**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:
- Impact-First Investors– who maximize social impact with a floor for financial returns; and
- 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.