The Rich History of Impact Investing: Funding Social Entrepreneurship Moves More Mainstream

From Colonial Quakers to Silicon Valley Billionaires: How Economic Activism Has Grown Into Investing for Good

Social entrepreneurs like Kirsten Ussery and Craig Grissom (top photos), funders like ImpactAssets (bottom photos), and events like SOCAP (middle) are all part of the growing impact investing movement.Photo credits, clockwise from top left: David Lewinski; Sumit Kohli, Sreel Photography; David Lewinski; ImpactAssets; Cindy Nawalis/SunFunder

Social entrepreneurs like Kirsten Ussery and Craig Grissom (top photos), funders like ImpactAssets (bottom photos), and events like SOCAP (middle) are all part of the growing impact investing movement.
Photo credits, clockwise from top left: David Lewinski; Sumit Kohli, Sreel Photography; David Lewinski; ImpactAssets; Cindy Nawalis/SunFunder

When former teachers Kristin Richmond and Kirsten Tobey launched a company to provide healthy, affordable lunches to kids attending inner-city schools, they didn’t forge their partnership over a kitchen table or in a teachers’ lounge. It was on campus, at the Haas School of Business at the University of California, Berkeley. And Revolution Foods, the enterprise they created, isn’t a charity. It’s a commercial operation that has served more than 50 million school meals and counts Steve Case, co-founder of AOL, among its investors.

Revolution Foods is among a growing cadre of enterprises using venture capital to address social problems. Rather than rely on philanthropic dollars, founders of these for-profit enterprises believe private investment provides more financial sustainability. Founders have the potential to tap into capital markets for further funding or to thrive using their own cash flows, and their businesses can grow and do more good as they expand. Some investors are drawn to the idea of achieving financial returns while creating benefits for people and the planet. In these matchups between purpose-driven enterprises and aligned funding, a new marketplace has emerged. It’s often called “impact investing.”

Conscious capitalism isn’t a new concept, but the movement is growing quickly. In a 2016 survey conducted by the Global Impact Investing Network (GIIN), respondents reported making more than 7,500 investments in 2015 focused on positive impact. The collective worth of these commitments was $15.2 billion. Respondents said they planned to increase that amount by 16 percent in 2016. Of course, this figure is tiny compared with the trillions of dollars deployed in global capital markets, but increased demand has Wall Street taking note: Financial giants including BlackRock and Goldman Sachs recently established impact-investing units.

Economic Activism and Investing for Good: A Movement With Rich History

Impact investing, in its broadest sense, has deep roots. Long before Wall Street became interested, social concerns shaped business decisions through economic activism. A century before President Abraham Lincoln issued the Emancipation Proclamation, Quakers in the United States condemned the sale of slaves and influenced public opinion and legislators with anti-slavery petitions, boycotts of products made by slaves and acts of civil disobedience. At the time, slavery was one of the young country’s biggest industries. (View a PDF of a timeline of economic activism and impact-investing milestones, and review the brief bios of Impact Investing Changemakers photographed throughout this article.)

In modern times, boycotts and other forms of economic activism gained legitimacy as a means of addressing civil-rights and labor issues. Martin Luther King Jr. led the Montgomery bus boycott, which culminated in 1956 with the U.S. Supreme Court decision declaring segregated city buses unconstitutional. In the ’60s, the Southern Christian Leadership Conference founded Operation Breadbasket, which organized boycotts in cities around the United States in order to pressure white-owned businesses to hire African-Americans. Photos of war atrocities in the late ’60s prompted protests against Dow Chemical Co., the maker of napalm, and other companies profiting from the Vietnam War. About a decade later, large financial institutions divested from companies doing business in South Africa as part of the anti-apartheid movement.

The concerns of investors coalesced into what is now referred to as socially responsible investing (SRI). Early on, SRI was more about reducing harm than promoting good. Investors could initiate change by screening out “sin stocks” — unethical or environmentally damaging investments — rather than by actively supporting businesses working to directly tackle poverty or environmental degradation.

But innovative, proactive investment strategies began to emerge. An early example of the use of market models to effect positive change followed the devastating 1974 famine in Bangladesh, when Muhammad Yunus, a banker and economist, started making very small loans to groups of impoverished villagers. In addition to recognizing the need for small-scale loans that support self-employment, Yunus discovered that peer lending — giving loans to groups of borrowers — led to low default rates because everyone in the group held each other accountable. Grameen, the bank he created, recoups its loans and covers its full costs. In 2006, Yunus won the Nobel Peace Prize for his novel approach and the impact of Grameen Bank in Bangladesh and elsewhere in the developing world.

Pierre Omidyar, Bill Drayton, Jacqueline Novogratz

Left to right: Photos courtesy Omidyar Network; Ashoka; Acumen

“The microfinance industry awakened a lot of people to the idea that a loan could be an effective way to address poverty, as opposed to the way people had thought about it in the past,” says Antony Bugg-Levine, CEO of Nonprofit Finance Fund, which provides consulting, financing and other support to nonprofits. Microfinance offered a more sustainable alternative to aid and donations as a way to empower impoverished communities and support social entrepreneurship.

Evidence that lending can improve livelihoods isn’t limited to developing countries. In the United States, the 1977 Community Reinvestment Act led to the creation of a network of Community Development Financial Institutions (CDFIs) — banks whose purpose was to provide mortgages and other financial services to underserved communities historically ignored by big banks. CDFIs often partner with local organizations to provide affordable housing, financial literacy training and job opportunities in conjunction with financial services.

While many see modern-day impact investing as a phenomenon that’s emerged in just the past few years, its underlying principles — mixing financial returns with positive social or environmental outcomes — have been around for some time.

In 1980, Bill Drayton founded the nonprofit Ashoka to identify and support visionary entrepreneurs whose ideas for social change were intent on transforming entire systems, whether in health, housing or education.

Joan Bavaria founded Trillium Asset Management in 1982 to provide clients with SRI investment options.

“This has been bubbling along pretty nicely for the past 20 or 30 years,” says Jed Emerson, who introduced the term “blended value” to investors in 2000. In a nutshell, blended value posits that pursuing social or environmental goals does not need to be decoupled from profit-making.

Silicon Valley titans, eager to change the world, are also embracing the idea. Among them: eBay founder Pierre Omidyar, who created a foundation and started giving money to charities after his company went public in 1998. In 2004, he and his wife, Pam, replaced the foundation with the Omidyar Network, which sees itself as an active investor, or “venture philanthropist,” in for-profit and nonprofit enterprises. Omidyar Network has backed a range of organizations and businesses, including, a microfinance website; Living Goods, a network of entrepreneurs selling essential health products to the poor at affordable prices; and Bridge International Academies, a chain of quality nursery and elementary schools for low-income students in Africa.

LLeft to right: Photos courtesy Root Capital; Grameen Bank; DBL Partners

LLeft to right: Photos courtesy Root Capital; Grameen Bank; DBL Partners

“In the 1990s and early 2000s, you had significant creation of wealth out of the dot-coms,” Emerson says. “This new money was controlled by people who in many cases had created that wealth themselves — and they didn’t want to do ‘drive-by’ philanthropy and just write a check.”

In 2007, the Rockefeller Foundation convened a group of investors, entrepreneurs and philanthropists at its Bellagio Center in Italy to explore how private capital could be harnessed to tackle big global problems. It was at that gathering that the term “impact investing” was coined.

“There were green investors, there were microfinance investors, and, in the U.S., there were community-finance investors — we named all of this ‘impact investing,’” says Bugg-Levine, who, as managing director of the Rockefeller Foundation from 2007 to 2011, designed and led its impact-investing initiative. “But more than the language, in 2007 we asserted that all of these different organizations and groups were part of a mindset shift.”

The shift extended beyond the investment community. Seminal events, such as the 2001 collapse of Enron — when widespread fraud brought the energy giant crashing down — and the 2008 global financial crisis, undermined confidence in the companies and institutions shaping the world’s economy.

