IMPACT INVESTMENT: THE INVISIBLE HEART OF MARKETS - SOCIAL IMPACT INVESTMENT TASKFORCE
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IMPACT INVESTMENT: THE INVISIBLE HEART OF MARKETS Harnessing the power of entrepreneurship, innovation and capital for public good Report of the SOCIAL IMPACT INVESTMENT TASKFORCE Established under the UK’s presidency of the G8 15 September 2014
LETTER TO LEADERS OF
TASKFORCE GOVERNMENTS
I want to use our G8 presidency to push this
agenda forward. We will work with other G8
In June last year Prime Minister David Cameron announced, during the UK’s presidency of the G8, nations to grow the social investment market
the launch of an independent Taskforce and set it the ambitious objective of reporting on ‘catalysing
a global market in impact investment’ in order to improve society. and increase investment, allowing the best
It has been a remarkable experience since then to lead an exceptionally talented and committed group of
more than 200 people across the world in achieving this inspiring mission and I thank them most warmly social innovations to spread and help tackle
for all they have done. The Taskforce itself comprises some twenty-two people, including one government
official and one representative of the social or private sector from seven countries and the EU, as well our shared social and economic challenges.
as one observer from Australia. But to inform our work and to drive its implementation in the future,
we created eight National Advisory Boards. We also established four international expert Working David Cameron Prime Minister, UK
Groups to address in depth the particular challenges of measuring impact, asset allocation, mission World Economic Forum, Davos 2013
in business and international development, all of which are critical to the success of our endeavour.
We are honoured to deliver to you this report together with four subject papers that provide
supplementary detail on important elements of our work. Each of the National Advisory Boards also
launches today its own report on what is required in its country if it is to bring impact investment to
take off. Our reports have all been written with the aim of attracting as wide a readership as possible,
to include all audiences interested in impact investing.
Our investigations have benefitted greatly from the insights of numerous impact-driven organisations
and entrepreneurs, foundations and philanthropists, investors, businesses, government ministers and
officials who have contributed their expertise and their experience to our deliberations. We are most
grateful to them all. As a result, we can confirm the tremendous potential of impact investment to
improve society and the environment. We note that it is already shifting the paradigm in how we think
It is urgent that governments throughout
about and tackle social and environmental issues in the 21st century, in developed and in developing
countries alike. The Taskforce will now continue its work for a second year to drive the take-up and the world commit themselves to developing an
implementation of our recommendations.
Our recommendations are critical to the success of impact investment. They define what is needed
international framework capable of promoting
from all actors in our society: government, business, the social sector and foundations, institutional
and private investors, and most importantly impact entrepreneurs. The role of each of these groups a market of high impact investments and
is addressed in this report. Impact investment is emerging as a new unifying force among them in
dealing with social issues, driving innovation and prevention to improve lives. It harnesses the forces thus to combating an economy which
of entrepreneurship, innovation and capital and the power of markets to do good. One might with
justification say that it brings the invisible heart of markets to guide their invisible hand. excludes and discards.
Yours sincerely,
Pope Francis, June 2014
Sir Ronald Cohen
Taskforce Chair
This is ground zero of a big deal.
Lawrence Summers, former US Treasury Secretary,
after investing in one of the US’s first social impact bonds, May 2014GLOSSARY Contents
Introduction: The New Paradigm 01
AFD Agence Française de Développement GIIRS Global Impact Investing Ratings System High Level Recommendations 06
APEC Asia-Pacific Economic Cooperation GRI Global Reporting Initiative
ASEAN Association of Southeast Asian Nations IFC International Finance Corporation The Age of Impact Entrepreneurship 08
BSC Big Society Capital (United Kingdom) IPO Initial Public Offering
The First Trillion 18
CIC Community Interest Company IRIS Impact Reporting and Investment Standards
(United Kingdom) IRS Internal Revenue Service (United States) The Third Dimension 28
CRA Community Reinvestment Act (United States) JICA Japanese International Cooperation Agency
CSR Corporate Social Responsibility MRI Mission-related investing A New Force in International
DFI Development Finance Institution NAB Taskforce National Advisory Board Development 33
DIB Development Impact Bond OAS Organisation of American States
DFID Department for International Development Galvanising a Global
OECD Organisation for Economic Co-operation
(United Kingdom) and Development Impact Movement 39
ERISA Employee Retirement Income Security Act OPIC Overseas Private Investment Corporation
(United States) (United States) Summary Objectives and
ESG Environmental, social and governmental PRI Programme-related investing Recommendations for Policymakers 43
EU European Union SASB Sustainable Accounting Standards Board
G20 Group of Twenty (Argentina, Australia, Brazil, (United States) Appendices 45
Canada, China, France, Germany, India, SEC Securities and Exchange Commission i. Members of the Taskforce, Working
Indonesia, Italy, Japan, Republic of Korea, (United States) Groups and National Advisory Boards
Mexico, Russia, Saudi Arabia, South Africa, ii. Meeting participants
SIB Social Impact Bond
Turkey, the United Kingdom, the United States
and the European Union) SRI Socially responsible investment
G8 Group of Eight (Canada, France, Germany, SSE Social Stock Exchange
Italy, Japan, Russia, the United Kingdom and UN United Nations
the United States) UNPRI United Nations Principles for Responsible
G7 Group of Seven (Canada, France, Germany, Investment
Italy, Japan, the United Kingdom and the US United States of America
United States) WEF World Economic Forum
GDP Gross Domestic Product WG Taskforce Working Group
GIIN Global Impact Investment Network
In this report, the Taskforce uses the following terms and definitions: Available separately: The Social Impact Investment Taskforce is
an independent taskforce launched in 2013
Impact-driven organisations Social sector organisations Businesses-seeking-impact Explanatory Note under the UK’s presidency of the G8. Over
Organisations that hold a long-term Impact-driven organisations with Businesses that set and maintain Policy Levers and Objectives the last fourteen months, it has brought
social mission, set social outcome partial or full asset-lock. For example: social outcome objectives for a together government and sector experts
objectives and measure their charities that do not engage in trading; significant part of their activities, Subject Papers from the G7 countries, the European
achievement, whether they be social charities and membership groups that without locking in their mission. Measuring Impact Commission and Australia to fulfil its
sector organisations or impact-driven trade but do not distribute profits; mandate to report on ‘catalysing a global
businesses. social and solidarity enterprises; Social impact entrepreneur Allocating for Impact market in impact investment’.
cooperatives; and other profit- or (also known as social entrepreneur Profit-with-Purpose Businesses This report presents a summary of the
Impact-driven businesses dividend-constrained organisations. and impact entrepreneur)
International Development Taskforce’s key findings and recommendations.
