Why Impact Investors Fight

**Disclaimer: This blog post only represents my opinions from my observed experience in the impact investing sector. I am excited to learn from others and hear differing opinions and experiences.

You may have heard that there is a continuum within impact investing ranging from negative to above risk-adjusted, commercial rate returns. Omidyar Network published its continuum with grants, sub-commercial, and commercial instruments paired with their decision-making process. As Omidyar and others have show, instruments do exists across this continuum. However, there are very few actors in the middle of the continuum, a smaller number in the grant and significantly sub-commercial range, and a larger group in the commercial to above commercial range. These groups often do not get along. For the purposes of this post, I’d like to go back to an earlier definition of the latter two groups from Rockefeller Philanthropy Advisors:

  1. Impact-First Investors– who maximize social impact with a floor for financial returns; and
  2. Finance-First Investors – who maximize financial returns with a floor for social impact.

Significant time and effort has been spent trying to bring these two sides together with limited success. It is rare for these two groups to be in the same room, conference, or conversation. Each from their own echo chambers, you can hear group members say and hear back that they are the only ‘real’ impact investors. This happens as often in Catholic and other faith-based settings as anywhere else. I believe it will be one of our primary challenges to break open the impact investing ecosystem and make it a more inclusive space where we all dial down the judgements placed on others for their investment decisions. This starts with understanding the motivations that have historically caused this big rift between impact- and finance-first impact investors.

Are there a variety of reasons why an investor may choose to be finance- or impact-first? Yes. I’m going to focus in on a few differences between the groups that I have seen, heard, and read repeatedly over the years. Let’s start with finance-first.

Finance-first investors make up the largest group of impact investors, and they typically have hundreds of millions of dollars or more to deploy. Often they are legally constrained from providing sub-commercial rate capital by fiduciary duty, ERISA, etc. They see a world with problems so large that philanthropy cannot make a dent, and, therefore, try to crowd in additional impact capital at scale by showing they can make commercial or above commercial rate returns. In order to make this return, their investments tend not to have the most direct and immediate impact on the poorest and most vulnerable. Sectors such as renewable energy, financial services, and affordable housing in low- to mid-income areas lend themselves to the type of risk / return profiles of this group. Start-ups – mainly in the health, ed-, and fintech space – also fit well with finance-first investors taking a VC approach. This group tends to have difficulty finding enough deal flow in which to deploy their capital. Finance-first investors can be both dismissive and critical of impact-first investors – seeing them as not ‘real’ investors that are muddying the water and making it difficult to crowd in capital at scale. The world’s largest problems need large-scale capital.

Now, let’s turn to the impact-first investors. They make up a much smaller pool of investors with a much smaller pool of capital. Typically, they accept a return trade-off for increased impact and are not legally bound by fiduciary duty to the exception of social good. Given the smaller size of investment, you may find multiple impact-first investors co-investing in the same deal. There are some interesting layer-cake structures with both finance- and impact-first investors participating. However, these structures often include government money for scale and/or a guarantee (e.g. first-loss, but more often 50/50) from a philanthropic source. Impact-first investors often argue that limited concessional capital should not be used to subsidize commercial returns. They and others also criticize many finance-first investors for green- or impact-washing, where an investor claims to be making social impact while using the term ‘impact investing’ for marketing purposes. For impact-first investors, there is no point in deploying capital at scale if no ‘real’ impact is occurring.

More recently, the Catalytic Capital Consortium has come together to make the case that grants and sub-commercial capital are necessary for the impact investing sector both to build the ecosystem and to have the greatest impact. It is not yet clear whether the philanthropic partners – MacArthur, Rockefeller, and Omidyar – will be joined by large-scale, private, commercial capital or if increased impact will come from the funds supported by the consortium. This is a space I’ll be keeping my eye on.