“The 2008 downturn underscored how inequity was rampant and that our traditional ways of doing things just weren’t working,” says Nancy Pfund, founder and managing partner of DBL Partners, a venture-capital firm focused on generating returns alongside social, environmental and economic benefits. “What that did was raise the bar for people wanting their investments not just to make money but to fix some of these problems.”

Jacqueline Novogratz agrees. “For too long, we had seen capitalism go unquestioned and witnessed unbridled markets overlook or exploit low-income communities, too often creating a cycle of poverty and inequality,” says the founder and CEO of Acumen, which invests in enterprises tackling global poverty. “The impact-investing momentum coincided with recognition that the markets could be used as a listening device to help us better understand the needs of the poor and create a system where everyone could participate.”

Merging Capitalism With Funding Social Enterprises

Rather than abandon capitalism, pioneers such as Novogratz asserted that business could be a force for good. In 2001, with seed capital from the Rockefeller Foundation, Cisco Systems Foundation and three philanthropists, she launched Acumen and started using philanthropic dollars as venture capital — investing in social enterprises pursuing market-based approaches to everything from access to clean water to affordable housing. Before long, conferences were established to serve the community, including the Skoll World Forum, which since 2004 has brought together hundreds of social entrepreneurs at the University of Oxford’s Saïd Business School, and the annual SOCAP conference in San Francisco, launched in 2008. (Read more about SOCAP’s evolution.)

Left to right: Photos courtesy Blended Value; Nonprofit Finance Fund; Skoll Foundation

Left to right: Photos courtesy Blended Value; Nonprofit Finance Fund; Skoll Foundation

The types of entrepreneurs that impact investors seek are addressing social or environmental challenges through for-profit enterprises, but their business models, goals and types of impact vary widely.

For some, like Revolution Foods, the idea is to tackle a big social problem — poor nutrition and low academic performance — using market-driven solutions. Schools need to provide meals, the thinking goes, so why not offer a better, more nutritious product, at a price schools can afford? By addressing a known market with huge potential, social enterprises like Revolution Foods are able to attract blue-chip investors who help them scale their businesses.

For other entrepreneurs, the goal is to create economic opportunity in underserved communities. Chid Liberty co-founded the fair-trade apparel-manufacturing company Liberty & Justice in 2010 to create a network of clothing factories that provide jobs for Liberian women. L & J produces value-added products in a country whose primary exports are raw commodities, such as rubber and iron ore.

For still others, the priority is to find commercially viable ways to offer affordable goods or services. This was the approach of Sam Goldman and Ned Tozun, who came up with a low-cost solar lantern designed for people living off the grid. The company they formed, d.light, has now sold more than 12 million solar lights in 62 countries. With funding from both mainstream venture capitalists and impact investors (including Omidyar Network), d.light aims to illuminate the lives of 100 million people by 2020.

“There was this whole wave of entrepreneurs who believed they could create businesses that would both make money and solve problems,” says Bugg-Levine.

Impact Investing Is Still an Emerging Market

Because investing directly in a social enterprise would require extensive knowledge and experience, intermediaries — funds and asset managers — help investors target their assets. A missing piece of the impact-investment ecosystem remains a sufficient supply of the funds and asset managers enabling mainstream investors to participate. (Read more about available options in Impact Investing for the 99 Percent.)

This is changing. Client demand has recently prompted big financial institutions to offer impact-investment products. Last year, for example, Goldman Sachs acquired Imprint Capital Advisors, one of a growing cohort of specialist impact-investment asset managers, and BlackRock launched an impact-investing fund. Merrill Lynch and Morgan Stanley have taken similar steps.

Bugg-Levine sees this as an important development. “One after another, the major financial institutions have set out to engage in impact investing,” he says. “It’s not a major part of their business, but we are in a qualitatively different place from where we were two years ago.”
However, more needs to be done to allow retail investors — as opposed to high-net-worth and institutional investors — to participate in the market. Jean Case, CEO of the Case Foundation, which she began with her husband, Steve Case, sees an urgent need for growth in impact-oriented financial products and services. “There are a series of tools and structures that investors have traditionally relied on as they come to a market, and they are still being filled out in impact investing,” she says.