Profit-with-purpose businesses or Entrepreneur leading an impact-
It does not necessarily reflect the individual
Businesses-seeking-impact that set Profit-with-purpose businesses driven organisation, be it a social
National Advisory Board Reports opinions of members of the Taskforce, its
significant outcomes objectives and Businesses that lock in social mission sector organisation or impact-driven
Australia, Canada, France, Germany, Italy,
Working Groups or its National Advisory
maintain them in the long-term. They through their governance and/or business, to achieve social impact.
Japan, UK, USA Boards, or the official positions of the
have no asset lock. embed it in their business model.
organisations and governments they represent.INTRODUCTION: THE NEW PARADIGM 01
STRUCTURE OF THE SOCIAL IMPACT INTRODUCTION This requires a paradigm shift in capital market
INVESTMENT TASKFORCE THE NEW PARADIGM thinking, from two-dimensions to three. By bringing
a third dimension, impact, to the 20th century
capital market dimensions of risk and return,
impact investing has the potential to transform
our ability to build a better society for all.
It is arriving at a time when a generational shift is
SOCIAL IMPACT taking place in how people, especially younger
INVESTMENT TASKFORCE people, see their role in solving society’s problems.3
Doing good and doing well are no longer seen as
• Government officials and representatives The world is on the brink of incompatible. There is a growing desire to reconnect
of the social and private sectors from
seven countries and the EU
a revolution in how we solve work with meaning and purpose, to make a
difference. This is leading to an increasing supply
•O
bserver representative from Australia society’s toughest problems. of people looking for employers with an explicit
and OPIC as a representative of The force capable of driving commitment to improve the world. There has
been a rapid rise globally in the number of impact
Development Finance Institutions
this revolution is ‘social impact entrepreneurs who want to find innovative ways to
solve society’s problems, and they are increasingly
investing’, which harnesses deploying the methods of business and private
entrepreneurship, innovation capital if that helps them to do so. They include
people in the social sector who can now tap the
and capital to power social markets for finance in addition to seeking grants
improvement. from donors, and philanthropists who are willing
National advisory boards Working groups to fund businesses rather than social sector
It is already bringing significant advances in areas organisations if that offers a greater likelihood of
• Domestic membership from within each Taskforce country • International membership from across achieving the social impact they desire. They are
such as reducing prisoner reoffending, caring for
Taskforce countries and beyond
• Created to inform the work of the Taskforce and to drive future children and the elderly, community regeneration, leading a shift in philanthropy from a focus on the
implementation across Taskforce geographies and beyond • Created to inform the work of the Taskforce financial inclusion, and supported housing. It act of giving to the impact it achieves.
• National Advisory Boards were established in Australia, Canada, • Tasked to address challenges critical to has the potential to generate great benefits in This new approach is built on a number of shared
France, Germany, Italy, Japan, United Kingdom and United States catalysing impact investment: measuring developed as well as developing countries. beliefs: that, in some cases, investment can be
impact, asset allocation, mission in business more effective than donations in helping the poor;
• Each National Advisory Board has published its own report on what Social impact investing, impact investing for short
and international development that social motivations harnessed to financial ones
is required in its country to bring impact investment to take-off
throughout this report, encompasses environmental can sometimes do good more effectively; and that
• Each Working Group has published its own
Subject Paper and recommendations to
impact. It is at the core of a broad ‘impact continuum’, in many situations there is no inevitable trade-off
accompany the Taskforce Report that runs from philanthropy to responsible and between financial and social return.
sustainable investment, which includes all those
seeking to achieve positive impact. Impact It is also becoming ever clearer that there
investment is growing fast. The amount invested by is an increasing need for innovative and effective
the 125 leading impact investors is forecast to grow solutions to society’s problems. Impact investment
by nearly 20% this year, according to the latest study is a response to the growing awareness in both the
by the Global Impact Investment Network (GIIN) and public and private sectors that the challenges
JP Morgan.1 Given that $45 trillion are in mainstream facing society in the 21st century are too large and
OECD Report Impact Measurement Asset Allocation Mission Alignment International investment funds that have publicly committed to too complex to be solved by government and the
Objective: To assess Objective: To Objective: To examine Development incorporate environmental, social and governance social sector alone. Old problems are proving more
• To complement the work the scope and process recommend approach ways of securing social Objective: To resistant than expected to efforts to solve them,
of the Taskforce, the factors into their investment decisions,2 it would only
for using outcome and principles needed mission for profit-with- recommend approach whilst some problems such as diabetes and
OECD is undertaking an need a small fraction of this money to start moving
metrics and to to achieve specific purpose businesses and principles for recidivism are taking on a new urgency and may
exercise mapping the recommend approach allocation to impact through corporate application of social into impact investment for it to expand rapidly along
the growth path to the mainstream previously taken well prove cheaper to prevent than the costs of
global impact investment and principles for investment by form, governance or impact investment dealing with their consequences.
sector and expected measurement of institutional investors legal protections in international by venture capital and private equity.
developments social outcomes development So despite their different models for tackling social
Social Impact Investments are those that
• Preliminary findings and environmental challenges, governments
intentionally target specific social objectives
are anticipated to be everywhere are under ever greater pressure to make
along with a financial return and measure the
published in Autumn meaningful progress in tackling the social problems
achievement of both.
