From impact investing to “impact first” investing – What is field learning? – Nonprofit News

What do investors look for in impact investing, or investing with social good in mind?Many in this field believe that investors are willing to sacrifice every penny of their own profits. I have long held that there is virtually no requirement for being able to influence society without having to do anything. As one company puts it, investors “don’t have to choose between doing good, which creates social or environmental benefits, and doing good, which means financial gain.”

This analysis, provided by Triodos, which has more than $6 billion (€5.9 billion) in assets under management and a 30-year track record, is not wrong in and of itself. There are actually many investments where social or environmental goals do not negatively impact (and perhaps improve) returns. For example, an investment portfolio that restricts energy investments to renewable energy may outperform a portfolio that includes fossil fuel companies. There is no doubt that continuing to hold fossil fuel stocks is riskier.

But if the goal is to build a solidarity economy or make structural changes to the economy so that business owners of color in the United States have the same ability to raise capital and develop thriving businesses as white business owners, then Investors may be willing to sacrifice some financial gain if it promotes This is because social influence is required. That’s the central conclusion of a new report released last December by the Boston Impact Initiative, a Boston-area nonprofit place-based investor and national champion of the field.

The report, “Funding Economic and Racial Justice Fearlessly,” is a 42-page study based on survey data from 15 foundations across the United States. calls for the development of a field of “regenerative, solidarity” funds aimed at It is not intended to maximize economic returns to investors, but rather ecological benefits to the communities it serves. ” (twenty five)

“The average start-up capital level for Black entrepreneurs is $35,205, compared to $106,720 for white entrepreneurs.”

But while this report makes a number of calls to action (for foundations, donors, donor-advised fund sponsors, lawyers, and policy makers, among others), it also provides a snapshot of the situation on the ground today. It highlights early successes and shows where we are going. More changes are needed on the ground.

Seek an impact-first approach

In addition to writing the report, the Boston Impact Initiative (BII) is also a community-based impact investment fund in its own right. Since 2013, the group has invested approximately $15 million in more than 85 companies. Of these, 72 percent are owned by people of color, 40 percent by women, and 36 percent by women of color. In terms of corporate employees, of the 962 total employees at these companies, 80 percent are workers of color, 58 percent are women, and 46 percent are women of color. An estimated 31% of businesses are wholly or partially worker-owned.

The numbers give a sense of scale. But how does BII invest? There are several principles that define the group’s approach.

The first is the principle that economic profits are finite. In the authors’ words, this means a promise to provide only “a small financial return to investors” (8). On the financial side, efforts are being made to combine the traditional investment tools of debt (loans) and equity with grants in terms of support provided to invested companies. Finally, we are also committed to providing additional non-financial support, such as coaching and networking. BII’s team calls this combination of traditional investment tools, grants, and non-financial technical assistance “integrated capital.”

As for why this type of grant and technical assistance approach is needed, research cited in the report found that “the average start-up capital level for Black entrepreneurs is $35,205, compared to $106,720 for white entrepreneurs. dollar.” (2382)’ This is a dramatic difference, and it is not surprising that a BII-type integrated capital approach or something similar is needed to effectively address this difference.

An impact-first investment approach requires investors willing to accept below-market returns.

Five years ago, BII launched a cohort-based approach to help organizations in other communities establish similar funds. To date, 69 fund managers from 38 organizations have participated in one of the first four cohorts, resulting in the launch of 18 funds (or fund pilots) across the country (9) .

Each fund is unique. The report notes that in their design, “the funds vary widely in terms of asset classes (small and medium-sized companies, growth companies, real estate); sectors (agriculture, reproductive health, affordable housing, technology); size (from a few thousand dollars per project to more than $1 million per real estate project)” (16); However, all of these funds share BII’s focus on serving community needs by providing integrated capital.

To date, the accumulation of these funds has been gradual. As of January 2024, the 15 funds surveyed, many of which were recently launched, reported having committed a modest total of $8.6 million. However, their ambition is to ultimately raise and manage $378 million from these funds combined (5).

What does it take to get there? In fact, an impact-first approach to investing requires raising investment capital to match the integrated capital. In other words, for these funds to work, enough investors must be willing to accept below-market returns. That funding must be supplemented by investment funds and foundations and donors (and in some cases government programs) that provide matching grants and technical assistance to the projects they support.

Activating these financial flows will be difficult, but not impossible. For example, this financing structure, which combines earned and grant income, shares some characteristics with the community development financial institution (CDFI) sector, which currently approaches $5 billion in assets. BII itself has the CDFI designation and recently won a $300,000 technical assistance grant from the U.S. Treasury’s CDFI Fund.

Ecosystem development

The report survey of fund managers found that they are focused on three things: raising sufficient levels of capital, supporting operational needs (bookkeeping, accounting, tax reporting, regulatory compliance, marketing, etc.), and fostering networking and connections. Key areas of need were identified.

In response, the report authors offer recommendations in the following areas:

Capital: One of the recommendations in this section is to create “structured funds with different risk/return profiles” that help attract investment from a variety of sources. This creates multiple entry points for investors at different levels who are willing to accept lower financial returns. . Other recommendations include supporting networks of mission-driven investors (such as the New England Impact Investing Initiative) and small businesses aimed at investing in entrepreneurs of color while maintaining fundamental standards. These include simplifying due diligence requirements to make it easier for large funds to raise capital. Operations: The report recommends developing and sharing templates for a variety of operational tasks, including deal flow management, portfolio monitoring, impact measurement, investor reporting, and legal and regulatory compliance. “By centralizing resources for human resources, payroll, marketing, communications, impact reporting and investor relations, fund managers can focus more time on investment activities that support their clients and communities. ” (27) Together, these can reduce operating costs by up to 25%. say the report’s authors. Building networks: The report authors emphasize the need for professional development to “facilitate experiential learning and collaboration and share best practices” (29), and invest in developing new leaders. is recommended. They further emphasize relationship building and call for the creation of a more developed shared database of industry information to “store research and market analysis that helps funds understand industry trends and opportunities.” (29). And they pointed to the need to develop “clear criteria that recognize the unique characteristics of impact-first investing.”

The road ahead

As this report shows, a core challenge in developing impact-first investment funds is that the traditional investment fund model, i.e. venture funds, is changing from the type of investment that funds like BII aim to achieve. This means that it is not suitable. Venture funds are self-supporting, and large-scale investments require management fees that are more than covering expenses. However, as the authors point out, many of the loans that funds in BII’s network make to emerging entrepreneurs of color are “below-market rates designed to help under-funded entrepreneurs succeed.” It is designed to set an interest rate, which will lead to a reduction in loan interest. and fee income” (26).

So subsidies are not just desirable, they are a necessary part of the model. That grant support may come from philanthropy (the authors focus on “technical assistance facilities”) or from public policy, or a combination, but the resources need to come from somewhere. There is.

The authors note that public policy can also help shift capital flows in other ways, such as through tax incentives and regulatory changes that “streamline the compliance process” (32 ).

At a public event held a month before the report’s release, Y. Elaine Rasmussen, who led the report’s research, said that building an impact-first investment infrastructure is not only cheap, but also hard work. He pointed out that there is. “The work behind the scenes is ignored. The human beings behind this work are ignored. The mental capacity required to do this is very taxing on the soul.”

Rasmussen added that leveraging and accessing existing networks of funders and investors is critical to the success of the impact-first investment vehicles she and her colleagues are developing. This is to ensure that entrepreneurs of color are supported and have a viable system in place to fund their businesses. need.