Impact investing has been gaining traction in recent years as a way for foundations and other charitable organizations to generate social and environmental impact alongside financial returns. By investing in companies, funds, or projects with the intention to generate measurable positive impact, foundations can amplify the effect of their philanthropic dollars. This article will examine how foundations are engaging in impact investing, the motivations and challenges, and the future outlook.
Foundations allocate capital for impact investing through various approaches
Foundations are allocating capital towards impact investing in a few key ways. Many are carving out an impact investing portfolio alongside their traditional grantmaking, dedicating specific funds or endowments to seek market-rate or below market-rate returns on impact investments. Others are using PRIs (program-related investments), a specialized tool that allows them to make investments aligned with their mission as part of their required 5% annual payout. And some choose a total portfolio approach, integrating ESG factors across all investment decisions. Each approach allows foundations to leverage different amounts of capital for impact.
Impact measurement and management is a key consideration
In order to ensure investments are truly driving impact, foundations put considerable resources towards measuring and managing impact performance. This involves working closely with investees to track metrics in areas like greenhouse gas emissions reduced, jobs created for underserved groups, affordable housing units built, or patients receiving healthcare. Tools like IRIS, GIIRS, and B Analytics provide standardized catalogues of impact metrics foundations can choose from. Both quantitative and qualitative data is used to understand if positive outcomes are being achieved.
Collaboration with other stakeholders continues to grow
Rather than making impact investments in isolation, foundations increasingly collaborate with other stakeholders in the ecosystem. They co-invest with other foundations to share due diligence and aggregate more capital. They partner with banks, DFIs, corporations and asset owners to develop creative blended finance solutions. And they share lessons learned in networks like the Global Impact Investor Network to further robust industry best practices. These collaborative efforts allow foundations to test innovative approaches while reducing risk.
As the impact investing space continues to mature, more and more foundations are exploring how allocating capital with the intent to generate positive impact can complement traditional grantmaking. With thoughtful measurement frameworks, collaboration, and innovation, foundations are poised to scale their impact exponentially in the coming years through impact investing.