G. Benjamin Bingham - Making Money Matter: Impact Investing to Change the World

The three of us, together with colleagues at Pacific Community Ventures and CASE at Duke, have spent the last three years shifting the discussion from the why of impact investing to the how, by examining the practices and performance of twelve outstanding funds in detail, culled from an initial list of 350. Our recently released book, The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism (John Wiley & Sons), also connects the experiences of the twelve funds to the bigger picture of a more outcomes-oriented, transparent, and responsive form of business and finance writ large.

What the twelve funds demonstrate is that, while inherently diverse in its application, impact investing is in fact a cohesive discipline. With decades of practice to draw upon, there is no need to speculate on what impact investing might be or debate whether it is possible for investors to receive financial returns along with social and/or environmental impacts. This level of doubt was warranted in the 1.0 era, but the twelve funds we studied prove the opposite.

The bottom line is this: a first generation of private impact investing funds has delivered on the promise of concurrently delivering financial returns and explicit social outcomes.

Developed and emerging market equity and hybrid funds, all with some participation of commercial investors aiming for market-rate performance, have generated financial returns of 322 percent. Social debt fundswith primarily individual, philanthropic or policy-driven bank investorshave returned 03 percent, matching their targets and never losing a dime.

We can now enter a 2.0 generation of impact investing with confidence, knowing what practices undergird success and building on these lessons to bring the field to scale.

Outstanding impact investing funds undertake many practices common to all asset managers; they carefully nurture their brand, leverage all of the relationships at their disposal, are often headed or backed by singularly reputable or experienced individuals and institutions, demonstrate exceptional financial discipline, are models of operational excellence, and work relentlessly to support the growth of their investees. However, there are particular characteristics that set impact investing funds apart:

First: Though not a necessity, many funds actively maintain relationships with government, either seeking direct investment from public entities or leveraging other policy incentives. And the relationship is not one-sided. The funds also use their experience in the field to influence the creation of more enabling and supportive public policy environments.

Second: Many funds benefit from what we call Catalytic Capital: when one set of investments triggers additional capital that may not have otherwise been available to a fund, enterprise, sector, or geography, thereby generating exponential social or environmental value. We know that investors providing capital for strategic in addition to financial reasons have been critical to the development of impact investing; however, we did not expect Catalytic Capital to have been so prevalent.

Catalytic Capital in the form of grants, guarantees, or concessionary or cornerstone investments may have the potential to negatively distort markets, particularly at the investee level. However at the fund level, our studies show Catalytic Capital has been nothing short of transformative, unlocking billions of dollars of non-catalytic investments.

Third: Many impact fund founders and leaders have a high degree of cross-cultural, cross-sector, and multilingual capacities. Those responsible for making investments must execute with unshakable financial discipline, but successful fund leadership is about more than simply effective money management. Cross-sector experience can be observed in multiple essential areas: finance/business, policy, and impact/philanthropy.

Multilingual Leadership takes this notion a step further and indicates the institutionalization of a funds ability to move seamlessly among diverse stakeholders and audiences.

Finally, the leading impact funds have shown that they are able to move beyond the conventional wisdom of the 1.0 era which assumed that any approach to impact investing had to choose between either a financial-first or impact-first lens. In fact we have seen that this is rarely the case. In reality, funds put financial and social objectives on an equal footing by establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment.