpayers’ money. Preschools were able to focus on developing healthy and prepared students, and the state of Utah saved a significant amount of money while expanding high-quality preschool programs. Investors even made a return on their investment.
IMPACTFUL INVESTMENT FOR WESTERN PENNSYLVANIA
As impact investing gains global prominence, communities and organizations in Western Pennsylvania are already rethinking how they fund social change. The Pittsburgh region shares its social, infrastructural, and environmental challenges with many other post-industrial cities, including everything from decaying sewer systems to high rates of lung cancer, opiate use, and infant mortality. Pittsburgh’s solutions however have come from an unusually large non-governmental sector, with approximately 11.1 nonprofits for every 10,000 people, and foundations that spend the fourth-largest amount of money per person, behind only Seattle, San Francisco, and New York City.
As a result, regional impact investing provides the opportunity to monetize cross-sector partnerships by pairing community service providers with investment funds, government agencies, and foundations. With shared outcomes and measured accountability, these coalitions can leverage significantly greater investment in partnership – and from sources independent of state and federal delays.
While regional funders have started to provide mission-based loans, one of Pittsburgh’s largest opportunities may lie in meeting the U.S. Environmental Protection Agency’s mandate to decrease storm sewer overflows in the region by 2036. The $2.5 to $6 billion project presents a panoply of socially beneficial solutions that includes rain gardens, parks, and green roofs, but as with any tax-funded project, it is difficult to justify “added” costs. In 2016, Green Building Alliance worked with Fourth Economy Consulting to complete a feasibility study to determine how Pay for Success might be a financially viable solution for stormwater compliance. Implementation remains under active development.
As communities reimagine serving 21st century citizens, true triple bottom line change requires finding partners in unusual places. Impact investment invites diverse collaborators to the table and provides a common language to discuss some of society’s most intractable challenges. As disparate sectors are beginning to learn, unlikely friendships can be the most rewarding.
Delve further into the world of social impact investment at our upcoming Inspire Speakers Series on November 2nd 2017.