In our continuing In Conversation Series, we speak with Antony Bugg-Levine, a pioneer of the impact investing field and co-author of Impact Investing: Transforming How We Make Money While Making a Difference.

Click here to listen to an excerpt from our interview and read on to get the full story.

{jcomments on}As managing director at the Rockefeller Foundation, Bugg-Levine designed and led its impact investing initiative, oversaw its program-related investment portfolio and convened the now-famous meeting that coined the phrase “impact investing.” Founding board chair of the Global Impact Investing Network, most recently Bugg-Levine took on a whole new challenge as CEO of Nonprofit Finance Fund,(NFF) dedicated to mobilizing and deploying resources effectively to build a just and vibrant society.

In our conversation, Bugg-Levine discusses the rise of impact investing, its impact, limitations and potential in helping nonprofits mobilize capital toward sustainability.

With the rise of impact investing, how do you see the nonprofit sector evolving?

One of the most important contributions the impact investing movement has made over the last few years has been to popularize an understanding that for-profit investing can be a morally legitimate and economically effective way to solve social problems. However, one of my worries is that, too often, conversations are de-contextual, and impact investing is seen as an end in itself, rather than as a tool. To realize its potential to counter social problems, impact investors will need to be very clear about how the tool can be used alongside other tools to solve problems.

The biggest question of our time is how to capitalize a decent, vibrant and just society when countries in the West face major macroeconomic pressures and demographic pressures on government monies and traditional sources of philanthropy. Impact investors need to be asking how they can contribute to the big challenges of our time as opposed to simply looking at where we put our money into specific deals.

The other part is understanding that impact investing is a tool and not an end in itself. When we ask the question, “where can I invest?”, we end up with a more limited way to make a difference than when we ask, “what are the social issues I can help solve?”. And it needs to play alongside philanthropy and government. For the nonprofits providing essential services in our communities, impact investing is an important part of the answer to how they will sustain themselves. But it’s not going to be the only part.

How has impact investing impacted your work with nonprofits?

For the last 30 years, NFF, and many of our peers, have largely been able to raise the money that we then use as impact investors from two sources: direct government programs and indirect government subsidies; and commercial banks who’ve been motivated to invest in us because they are seeking to comply with government regulation. The growth of impact investing opens a whole new range of potential partners we can work with, whose motivation doesn’t rely on government intervention.

So, rather than relying exclusively on funding from government and regulatory-motivated banks, we increasingly see the opportunity to work with private individuals, private foundations and privately motivated investors to help put their money to work in solving social problems. I think the sector is poised for radical transformation if it’s able to capture the momentum that’s been created and the interest in these new sources of capital that are addressing social challenges because of personal motivations and not just because of government action.

What are the limitations of impact investing? When are government and/or philanthropic investments the better answer?

In the book we talk about the very exciting yet constrained set of circumstances in which impact investing is appropriate. If the organization addressing a social challenge produces a substantial public good but not one that can generate revenues for the organization, then taking on investment is completely inappropriate.

If an organization is promoting human rights or providing essential services to completely destitute people, it would be ill-conceived for it to demand that people pay enough for those services so the organization can repay investors. Those are the kinds of organizations and social issues that our society needs to commit to funding through government and charity. It’s very important that we don’t stigmatize those organizations as less efficient or effective just because there are other social issues in which other organizations are able to take on investments and repay them.

Impact investors can help organizations make better use of the financing they’re receiving from subsidies – those are two conditions when impact investment makes sense. At NFF we’ve spent the last 30 years lending to nonprofits. Often our loans are repaid by government reimbursements from within the organization. The work of these organizations – homeless shelters, domestic violence agencies and others producing substantial public good – is funded by government, which is completely appropriate. In that case, the role of the impact investor is to help the organization with short-term financial needs, often bridging between when they need to pay for services they’re delivering and when they get reimbursed by government.

Do you think that distinction is understood or is more education needed? Why is understanding it so important?

I certainly think there needs to be greater clarity from both sides as to when investment is appropriate and when grant-making is appropriate. On one hand, it would be destructive for our societies if organizations that have an absolutely legitimate claim on charitable resources because they provide true public goods were to find themselves trying to take on debt they cannot repay. At the same time, it is an unacceptable waste of our philanthropic resources to allow grants and government subsidies to fully fund organizations who could potentially be providing those services by mobilizing other forms of capital as well.

At the end of the day, philanthropy is our most precious resource, if you just look at the amount there is of it versus for-profit investment. So we do want to make sure that, where appropriate and effective, impact investing can be mobilized in order to free up philanthropy for other, more important uses. At the same time, we should avoid the danger of trying to insert impact investing into businesses or organizations that more legitimately need philanthropic support.

