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Stanford social innovation review impact investing merrill
Similarly, United Way, which oversees the Utah High Quality Preschool Education program in the Salt Lake contract, has reported that recipients are half as likely to need special-education services as children without preschool education. With the Massachusetts juvenile justice PFS, the state will achieve savings from reduced court costs and policing, as well as direct savings to the state Department of Corrections and the county Houses of Correction.
In Cuyahoga County, while numerous government agencies will likely realize savings from keeping children with their parents and out of the foster care system, the PFS contract specifically benefits the Department of Children and Family Services.
Although the Cuyahoga County contract addresses a very different social issue from the Massachusetts and New York state projects, the RCT evaluation model and framework for tying government payments to those outcome measurements and associated government savings are virtually analogous.
Both programs lack rigorous RCTs to assess success and correlate social welfare interventions to Department of Education savings, instead relying on standardized testing to measure educational achievement and special-education placement. Chicago chose to use a quasi-experimental comparison group of children who did not attend a preschool program and Salt Lake County relied solely on evidence-based secondary research documenting the positive effects of a preschool program.
It is little wonder that, given the tenuous correlation between government savings and education intervention, the Chicago and Salt Lake contracts have come under criticism regarding the trigger points for paying back private capital. Correlating those impact measures to monetary returns is even more difficult, and many social interventions simply defy the kind of impact measurement and linkage to financial savings the PFS structure demands. Such measurement will likely prove difficult for nonprofits already struggling to fund services, let alone finance the human and technical resources to support sophisticated measurement and tracking systems.
The state has a homeless population of nearly 16,, with Boston alone having on any given night 7, people living in shelters, hospitals, and emergency medical facilities, or on the street. To demonstrate rigorous cost savings, the PFS was focused on a narrow segment of chronically homeless people, leaving open the question of how society could address the needs of the remaining thousands of homeless people.
In Massachusetts, two nonprofits, Roca and Youth Options Unlimited , were originally selected by the state to bid on providing services for the recidivism contract. By the time the PFS contract was finalized, however, Roca had secured the entire agreement and the resulting funding. PFS projects in Chicago and Salt Lake City were awarded to education providers holding existing government contracts, without an open bidding process.
This creates little incentive for other providers to innovate and operate more effectively in the hope of landing a contract. After contracted nonprofits deliver the first round of government savings, political pressure will inevitably demand ratcheting down the success payments for subsequent contracts in line with the recently achieved efficiency benchmarks.
Given the higher target and thus higher chances of falling short, private capital may flee existing PFS markets, and potential service providers may find it impossible to deliver critical services at ever-higher efficiency without compromising the well-being of the people they serve. For example, in the United Kingdom the Peterborough Prison project was on track to achieve the target recidivism reduction of 7. Subsequently, the UK government announced an early phase-out of the project and began constructing interventions building on lessons from the Peterborough program using its own direct funding without the need for intermediaries or investors.
In some cases the transaction costs can be as high as 7 to 10 percent Chicago and New York State , but many of these costs, such as auditing and legal fees, would have been incurred regardless of the form of contracting. The one clearly additional cost, evaluation, is at the heart of the PFS structure and does not exceed 2 percent of the project costs in any case. The Role of Philanthropic Funding Although PFS contracts are typically characterized as employing private capital-market funding to solve social problems, a closer look at all of the US PFS projects reveals the critical and enabling role of philanthropic and mission-led capital.
To better understand the role of such capital in the PFS funding structure we have divided funders into three categories: senior lenders, junior lenders, and venture philanthropists. Goldman Sachs represents the profit-seeking senior lender, while the Kresge Foundation and Living Cities represent the junior lenders carrying a higher share of the risk.
The Kresge Foundation and Living Cities, which are providing program-related investment PRI loans, will be the second-in-line investors to be paid back, along with a potential upside. The role of these junior lenders cannot be minimized. Philanthropic investors will be the last to see their principal repaid.
The Rockefeller Foundation provided a first-loss guarantee to cushion the risk for the investors. While the bulk of the financing has come from impact investors, philanthropic funders are absorbing the initial risk, as in the Massachusetts deal. In Cuyahoga County the contract is being financed entirely by philanthropic dollars. The project is effectively the first instance of a PFS financing without private investment capital, where the funders are overwhelmingly focused on social impact rather than financial returns.
Much of the project risk is absorbed by the second and third layers, whose interests and motivations differ from those of the profit-seeking investors. At best, these funders may receive their principal with a lower than market return or, in the case of philanthropic investors, their principal depreciated by the amount of lost interest, to recycle into another social investment. That is not the case for the profit-seeking PFS investors, who have the first claim to the promised rewards.
Without the risk reduction provided by impact investors and philanthropists, we believe that market capital will not rush to fund PFS deals. These projects targeting juvenile and adult incarceration, homelessness, health care access, education, and other social challenges not only will raise the bar for nonprofits to demonstrate robust indicators of their outcomes but also, we believe, will fundamentally change the way governments procure and deliver social services.