2014 facing their countries. All of the countries on the
The financial crash of 2008 highlighted the need for Taskforce also face growing pressure, in a context
a renewed effort to ensure that finance helps build of fiscal restraint, to allocate government spending
a healthy society. more efficiently and effectively to social needs.
1 J.P. Morgan and the GIIN, Spotlight on the Market: The Impact Investor Survey, May 2014
2 UN Principles for Responsible Investment, PRI Fact Sheet. Available at: www.unpri.org/news/pri-fact-sheet
3 Deloitte, The Millennial Survey 2014, Available at: www.deloitte.com/MillennialSurvey02 INTRODUCTION: THE NEW PARADIGM INTRODUCTION: THE NEW PARADIGM 03
Impact investing does not relieve governments of recommend involve no additional government SOCIAL IMPACT INVESTMENT ECOSYSTEM
their responsibilities. But it can help to fulfil them spending, whilst those that do should generate
more effectively. By financing innovative approaches, benefits over time that far exceed their cost.
impact investing also has the potential to help
Even within the countries engaged in the Taskforce
deliver services more efficiently and, in some cases,
there are significant differences in relevant laws,
tackle the underlying causes of growing demand
practice and culture, and in the relative roles of Demand Supply
for social services instead of just trying to cope with
the state, business and social sector organisations
their consequences.
in dealing with society’s problems. This affects Impact-seeking Impact-driven Forms of Channels of Sources of
Impact investing can also greatly strengthen social the nature and form of the ecosystem for impact purchasers organisations finance impact capital impact capital
sector organisations. Until now these have had investment. Our recommendations take these
to make their essential, and often considerable, differences into account, mostly by setting out
contribution to society without access to the full principles that can be applied everywhere and so Government Grant-reliant Government/
Secured loans Social banks
range of financing options available to regular help to catalyse a truly global market for impact procurement organisations EU investment
businesses. Although there are outstanding examples investment. Where there are specific proposals that of services (e.g. charities)
Social investment
of big, impactful social service organisations, too are only suited to one or a few countries, we say so. Unsecured loans Community
Government Grant-funded wholesaler
many struggle to make the large scale impact that Country-specific recommendations are set out in development
the success of their methods deserves. Impact the reports of each NAB. as commissioners organisations with
finance institutions Charitable trusts
investment, with its emphasis on scaling up of outcomes trading activities Charity bonds
Impact investment, like any market, is a combination and foundations
activities that achieve measurable social outcomes,
of demand (for capital to finance impact-driven Foundations as Social enterprises/
can transform how social sector organisations Impact investment Local funds
organisations), supply (of impact capital) and commissioners profit-constrained Social impact bonds
are financed, and in doing so make it likelier that fund managers
intermediaries (helping to connect supply and
they will succeed in achieving their mission at of outcomes organisations Institutional
demand). The principal components of the impact
significant scale. investors & banks
investment ecosystem are: Socially minded Quasi equity
Impact investing is already starting to make an Profit with purpose Impact investment
• Impact-seeking purchasers – these provide the consumers of Corporates
important difference. But it needs to grow fast businesses intermediaries
sources of revenue that underpin investment in goods and services
if we are to meet the challenges now facing the Equity
impact-driven organisations. Such purchasers High net worth
world. That is why in June 2013, as part of the UK’s Socially minded Businesses setting
can include governments, consumers, Crowd-funding individuals
presidency of the G8, this independent Social corporate purchasers significant outcomes
corporations or foundations.
Impact Investment Taskforce was established.4 Our Grants platforms
of goods and services objectives Mass retail
recommendations are the result of work over the past • Impact-driven organisations – all types of
14 months by hundreds of people around the world organisations which have a long-term social
from the public, social and private sectors, who have mission, set outcome objectives and measure
collaborated with the Taskforce and its eight National their achievement, whether they be social sector
Advisory Boards (NAB) and four international expert organisations or impact-driven businesses. Not everything we propose is new. In some Our recommendations fall into the following
Working Groups (WG) focused on the main barriers countries, aspects of impact investing have a long chapters. The Age of Impact Entrepreneurship
• Forms of finance – which are needed to address
to the global spread of impact investment. history (such as community development finance focuses on removing constraints on the growth
a range of different investment requirements.
Our recommendations are addressed to a wide in the US, the credit union and Quebec social of organisations established or now led by impact
• Channels of impact capital – to connect economy movements in Canada, or the thriving entrepreneurs. Those who seek to deliver impact
range of actors that can help to grow impact
investors to impact-driven organisations in cooperative movement in Europe). Modern need better recognition and better tools and
investment. These include governments, private
situations where the sources of impact capital do philanthropic institutions such as the Bill & Melinda support to get things done at scale. This includes
philanthropy, business and social sector organisations,
not invest directly in impact-driven organisations. Gates Foundation (Gates Foundation) have been at mechanisms to protect social mission in
as well as individual savers who want to use their
money to help build a world fit for their children • Sources of impact capital – to provide the the forefront of experimenting with market-based businesses, such as the new benefit corporation
and grandchildren to live in. For all of them, impact investment flows needed. mechanisms and using financial innovation to structure that is catching on among impact
investment offers the opportunity to help bring a create sustainable social change. The work of the entrepreneurs in the US and many other countries.
The diagram on the next page provides a schematic
profound cultural change in the way we deal with Gates Foundation to introduce Advance Market In this chapter, we describe six key ways that the
overview of the ecosystem.
society’s problems. Commitments for vaccines, for example, has legal system can help impact entrepreneurs
In each country, the ecosystem varies according contributed to their widespread and low-cost achieve scale, only one of which is currently
Many of our recommendations are addressed to to the role of government, foundations, the private distribution across the developing world through available in every Taskforce country. In this respect,
government, which in every country is called to play sector, individual investors and the social sector. its clever application of market economics. we think every country can make progress.
a number of important enabling roles: as a market- These differences affect the driving forces behind However, everywhere we think there is a need,
builder, by upgrading its ecosystem to better There is also huge potential in every country for
impact investment. For example, in France and Italy, and opportunity, to do much more. By following
support impact investment; as a large purchaser government, as a ‘commissioner’ of social services
the social sector is the driving force and in Japan it the relatively simple, inexpensive and practical
of social outcomes that can drive pay-for-success; and impact, to help scale social sector start-ups
is large corporations. steps set out in this report, we believe there is
and as a market steward, to remove legal and other into organisations that deliver significant impact.
the potential quickly to unleash up to $1 trillion
barriers to impact investing and ensure that the The ecosystem and the related policy options The recent innovation of social impact bonds (SIB),
of new investment to tackle social problems more
positive intentions of impact investment are available to governments are outlined in the initially in the UK and now in many other countries,
innovatively and effectively.5
sustained over time. Most of the policies we Explanatory Note for Policymakers. could drive the development of a market in which
4 www.gov.uk/government/groups/social-impact-investment-taskforce 5 Impact Investments: An Emerging Asset Class, J.P. Morgan and the Rockefeller Foundation, November 2010, pp. 6 and 1104 INTRODUCTION: THE NEW PARADIGM INTRODUCTION: THE NEW PARADIGM 05
government, philanthropic foundations and, several recommendations, including exploring
perhaps, others can agree in advance to ‘buy’ the potential for ‘development impact bonds’
specific social outcomes delivered by impact- to address social constraints on economic
WHAT IS A SOCIAL IMPACT BOND?
driven organisations. We set out proposals to development, including illiteracy, sickness and
accelerate the development of this market. unpreparedness for employment.
The next chapter, The First Trillion, focuses on how The final chapter, Galvanising a Global Impact
to remove barriers to the flow of capital into impact Movement, identifies action to be taken by
investment. Our recommendations are relevant to national governments, international institutions,
Government, all investors, but especially foundations and pension foundations, mainstream investors, and other
foundation or funds. There should be no room for doubt that important actors, including individual citizens, in
corporation, trustees responsible for other people’s money can developing a thriving impact investment market
be prudent and responsible when they incorporate capable of delivering potentially huge direct
individually or impact alongside risk and return in their decision benefits in the form of better social outcomes.
together making. More particularly, foundations and
As the global impact investment market grows,
charitable trusts established by wealthy individuals,
governments will not only have access to vast new
as well as the investment management activities
pools of capital but also the ability to share in the
of banks and sovereign wealth funds, have the
Set objectives, timelines, Government achieves entrepreneurship and innovation expertise of business
opportunity to play an especially catalytic role in
payment levels and pay only net savings and increased and the social sector. This is not about increasing
the impact marketplace by investing an appropriate
for verified positive outcomes tax revenues or reducing public expenditure, but rather about
portion of their portfolios more actively in pursuit
helping government do more with the money it has.
of their chosen social mission. Foundation assets
across the world are very considerable, representing Entrepreneurial leaders in the social sector will
some $150 billion in the US, £100 billion in the UK, gain access to the finance they need in order to
Provide Investors
€100 billion in Germany and approaching $44 billion scale up their ideas, in similar ways to those which
capital
in Canada, with many prominent foundations entrepreneurs in the for-profit sector have long taken
Impact investment outside these countries such as the Aga Khan for granted. In the business world, there will be rapid
intermediary Foundation and the Gulbenkian Foundation. growth in impact-driven regular businesses and
Receive capital ‘profit-with-purpose’ companies with an embedded
The following chapter, The Third Dimension,
1. Puts together arrangement back and returns social mission and measurable objectives whose
focuses on perhaps the most important enabler of
2. Funds service provider only according to achievement is tracked. Philanthropic foundations
this new paradigm, impact measurement. Starting
positive outcomes will have new ways to deploy some of the capital in
3. Supports with expertise in the 1930s, there was a concerted effort by
achieved their endowments to achieve their social missions.
governments and the private sector to develop
Investors will potentially gain a valuable new set of
better economic and business data, to enable
less correlated investment opportunities and the
policymakers, investors and corporate managers to
financial sector a chance to rebuild trust with the
better understand and manage performance.
public by demonstrating it can be a powerful force
Today, there should be a similarly concerted effort
for social good and help deliver inclusive economic
to incorporate the measurement of social and
growth that benefits everyone.
environmental impact into the performance
reporting of governments, business and the The success of our efforts will itself be measured, by
charitable sector. This will be a challenge. There the size of capital flows into impact investment from
will be no perfect measures of impact. But that is foundation endowments, mainstream investment
Social no different from our measures of the economy institutions, wealthy individuals and the general
sector service and financial risk. As with them, the goal should be public; the spread of outcomes commissioning by
to develop measures that are good enough to be governments, foundations and businesses, directed
provider at achieving specific social objectives; the number
useful. The better we measure impact, the more
capital will be invested in achieving it. of successful impact-driven organisations created;
the number of impact-driven organisations that
The chapter describing A New Force in
achieve impact on a significant scale; the number of
International Development deals with the fact
impact investment managers; and the development
that our recommendations are not exclusively
of supportive market infrastructure, including
about helping the world’s leading economies to do
ratings agencies and social stock exchanges. The
a better job of solving their 21st century problems.
Beneficiaries Impact investment may have even greater potential
NAB reports explore in more detail what is required
to build the market in each country.
for helping developing countries to simultaneously
achieve better social outcomes and economic The ultimate test is whether impact investment
growth, both by incorporating it in their domestic delivers better outcomes on social issues and
Positive outcomes, improved policies and by giving it growing prominence in improves millions of lives across the world.
lives and benefits for country international aid and foreign investment. We make06 INTRODUCTION: THE NEW PARADIGM INTRODUCTION: THE NEW PARADIGM 07
HIGH-LEVEL
RECOMMENDATIONS
3
1 2 3 4
Set measurable
impact objectives
Investors to
consider three
Clarify fiduciary
responsibilities of
Pay-for-success
commissioning:
5 6 7 8
Consider setting up
an impact investment
Boost social sector
organisational
Give Profit-with-
Purpose businesses
Support impact
investment’s role
and track their dimensions: risk, trustees: to allow governments should wholesaler funded capacity: the ability to lock-in in international
achievement return and impact trustees to consider consider streamlining with unclaimed governments and mission: governments development:
social as well as pay-for-success assets to drive foundations to to provide appropriate governments to
financial return on arrangements such development of the consider establishing legal forms or consider providing
their investments as social impact impact investment capacity-building provisions for their development
bonds and adapting sector grants programmes entrepreneurs and finance institutions
national ecosystems investors who wish to with flexibility to
to support impact secure social mission increase impact
investment into the future investment efforts.
Explore creation of
an Impact Finance
Facility to help attract
early-stage capital,
and a DIB Social
Outcomes Fund to
pay for successful
development
impact bonds.08 THE AGE OF IMPACT ENTREPRENEURSHIP THE AGE OF IMPACT ENTREPRENEURSHIP 09
THE AGE OF IMPACT This sea change is reflected in the blurring of old
lines between working in the for-profit and social
A vibrant social sector will include small and large
social sector organisations. Impact investing can help
SOCIAL SECTOR ORGANISATIONS
ENTREPRENEURSHIP sectors. Social sector organisations increasingly entrepreneurs take their good ideas to scale, much Social sector organisations already account for
look to increase their impact and sustainability by as the emergence of a large venture capital industry more than 5% of GDP in several countries,
generating revenues and embracing some best in several countries over the past four decades including Canada, Germany, the UK and the US.
practices from business, and a growing number has led to a huge increase in the number of In some countries, they employ more than 10% of
of companies claim a social purpose beyond profit. entrepreneurial start-ups growing into big, successful the workforce.8 We believe that this will increase
It is evident, too, in the growing number of people companies. Impact investing comprises all forms of significantly, as will the productivity of the social
who are themselves creating organisations to financing linked to social objectives, from seed and sector, as the impact investment market grows.
address some of our biggest challenges. Today, early stage risk capital all the way through to debt In certain countries, such as France and Italy, there
impact entrepreneurs can often be found where and growth capital. The need for this full range of is a broad sector called the ‘social and solidarity
economy’ which includes charitable ‘associations’,
One of the strongest reasons tough problems have created a pressing need for
social innovations.
financing forms has become all too clear. In the US,
for example, over the past 25 years or so, whereas cooperatives, mutuals and impact-driven businesses,
to be optimistic about the With its focus on achieving demonstrably better
over 50,000 new businesses have passed the $50 some of which will be suitable for impact investment.
In France this social and solidarity economy employs
outlook for impact investment outcomes, impact investing has the potential to
million revenue mark, only a meagre 144 social
sector organiations have succeeded in doing so.7 It 2.3 million people, and its importance has recently
is the growing number of give every organisation with a social mission a
better chance of success. This includes social sector
is time for the social sector to start catching up. been recognised in legislation.9
impact entrepreneurs applying organisations that want other sources of capital Any impact-driven organisation can be a recipient
of impact investment, provided it can deliver social
their creative energy to find besides traditional grants from charitable donors
or government and businesses that decide to put a There has been a steady increase in the impact and financial return. A grant from a donor
innovative and sustainable ways social mission at the core of their business model.
number of social sector organisations that raise
is not impact investing, however, as there is no
expectation of a getting any of the money back,
of addressing social problems. Impact investment moves us away from the
revenue through government contracts or by let alone of earning a financial return on it.
There is an untapped latent traditional misconception that the same organisation
cannot pursue both profit and social impact. charging for services or products they supply. The growth of social sector organisations has
supply of the talent needed Government regulations which have typically accelerated in recent years, as government
contracting to them has risen. In the UK, for
to build successful impact focused on public versus private benefit as the clear
differentiator of social impact are starting to adjust example, more than 80% of government funding
organisations. to these new approaches, but need to go further.
The emergence of impact investing is happening
at least partly as a result of the increasing efforts
received by charities is now in the form of contracts
for delivering services rather than grants to
Some of the leading impact entrepreneurs have of social sector organisations to generate support their work, reaching over £11 billion a year
Members of the millennial generation that is created thriving social sector organisations. Sal revenues, rather than depend solely on grants. in 2011/2012.10 In Germany, a codified welfare
entering the workforce today want their work to Khan now provides online tuition to 10 million Where they have been allowed to do so, they system with legally guaranteed funding streams
have a purpose beyond merely making money, people a month through his Khan Academy. have been growing more rapidly, driven in part by has enabled the growth of a large social sector,
whilst older generations too are ever less willing Andrew Youn helps train 200,000 small farmers government contracting, which has been rising. which is at the heart of delivering government
to settle for a compartmentalisation of how they in Africa through the One Acre Fund he founded. funded social provision. In Italy, the social sector
Developing a thriving social sector to use the
earn a living and how they want the world to be.6 In recent years, they have been joined by a accounts for 15% of national GDP and 10% of the
capital deployed by impact investors is about far
At the same time the demand side is growing growing number of impact entrepreneurs who total workforce.11
more than helping entrepreneurial start-ups, of
as ‘impact-seeking purchasers’ including pursue social innovation by starting for-profit
course. There are opportunities to increase the There has been a steady increase in the number of
consumers, governments, philanthropists and companies, such as Kristin Richmond and Kirsten
impact of established organisations, too. In social sector organisations that raise revenue through
others increasingly seek out goods and services Tobey, the founders of Revolution Foods, which
Australia, for example, impact investors provided government contracts or by charging for services or
that demonstrably make the world a better place. provides one million healthy meals each week
A$95 million to purchase a large private provider of products they supply, from hospitals to international
to school children across the US, 75% from low-
early learning and childcare services and turn it into development organisations. For example the San
income families, and Dirk Mueller-Remus, who
Members of the millennial generation that is a large scale social sector organisation, Goodstart, Patrignano centre for drug rehabilitation in Italy raises
founded auticon, a Berlin-based business with a
which runs 641 centres catering for 73,000 children. revenue through selling products produced by
mission to train people with Asperger syndrome
entering the workforce today want their work and find them work in IT departments. Some have To accelerate the growth of a thriving impact sector, the young people living there and following its
to have a purpose beyond merely making already achieved scale through hybrid models, it is important for governments to understand the programme. In 2012, Oxfam International’s 1,200
such as Groupe SOS in France which has 11,000 range of choices impact entrepreneurs must make stores in 9 countries generated revenues of €178
money, whilst older generations too are ever employees, €900 million of revenues and at in starting organisations dedicated to achieving million, and a net surplus after costs of €31 million.
less willing to settle for a compartmentalisation least one million beneficiaries of the work of its societal goals, and the pros and cons of the different There remains a pressing need to help individual
constituent organisations in meeting a range legal forms their organisations can take. They
of how they earn a living and how they want of social needs. In Italy, the CGM Consortium should ensure that laws, regulations and fiscal
social sector organisations, and the social sector as
a whole, to develop the capacity required to make
the world to be. includes 900 social enterprises, 42,000 employees, incentives work to encourage, rather than hinder, good use of impact investment capital. Just as
800,000 beneficiaries and €1.2 billion of revenues. choices that allow for the greatest social impact.
7 W. Foster and G.Fine, ‘How Nonprofits Get Really Big’, Stanford Social Innovation Review, (Spring 2007) 5(2), pages 46-55
8 See, for example, Roeger, K, Blackwood, A and Pettijohn, S, ‘The Nonprofit Almanac’, The Urban Institute (2012) page 35; and Statistics Canada,
Satellite Account of Nonprofit Institutions and Volunteering, 2009. Available at: www.sectorsource.ca/resource/file/satellite-account-nonprofit-
institutions-and-volunteering-2007
9 European Commission (2012) Social Economy: Laying the Groundwork for Innovative Solutions to Today’s Challenges, Synthesis Report, France,
10-11 December 2012, page 16.
10 NCVO, UK Civil Society Almanac (2014), page 29. Available at: www.data.ncvo.org.uk/a/almanac14/how-has-the-funding-mix-changed/
6 Deloitte, The Millennial Survey 2014, Available at: www.deloitte.com/MillennialSurvey 11 Istat 2014, Censimento dell’Industria e dei Servizi 2011, Istituzioni Non profit10 THE AGE OF IMPACT ENTREPRENEURSHIP THE AGE OF IMPACT ENTREPRENEURSHIP 11
traditional businesses now benefit from a vast for America and Kiva, venture philanthropy seems responsibilities. There are grounds for optimism to raise capital for growth. There are many examples
ecosystem spanning bankers, management poised to play a more significant role in social in the adoption of ideas such as ‘shared value’, of such impactful businesses. In the US, Progreso
consultants, lawyers, accountants, public relations sector organisations, helping prepare them to advocated in recent years by Michael Porter of Financiero empowers Hispanic individuals and
firms, and business schools, impact delivery put impact investment capital to work. Harvard Business School, where businesses seek business owners with limited or no credit history by
organisations will need help in identifying oppor- to incorporate into their business model both offering credit-building loans at affordable rates. This
For the social sector to achieve its potential,
tunities to draw on impact investment and support making a profit and bringing a clear benefit to impact-driven company has received more than $175
there will need to be a dramatic increase in the
in reaching across the cultural chasm that often society, and the proliferation of partnerships million from leading impact investors and venture
organisational capacity of social sector organisations
divides the social sector from the finance industry. between big business and leading social sector capitalists and has distributed more than a billion
and in their ability to attract management talent
organisations, such as Dow Chemical and the dollars in loans to underserved populations. In the
A related challenge is the type of financing that and deploy investment capital.
Nature Conservancy, Danone with Grameen and environmental domain, Opower is a company that
social sector organisations usually get. For-profit
To accelerate the ability of social sector organisations Nestle with the Fair Labour Association. combines a cloud-based platform, big data, and
start-ups have traditionally received funding from
to deliver social impact, some governments, behavioural science to help utilities around the world
venture capitalists and others that allows them the Equally remarkable is the number of entrepreneurial
foundations and companies have contributed reduce energy consumption and improve their
flexibility to finance their growth. By contrast, the start-ups emerging that have social mission at the
financial and human resources to help them. relationship with their customers. The enterprise has
heart of their organisation and the variety of business
Foundations are well placed to assume the leading reached 32 million households and saved more than
models they use. Companies such as d.light,
role in achieving this. 5 billion kilowatt hours of electricity; it recently had a
Equally remarkable is the number of Microensure and Barefoot Power create products
successful initial public offering (IPO). And Indiegogo,
Capacity-building can be supported in a number (solar lighting, microinsurance and affordable
entrepreneurial start-ups emerging that have of ways, from technical support to incubator funds. renewable energy, respectively) that have a direct
along with Kickstarter, has democratised access to
funding with its online platform that has allowed
social mission at the heart of their organisation Partnerships with established big companies impact on underserved populations. What is more,
millions of small-scale artists, community builders,
have also proved fruitful. The B Team, a group these impact entrepreneurs have taken pioneer risks
and the variety of business models they use. of prominent business leaders, including Sir to prove that there are indeed large market
inventors and innovators to mount crowdfunding
campaigns that extend well beyond their own
Richard Branson, Arianna Huffington and Paul opportunities in addressing these problems. As a
individual networks, thus greatly increasing their
Polman, is emerging as a champion of impact result, they are now able to attract large amounts
odds of success. The Indiegogo website has over
vast majority of grants to social sector organisations entrepreneurship across the world, joining leading of investment capital to grow. Others have chosen
9 million visitors each month with campaigns
are allocated entirely to a specific project. This convening organisations such as the Clinton Global different business models to benefit underserved
started in 224 countries.
constrains social sector organisations from investing Initiative, the Skoll World Forum and the World populations. For example, Tom’s Shoes and Warby
in their organisation’s operational capacity – Economic Forum in actively supporting the Parker have built into their business model a ‘buy a A growing number of entrepreneurs see advantage
whether through hiring the right executive talent, development of impact entrepreneurship. The pair, give a pair away’ cross-subsidisation, with shoes in having their impact certified. Certification
or creating back-office infrastructure that improves annual SOCAP (Social Capital Markets) gathering and eye glasses respectively. In this model purchases organisations verify impact and the use of
efficiency. In the US, for example, only 16% of in California has become an important knowledge from richer customers finance needed goods for responsible business practice for companies,
grants given out each year are for general exchange for the field. In addition, growing interest poorer customers. providing a seal of excellence that can help motivate
operating support. in the Global Learning Exchange, launched at the employees, provide transparency to stakeholders,
G8 Social Impact Investment Forum in 2013, has and send a proactive message to customers. There
One promising development has been the A growing number of entrepreneurs see
shown how important it is to have global platforms are more than 1,000 ‘B Corps’ around the world,
emergence of ‘venture philanthropy’ firms that
that can connects people, ideas and resources in including notable companies, such as Ben &
seek to apply many of the ‘hands-on’ capacity-
order to share best practice and build the impact
advantage in having their impact certified.
Jerry’s, Change.org, Etsy and Patagonia.
building techniques of venture capital to social Certification organisations verify impact and
investing market.
sector organisation start-ups – including providing Another emerging practice is that of incorporating a
general operating support, mentoring, help with the use of responsible business practice for new business using a special legal structure designed
recruitment, strategic thinking and embedding a PROFIT-WITH-PURPOSE BUSINESSES companies, providing a seal of excellence to protect the mission of that business, even through
revenue model from the start. a change in management or ownership. Impact
Among the leading examples in the US are: Many young people today believe that the number that can help motivate employees, provide entrepreneurs may find it beneficial to have such a
one purpose of business is to benefit society, and transparency to stakeholders, and send a legal ‘mission lock’ when, for example, raising money
New Profit Inc; Social Venture Partners; Venture
50% of them say they want to work for a business from public or quasi-public sources, or to attract
Philanthropy Partners; SV2; and Draper, Richards,
Kaplan. The European Venture Philanthropy with ethical practices, according to recent surveys proactive message to customers. other forms of socially driven investment. In the US,
of millennials by Deloitte.12 There has been a rapid the legal ‘benefit corporation’ structure was first
Association boasts over 170 members, such as
increase in the number of businesses that put a social adopted in Maryland in 2010 and is now law in 27
Impetus-PEF in the UK and others as far afield as
mission at the heart of their business model. They are Entrepreneurs starting impact-driven businesses States.13 The idea is also generating interest abroad.
Turkey and the UAE. The Asian Venture Philanthropy
challenging a traditional scepticism in many countries have a number of choices to make in terms of how Although this is a relatively new phenomenon, we are
Network has more than 160 members from 28
about the mixing of profit with the tackling of they structure their business to achieve the most hopeful that such mission-locked organisations will
countries and Japan now has its first comprehensive
social issues. impact. Many, especially those who sell product be especially attractive to social impact investors
venture philanthropy fund, JVFP, founded by
with impact ‘baked into’ the business model, as well as mainstream ones. We recommend that
private equity and corporate finance professionals Existing businesses, big and small, are also
choose to use standard for-profit tools (such as the governments create legal structures that offer
in 2013 and jointly managed by the Nippon recognising the importance of a greater focus on
limited liability corporation) so as to appeal to the impact entrepreneurs a choice of corporate
Foundation and Social Investment Partners. achieving social impact. There are a growing
widest mix of mission driven and conventional vehicles that give them the best shot at fulfilling
After over a decade of experimentation and number of big companies that now take seriously
investors – and thereby maximise their opportunity their social mission.
learning, and notable successes such as Teach their environmental, social and governance
12 Deloitte, The Millennial Survey 2014, Available at: www.deloitte.com/MillennialSurvey 13 www.benefitcorp.net12 THE AGE OF IMPACT ENTREPRENEURSHIP THE AGE OF IMPACT ENTREPRENEURSHIP 13
CATALYSING IMPACT exploring innovative ways of involving public, CHART A:
ENTREPRENEURSHIP private and foundation resources to finance SIX STEPS TOWARDS SECURING THE SOCIAL MISSION
capacity building.
OF A PROFIT-WITH-PURPOSE COMPANY
Governments can play an important role in In the US, the White House’s Office of Social
catalysing the growth of impact entrepreneurship. Innovation and Civic Participation is leading efforts
Regardless of whether they are social sector
organisations or impact-driven businesses, the
to support impact entrepreneurs and catalyse
Step 5 Step 6
additional private impact investment for
most common obstacle faced by impact entrepreneurs. Step 3 Step 4 Establish pursuit
entrepreneurs is securing early stage risk capital.