What do you see to be the greatest challenges of impact investing?

Rather than just focusing on demonstrating effective deals and building infrastructure such as the impact investment banks and measurement systems, I increasingly see the biggest constraints are around building the systems to support those works and transforming people’s mindsets that currently prohibit them from seeing and accepting the potential in the impact investing movement.

Most people are still stuck in what we described in the book as the “bifurcated worldview,” in which they believe the only way to solve social problems is through charity and government and the only purpose of investing is to make money. That fundamental mindset really changes how people see the world and leaves many people unable to see the opportunity of impact investing without either dismissing it or fearing it.

So, while there are many practical actions that have to take place, they all add up to a fundamental mind shift that has to occur among our nonprofit organizations, our government regulators, our mainstream investors and many other people who have to overcome that bifurcated worldview to see that investing can be a real partner to government and charity in how we address social challenges.

With the rise of social entrepreneurship, has there been any movement forward, away from this bifurcated worldview?

Certainly there are two major streams of work over the last few decades that impact investing is beginning to ride. One is the increasingly clearer articulation of social enterprise as a new approach to addressing social challenges. It’s helped galvanize an interest in organizations that are looking at more creative ways to address major social issues. The other is the decades-old socially responsible investing movement, making the case that how we invest is really a reflection of who we are and what we care about and not simply a way to make money. Those two streams of thinking certainly helped inform impact investing.

The other really important point about the mindset shift is it’s occurring already among younger people. So, while the dominant mindset of people in power might still be stuck in the bifurcated world, it’s quite remarkable when I go around the world and speak to students the extent to which the bifurcated view doesn’t make sense to them.

One thing we say in the book is maybe the best thing we could all do is just get out of the way of young people who are already far ahead of most of us in seeing the world in this way.

Talk about the social impact bond and the efforts to get it adopted in North America.

There are already commitments by state and local governments to explore it, including in Massachusetts, Minnesota and New York City. When the first one will be launched, I’m not sure, but in the latest budget proposal from the White House there was a provision for more than $100 million of federal support for a social impact bond pilot project.

NFF held a convening late last year with the White House that brought together state and local governments from across the US, private sector organizations and nonprofits interested in supporting this. It revealed a strong interest among all these constituencies in exploring the idea, not only of the social impact bond as a tool but, more generally, the concept of paying for outcomes rather than outputs when we fund social service delivery. It’s clearly something that—in the US and Canada—will have to be part of the answer to the question of how we’re going to fund a just and vibrant society in the future when faced with bigger problems with fewer resources.

We’re very excited to work with partners on social impact bonds and other tools to help shift the appropriate parts of our social funding toward an outcomes based model in a way that enables great organizations that deliver great services to thrive.

Collaboration seems to be a common theme. Discuss its importance.

The most exciting impact investing in the next five to ten years will be deals in which investors figure out how to work most effectively with government and charity. The deals in which investors operate alone and where investment money alone will make a huge difference will be few and far between. And, in many cases, they won’t be tackling the most fundamental challenges we face. In contrast, when investors work in smart ways alongside government and philanthropy, they can produce solutions that no one part could produce alone – and solutions that enable each part to leverage each other.

NFF is working in NYC on a $100 million project called the Community Resilience Fund that is looking to mobilize $60 million of impact investing loans alongside $40 million of grant money with the purpose of transforming the capabilities of 100 social service agencies to survive and thrive in a very different funding environment. The challenge we face is the fact that these organizations – soup kitchens, homeless shelters, afterschool programs etc. – are on a slow path to bankruptcy because of the very rough economic climate and structural problems in their business model. We don’t believe we can enable them to sustain themselves and thrive unless we bring a complete capital approach that puts impact investing alongside very intelligent grant-making and brings government in as a partner to help reduce the risk for investors, as opposed to simply focusing on asking government to pay for services they can no longer afford.

Impact investors working alone could not be effective, nor could philanthropy or government. When you put all three together in a complete capital approach, we actually believe we can bend the arc of the sustainability of these organizations providing essential services in our poor communities. We think that’s the model that is going to prove the power of impact investing, a capital approach organized around the challenges we face, as opposed to the tools we have. That’s when we can really make a substantial difference.

Click here to read an excerpt from Impact Investing: Transforming How We Make Money While Making a Difference.

Elisa Birnbaum

Elisa Birnbaum is the co-founder of SEE Change Magazine, and works as a freelance journalist, producer and communications consultant. She is also the president of Elle Communications.



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