By using PFS contracts, and importantly philanthropic dollars, to construct a new impact-driven model for meeting social needs, governments and nonprofits will learn to operate more effectively. Market capital will have a role to play, but return-seeking investors will participate when the financing structure minimizes their risk, as recent contracts have done. The European Commission has expanded its Social Business Initiative to foster social entrepreneurship and investments in social innovation throughout Europe, where PFS projects to address adult and youth unemployment have been launched in the Netherlands, Germany, and Belgium.
Farther afield, Australia where the model is known as a social benefit bond, or SBB and South Korea have embraced the model to target foster care, family support, and child welfare issues. Some of these are characterized by innovative financing structures. Such an innovation in the financial structure could open the doors for pension funds and other institutional investors seeking to diversify their investment portfolios. Philanthropy stepped in to fill a void where a cash-strapped government did not have the budgetary savings to backfill private investors in this case, impact investors.
For most of its year history, the note has been sold by a small number of brokers. That is about to change. In all likelihood, many more investors will soon find it easy to buy and sell CCI Notes, which could mean substantially more money going to fund social change. Using Money to Raise Money The YouthBuild Philadelphia Charter School teaches low-income high school dropouts between the ages of 18 and 21 practical construction skills while allowing them to earn a high school diploma.
Students might spend one week learning to lay floor tiles, and the next week learning how to write a college essay. Every year the students remodel one or two abandoned homes for low-income families. The students do everything — rewire the electrical system, repair the plumbing, and restore the ceilings and walls — all the while receiving a traditional classroom education. In , the school awarded diplomas to students, yet despite this success, YouthBuild and similar programs have had a tough time getting financing from a traditional bank.
Fortunately, community-lending organizations can sometimes fill the gap. With Calvert money in hand, TRF is able to raise additional money from private banks. A Safe Bet By spreading its investments across a broad range of programs, the Calvert Foundation lowers the risk of individual investors losing money, even if one of the programs tank. The Calvert Foundation also screens the organizations to which it lends money, looking at the means, management, and social impact of prospective borrowers before and after lending them money.
It also requires borrowers to raise money from a variety of sources — investments and donations from foundations, charities, religious institutions, and private market lenders — not just from Calvert. To date, loan losses total less than 0. About one in four investors chooses international investments. Large investors who want to target their investments even more can get assistance from Calvert Foundation staff. Founded in , Calvert Group offers mutual funds and other investments in companies that it screens not only for their profitability, but also for corporate governance, environmental practices, diversity, and other socially relevant criteria.
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Of the strategies launched in , 46 percent include specific diversity, equity, and inclusion targets. Five Characteristics of Effective Corporate Impact Investors While corporate impact investing is still a nascent field, with more validation points and definition likely to come in the years ahead, similarities among effective practices have begun to emerge. Additionality The concept of additionality involves using corporate resources, market position, customer networks, and supply-chain reach to add value to an investment beyond capital.
A hallmark of corporate impact investing funds is leaning on the company to add value to the investment portfolio in meaningful and differentiated ways. Increasingly, corporate impact funds are using their market position and supply-chain power to serve as a go-to-market partner, joint technology developer, or customer in valuable ways. Corporate impact investors identify opportunities to add the specialized expertise, technology, and ecosystem value that a corporation often brings to both diligence and portfolio development.
While corporate impact investors may not typically lead deals, they can be a helpful addition to a broader syndicate, and founders, ecosystem players, and institutional investors are increasingly seeking participation from corporate impact funds that offer differentiated value.
In , Salesforce partnered with Endeavor , a global network of high-impact entrepreneurs, to gain exposure to founders outside the United States. Collaboration is, of course, a two-way street; the Salesforce team has also opened doors inside and outside its own ecosystem for founders and others who would benefit from potential partnership and customer introductions, irrespective of an immediate investment opportunity.
Governance and Executive Buy-In Executive buy-in from the C-suite and governance is critical to creating long-term stability and accountability. Corporate venture capital investing along the two-axes of financial returns and strategic value has historically expanded and retrenched during economic cycles, changes in management, and pivots in innovation management. Done well, companies can preserve the long-term goals of impact investing through natural changes in economic and market conditions.
Direct and explicit buy-in from executive leadership further enables long-lasting organizational support. This alignment informs clear evaluation criteria for new investments and portfolio performance tracking, and helps establish clear objectives for the relationship between social impact and financial returns.
These criteria vary widely between companies, but consistency and clarity are common elements of successful practices. As an investor in Leapfrog Investments Fund III , for example, Merck is supporting financial inclusion and health-care services for underserved consumers in high-growth emerging markets.
Impact Management The intentionality to create positive social impact from investments naturally demands measurement, not only to validate performance, but also to inform investment and management decisions. As such, impact measurement and management is foundational to any successful corporate impact investing practice. If you are interested in innovative approaches for collective impact, check out this article. To learn about the shifting character of American civil society, check out this article.
Our impact-oriented members represent a wide variety of industries but unite behind the common goal of implementing positive social change in our community. Learn more about our mission here. Search for:.