In the UK, the Cabinet Office created an Investment Step 1 Step 2 Establish a of mission in
Many impact investors are willing to invest at later Establish legal specific legal form
Readiness Programme, which includes an initial pool Establish legal mechanisms, such directors duties
stage, when business models have already been Ability to include to lock-in mission
of £20 million to be deployed in capacity-building Ability to include precedents and as a golden share, in an enforceable
proven and risks are lower; far fewer are willing to social mission as
grants for investment readiness. This consists of a social mission as practices and a to secure mission way
walk side by side with entrepreneurs through the primary object for
£10 million ‘Investment and Contract Readiness’ fund, secondary object clear legal
critical early stages of a high-risk, high-growth profit-distributing
which helps social ventures access impact investment for profit- framework
impact business. It is only with this type of funding entity
that we will be able to test and scale dynamic of at least £500,000, or win contracts over £1 million; distributing entity
market-driven solutions to urgent problems. Social and a £10 million ‘Social Incubator Fund’ to support
sector organisations, similarly, may need to secure social incubators to provide investment and support
general operating support that would allow them to early stage social ventures. To date, the Investment
to pivot in response to the needs of the market Readiness programme has helped over 100
frontline social ventures unlock almost £100 million US social sector organisations are currently to continue to deliver impact over the long term
they are serving, and to invest in developing
in investments and contract values and created ineligible to apply for the nearly $15 billion of and to report on the impact created. Taskforce
robust revenue streams. Various government
10 social incubators, which will support over 600 federal loans to small businesses – even if they countries have all been moving in the direction
initiatives are helping them go in this direction.
start-up ventures. In addition, the UK Government have substantial revenue streams. A small change of providing a supportive environment, but there
has recently confirmed £60 million to ensure in regulation allowing social sector organisations remains plenty of scope for further action.
capacity building funds for social sector to apply could make a world of difference.
The Mission Alignment WG has set out several
Regardless of whether they are social sector organisations over the next decade. A similar review could be conducted in every recommendations for enabling a choice of mission-
organisations or impact-driven businesses, The NAB in Germany established as part of this country of regulations that reflect old thinking lock. Its recommendations are published in its
about the social sector organisation/for-profit Subject Paper, Profit with Purpose Business.
the most common obstacle faced by impact Taskforce suggests exploring mechanisms of
divide and which prevent money from flowing
risk-mitigation/risk-sharing for potential social The ability to go public is likely to be important if
entrepreneurs is securing early stage impact investors. The NAB sees a potential role into mission driven entrepreneurial organisations.
the benefit corporation, or other profit-with-purpose
In some countries there are legal constraints on
risk capital. for promotional banks in this context. Primary
social sector organisations generating revenues.
legal structure, is to emerge as a viable alternative
application fields are deemed to be issues such as to traditional corporate forms. It may be that the
care for the elderly and long-term unemployment. In Canada, for example, the current rules do not
ability to list on a ‘social stock exchange’ would
recognise the value of revenue generating activity
In Italy, the Prime Minister has announced the There are also a number of ways to unlock early- make it easier for such firms to conduct an IPO,
among charities and non-profit organisations.
creation of a Social Fund to finance impact-driven stage risk capital for impact entrepreneurs at no and attract impact investors who are motivated to
In some cases, administrative guidance and
businesses, a provision included in legislation new cost to governments. The US NAB reviewed protect and advance the social mission of the firms
interpretive rulings have gone so far as to imply
for social enterprise being discussed in the existing federal policies and found a number of in which they invest. Social stock exchanges have
that non-profit organisations can never intend to
Italian Parliament.14 instances in which a small tweak in programme begun to emerge. The oldest and most established
generate a profit. We recommend that all countries
design could unleash billions towards impact. is the Impact Investment Exchange (IIX) in Asia,
In Japan, the government provided a $210 million consider ensuring a permissive legal environment
For example, the US ‘EB5’ visa programme which was established in 2005. The IIX was
grant for social innovation during 2010-2012 under that, within reason, allows social sector
allows foreign investors to get green cards by developed to be Asia’s first private and public
the ‘New Public’ initiative, of which $86 million has organisations to generate income.
investing $500,000 and creating at least 10 jobs platform for social enterprises to raise capital. In
gone to support 800 start-up social enterprises,
in economically troubled areas. In 2012 alone, this Finally, the Taskforce found that impact 2013 it incorporated Nexii, a social stock exchange
while 14 intermediary organisations run a series of
programme generated $1.8 billion in investment. entrepreneurs should have access to a full range in South Africa. It aims to help direct much-needed
capacity building internship and grant programmes
With a few small tweaks around the rules for of choices in terms of the legal form in which they growth capital to social businesses across Asia and
for seed funding.15
qualification, the government could both expand incorporate their business. The Taskforce Mission Africa. The Social Stock Exchange in London (SSE)
In France, the 2014 Social and Solidarity Bill this pool and channel an important portion of it Alignment WG conducted a review of legal was launched in 2013 to connect impact-driven
aims to facilitate the financing of social sector towards impact entrepreneurs. protections for entrepreneurs who wish to lock-in businesses with impact investors. A team in Berlin
organisations, while a social innovation investment their mission. It found six different ways in which is in the process of developing a German social
fund for social innovation is due to be launched by The US NAB identified a number of specific the legal system can provide support for this goal. stock exchange, NExT SSE. In Canada, a social
‘Banque Publique d’Investissement’ (a state-owned recommendations to make funding for (See Chart A). It highlights intent, duties and venture exchange has been created, SVX, which
bank) and regional government entities to make entrepreneurial organisations agnostic of reporting as defining characteristics of a profit- seeks to connect social ventures, impact funds,
loans to social innovators. The French NAB is corporate/charitable status. For example, with-purpose business, the commitment being and impact investors.
14 www.avvenire.it/Commenti/Pagine/Impresa-sociale-per-ripartire.aspx
15 www5.cao.go.jp/npc/pdf/torikumi0906.pdf(Cabinet Office 2012); www5.cao.go.jp/npc/pdf/youbou.pdf(Cabinet Office 2013)You can also read
