The Hottest Trend for Wealthy Do-Gooders

The Rockefeller Foundation's Judith Rodin explains impact investing. But she warns: "This is not the solution to less government funding."

National Journal

Can capitalism be the solution for easing pressing social problems? These days, the concept of "impact investing" is all the rage among high-powered do-gooders. It's an emerging field that allows investors to make money and make a difference at the same time. The Rockefeller Foundation has spent some $40 million funding the kind of network needed to make impact investing possible--from supporting social entrepreneurs to developing new metrics. And it has put $140 million of its own endowment into impact investments.

National Journal's Sophie Quinton recently talked with Rockefeller Foundation President Judith Rodin about how private capital can help alleviate government budget pressures and address some of the challenges that weigh on our economy and society. Edited excerpts follow.

First things first: What is impact investing?

We hosted a conference in 2007 where the term was coined. It was to refer to investments that were designed to deliver both financial and social or environmental returns. Impact investors are making an active decision to invest in a company, or in a fund, for both profit and for social good.

Who — or what — are impact investors?

The most interest, so far, has been from large family wealth management companies, high-net-worth individuals, and pieces of funds that have a specific designation for double bottom-line returns. I think the field is starting to develop enough data that more people are going to come into the space. An early analyst report that we did with J.P. Morgan suggests that ultimately, if this continues to move and accelerate at the pace it is now, it could unleash somewhere between $400 billion and $1 trillion in capital markets. That's a long-term, optimistic analysis. But there are billions being invested right now.

How do we measure social impact, in addition to financial impact?

Many potential investors say, "I know how to do the financial due diligence; I don't know how to do social due diligence because I don't know what social impact looks like." We funded several grantees that have created standards, like GIIRS and IRIS: One rates the financial and social return of funds, and one rates the social impact of companies the funds are invested in. That will accelerate investment opportunities, but it's a really important step for public policy. We want a uniform set of standards that policy can be built around to enable this field to grow.

Where are we seeing this kind of investment? Are we seeing more activity in developing countries, or domestically?

The U.S. is the best market, actually. The developed world is clearly the best market — there are reams of opportunities, and much more experience. In the U.S., the earliest use of this has been around affordable housing, where there have been many investment funds that have invested alongside government or in place of government.

Here's one innovation: In the 2000s, New York City wanted to build more affordable housing. They needed to get new land acquired and the preconstruction costs done by developers, but without tax credits it was hard to get commercial financing. So we and other foundations put in about $40 [million] to 50 million of the riskiest capital. Because we were guaranteeing the first tier of risk, the commercial lenders came in with several hundred million, and then New York City came in with loans and debt capacity.

Other than housing, what other opportunities exist for impact investing in the United States?

Clean energy is one area. The interesting thing about impact investing is, it exists in every asset class from public equity to private equity, from public debt to private debt. That makes it available for a wide variety of applications.

Another impact-investing innovation is the social-impact bond, and they're being used to address a broad range of things — homelessness, recidivism, health. In his budget, the president announced for the third year that the U.S. government is going to put money behind what he calls pay-for-success bonds. He also proposed a $300 million pay-for-success fund in the Treasury Department, for loan guarantees to undergird investors or banks to participate. We think that's important, and critical, at this stage of evolution, but we think that's a way station to a point where government or philanthropy shouldn't have to backstop the private investor.

What will it take to make impact investing mainstream?

The first and most important thing is long-term data. Until the real range of rates of return for each of the impact investing asset classes — both equities and public debt — can really be calculated with long-term experience, the biggest money will sit on the sidelines.

The second thing is an enabling policy environment. One policy that has been transformational has been the evolution of benefit corporation legislation, which allows companies to register themselves differently. Also, several big auditing firms want to add an impact investing assessment to their auditing practice. Once you have an auditing practice, you'll get an even further refinement of the standards and further standardization of the metrics, and that's going to accelerate the field.

What's the Rockefeller Foundation currently focused on?

Our focus is on impact financing for infrastructure. There's huge pent-up demand for infrastructure investment, and we've been working with states and regions to help them understand what kinds of laws, policies and actions are going to be necessary to crowd in private capital.

We have seen much more significant private investment in infrastructure in other developed countries than we see in the U.S. When we talk to those infrastructure funds, they say the U.S. doesn't have the right policy environment for us to invest as heavily as we have elsewhere. Canada is crowding in a lot of private investment, without giving up public control.

We're working with the West Coast Infrastructure Exchange, which is California, Washington, Oregon and British Columbia. They estimate that they're going to need about $1.5 trillion in new investment over the next ten years. They're looking for public private partnerships, and we're working with them on the policy framework that would enable that to happen.

Young people, in particular, are excited about impact investing. Do you have any advice for young people who want to enter the field?

The advice is that we shouldn't move too quickly. This is not a panacea, and it is not the solution to less government funding. But there's a way to kind of bring Wall Street to Main Street, for social good. If we get this right, that's a phenomenal outcome. But it's not for everything, and one size doesn't fit all.