Bringing this all back to CST and reimagining the economy, I’d like to put forward a challenge to this group. Can we find a replicable model / deal that brings in Catholic finance-first, impact-first, and philanthropic money and execute it? Using See, Judge, Act, can we model collaboration around more fully understanding the motivations for different capital actors and holding back criticism? I strongly believe that there is space for all impact investors and ecosystem builders, and it will be vital for us to work together to scale both the depth of impact and available capital. If we can use CST as a tool for investment decision-making at all levels, then we can start from a common understanding in common settings with the common goal of making the economy serve the people.

6 thoughts on “Why Impact Investors Fight

  1. Agree 100% and appreciate your articulation of this divide. I agree that there should be space for all, recognizing some are constrained by fiduciary requirements. That said, and perhaps this comment will only reinforce your point about the divide, but coming from a finance-first mentality and now being more firmly in the impact-first camp, I do think there are a lot of groups in the finance-first mentality that really could be in an impact-first camp if they were more enlightened by what the impact-first group is doing. I admit, I myself, took a bit of educating by our sisters and folks from the non-profit world to get there. I think CST can be used as a way, at least for Catholic finance first groups without regulatory fiduciary requirements, to encourage more finance first groups to move closer to impact first.

    Also, I would gladly contribute to trying to build a Catholic product that involves both groups. Though I admit if we were providing the impact-first, first loss/guarantee/risk-absorbing capital, our sisters and stakeholders would likely question why we are bearing risk for arguably larger, more financially secure, organizations. I welcome anyone’s thoughts/strategies/tactics for responding to this question of why are we crowding in larger, wealthier organizations who often (not always) are better positioned to bear the risk than we are!


  2. Very helpful piece and a concept I have been grappling with myself.

    So many challenges we face today do not have an obvious economic solution (yet). In many cases, the only solution we know of is through philanthropy or redistribution. I am having trouble getting over a mental block here. As investors following Catholic Social Teaching, do we not have a duty to promote economic solutions to the challenges we face? Can one view the acceptance of a non-compensated risk as a short-term solution to a problem that needs a long-term fix rooted in economic viability? Shouldn’t our capital be used to promote that solution?

    Perhaps I am sitting here waiting for Superman when we need to be the solution. Perhaps I am waiting to allocate to someone else’s creativity when we are being called on to be creative…


      1. I wish I could bring creative, entrepreneurial, solutions to the challenges of inequality, climate change and the many other issues of today. Unfortunately, my let-brain limits that level of creativity! However, maybe can bring financial creativity can promote a solution to bridging the gap Evan notes.

        One concept that continues to come up is the risk/return relationship, and I keep thinking about how none of our groups (to my knowledge) have the “luxury” of being taxed and therefore philanthropy does not serve any direct economic benefit. This, of course, is fine, but it may limit the amplitude of our effectiveness. If your capital losses do not help offset your capital winners, you’re even more inclined to avoid loses. Knowing their contribution would help amplify and add depth to the impact markets, would a philanthropically inclined family be apt to provide the impact-first, first loss/guarantee/risk-absorbing capital? A loss has some — albeit limited — benefit, all while amplifying the effect of absolute monetary investment. Just like the depth of the ESOP market is undoubtedly aided by tax structures, we too could attempt to use the rules of the our existing game to our benefit.


  3. @evangillccusa – I love your last paragraph. It names something I’ve been hoping for as well.

    you write: “Catholic finance-first, impact-first, and philanthropic money”
    What can you imagine with these folks together?

    What might it look like for you?

    you write: “Using See, Judge, Act, can we model collaboration around more fully understanding the motivations for different capital actors and…”
    What might this collaboration feel like?

    I’m so glad to hear you talking about the ecosystem builders. I’ve been intrigued by Second Muse Capital + Zebras Unite — and their “Future Economy Lab” process that is around collaboration and capital formation very similar to what you describe. They’ve been trying to encourage me to put one together around cooperatives.

    Perhaps we could imagine what that would look and feel like and then maybe make it happen with a group of folks from this workshop?

    Keep up the good work !


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