By Esha Chhabra
Foundations just make grants, correct? Not necessarily. Grants are becoming one option in a more complex menu of financial tools for the social sector.
Judith Rodin, president of Rockefeller Foundation, is taking risks with philanthropic capital, risks she says have the potential for bigger impact long term. These experiments come in different avatars: social impact bonds, impact investments, and crowdfunding – to name a few.
Wait, you don’t have to be filthy rich to be an investor? Rodin explains.
Esha Chhabra: You state clearly that this book is not just for the 1%. Explain.
Judith Rodin: There is a sense that when one is talking about investment, it’s only for the affluent. This is a book for those who are interested in learning about how to make both a financial return as well as impact. We think it’s critical and opportunities like crowdfunding are providing a way in to those who are not among the super affluent.
But, more so, it’s also of interest to those who are somewhere near the middle. Hope Consulting did a survey last year, talking to more than 4,000 Americans living in households of $80,000 and up – so, clearly not billionaires. Forty-eight percent said they were interested in impact investing products. But only 12% had any experience with these products. We want to help those individuals learn about how their money can be used for social impact.
Chhabra: So far impact investing has been associated mostly with established funds such as Acumen, Omidyar, Gray Ghost, and Echoing Green. Are you suggesting that we could see that democratize down the road with angel investors or individual investors getting into the space?
Rodin: Yes, there are many funds. But there are other options already. We’re trying to show in the book an array of opportunities, ranging from equity investments to debt as well. It just depends on the appetite and needs of the investor.
For instance, there are products such as Calvert Foundation’s community investment notes [a debt security of $1,000 or more], which is a very direct way of being involved and anyone can do so.
Chhabra: Social impact bonds are another financial tool and Rockefeller was one of the first foundations to experiment with them. Where do SIBS fit into the impact investing scene?
Rodin: Yes, we’re big supporters of this.
We funded Social Finance UK, the office in the UK that developed the first social impact bond in Peterborough. We also then invested in that bond – the Peterborough prison experiment. Those SIBs have replicated in the UK and abroad.
Rockefeller wanted to systematically support the SIB infrastructure. To do that, we funded Social Finance US which has facilitated social impact bonds in the US.
We worked to bring in investment banks, and local banks that want to create a product around social impact bonds. The biggest in the US have been Goldman Sachs, JP Morgan, and Bank of America BAC -1.09%. Social impact bonds are now being applied to so many issues beyond prison rehabilitation programs. For example, it’s also being used for asthma, early childhood education, and diabetes programs.
Chhabra: Most foundations are generally risk averse. How can Rockefeller Foundation get more foundations to experiment?
Rodin: Our grant funding should be used to promote the field.
For example, in impact investing, we funded Global Impact Investors Network (GIIN), which brings all these investors together. We funded the development of metrics that measure the performance of social enterprises and impact investing funds. This is all necessary infrastructure to help impact investing grow.
Essentially, we have to deliver social and environmental impact at scale. At scale, that’s key. And to do that, it requires more capital than what governments and philanthropy have alone. So our effort has really been to unlock capital markets.
Plus, the timing is right. We see a growing number of investors, particularly younger investors who don’t want to wait to achieve their philanthropic goals.
And the numbers are proving it. A new study by GIIN and JP Morgan showed that surveyed participants had expected commitments of almost $13 billion, up from $10.6 billion last year, in impact investments. That’s a 19% increase. Thirty-one percent of investors anticipated an increase in the number of deals. Over 90% of investors surveyed reported both financial and social/environmental returns that were in line with or above their expectations.
Chhabra: On a policy level, what is being done?
Rodin: Let me give you a few examples from our work on SIBs. We made a $1 million grant to the Harvard Kennedy School’s social impact bond technical assistance lab (SIB Lab) to conduct the SIB Lab National Competition which offered pro bono technical assistance to state and local governments considering the pay-for-success approach.
On December 30, New York Governor Cuomo announced New York as the first state in the nation to launch a pay for success project to reduce recidivism. The project will provide services to 2,000 formerly incarcerated individuals, who are at high risk of reoffending, soon after they are released from prison. The Rockefeller Foundation has provided a $1.32 million credit enhancement to the project.
We have also worked with the Obama Administration on pay-for-success models and have been pleased to see the Administration include a request for $300 million to create a Pay for Success Incentive Fund in its proposed 2015 budget.
Chhabra: So were do grants fit into all this going forward? Is there ever a concern that there is too much focus on the quantifiable impact, not the qualitative impact?
Rodin: Grants are still a critical piece. We will never stop being a philanthropic grant-giver. But we’re looking for leverage from our grant dollar. We need to leverage in other forms of capital.
Whether it’s a grant or an impact investment, we are looking for impact and metrics is one way to measure performance. Because it’s measured, it doesn’t have to be quantitative. I’m an empirical scientist and some of the most useful data is often qualitative data. You can’t put a number to everything.
Still, there is much that is measurable and demonstrating impact.
Chhabra: When you were dipping into impact investing, did you face any changes early on?
Rodin: Yes, there were critics early on about measuring impact. I had investors who said that I know how to do the financial due diligence but I don’t know how to do the social due diligence. So, that’s why we worked on developing those metrics.
There was also the “either/or” category who felt that investments would take away from grant-giving, particularly grantees. But our grant-making in this space has actually unleashed huge pools of capital that otherwise would not have been available.
And over the years, we’re seeing a huge mind shift in business, large-scale businesses like GE, who are making social impact part of their narrative.
Chhabra: How evolved is this conversation about impact investing globally, especially overseas?
Rodin: In Africa, there’s a chance to leapfrog and combine these goals early on. But that’s TBD – we’re just at the beginning of the conversation as businesses start to merge impact with commercial practices.
In the developing world, where we are seeing a lot of innovation and acceptance of this is India. India is putting together regulations for business and investors to work together on building the impact market.
It’s important to remember, though, this is still a market and set of practices in evolution. One of the reasons we did this book was to help evolve the market more quickly.
This is not the solution to the world’s biggest problems. It’s merely an arrow in our quiver.