As impact investing goes mainstream, key questions remain: How is “impact” defined and measured? How can investors ensure their money is achieving the outcomes claimed by a fund or asset manager?

Adding up the dollars earned by a fund or public company is straightforward. Measuring and verifying those dollars’ effect on society and the environment is difficult but vital if investors are to have confidence that their money is being put to good use. The challenge will be to standardize metrics for fair comparison.
One tool for measuring impact is the Global Impact Investing Rating System (GIIRS). Administered by B Lab, the nonprofit that certifies B Corporations, GIIRS takes an approach similar to Morningstar’s investment rankings, but solely rates social and environmental “returns.”

For a fund to obtain a GIIRS rating, every company it invests in must complete B Lab’s B Impact Assessment, which scores the company on how they treat workers, customers, communities and the environment. Fund managers are also assessed. After completing the assessment, funds are given a GIIRS rating, providing a gauge of the social or environmental return investors can expect on their investment as well as a standardized means to compare that return across funds. (Read more about GIIRS Best for the World Funds for 2016.)

Left to right: Photos courtesy Heron Foundation; Social Finance Israel; Blue Haven Initiative

Left to right: Photos courtesy Heron Foundation; Social Finance Israel; Blue Haven Initiative

Another helpful tool for impact investors is the Impact Reporting & Investment Standards (IRIS) developed by the GIIN. IRIS is a catalog of generally accepted performance metrics used by impact investors to measure and manage the returns on their investments.

Some, including DBL Partners, use their own measurement tools. “We have metrics that we report on to investors, and they’re quantitative as well as qualitative — things like how many jobs are created in low-income neighborhoods or what’s the carbon footprint,” says Pfund. “If you don’t measure it, how can you determine if it’s making progress?”

Results from one GIIN survey indicated that 80 percent of respondents use data on investees’ social and environmental performance to inform business decisions. In other words, whether using third-party measurement tools like GIIRS or establishing internal metrics, as DBL Partners has, the vast majority of impact investors use data to inform decisions.

Of course, the focus on measuring impact does not mean that financial returns can be ignored. Much debate has focused on the rate of return an impact investment should deliver. Should returns be market-rate, or should investors be prepared to accept lower, “concessionary” returns in exchange for greater social or environmental impact?
Novogratz sees room for a wide spectrum of approaches. She thinks, however, that as the market evolves, different types of investments should be clearly delineated. “It’s like any movement,” she says. “At the beginning, the tent is big, so many players can participate, but as it matures I hope we see segmentation. Because if we’ve learned anything, it’s that different levels of organization require different kinds of capital.”

When it comes to attracting more mainstream investors, Pfund is clear. “Most investors need to make a return,” she says. “It’s not that concessionary funds don’t play a role, but it’s hard to get pension funds and endowments at scale if that’s what you’re offering.”

The good news, she says, is the increasing evidence that impact investments can yield impressive financial rewards. DBL, for example, was an early investor in Tesla Motors and SolarCity, a leading provider of solar-energy systems.

Case cites the positive example of Revolution Foods, in which her husband is an investor. “They have returns that would turn the head of any early-stage investor,” she says. “They’re demonstrating that it’s a very real company while balancing the financial interest of its investors with the social impact it wants to have.”
Some even argue that a day will come when these kinds of investments will no longer need to be called “impact,” because all businesses will take into account the effect they have on people and the planet.

Pfund looks forward to the day when the word “impact” is superfluous. “That’s my goal,” she says. “That someday people will integrate this approach into all of their investing, because it leads to better returns. Why wouldn’t you want to do that, if you could?”

This article was originally published as “Investing for Good” as part of the Impact Investing Special Section in the Winter 2016/2017 issue of B Magazine.

The other articles on impact investing included in that special section:


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