Analysis

5 Practical Takeaways for Nonprofits That Are Curious About Social Impact Investing

By Chuck Redmond

Impact investing – investments in companies, organizations, and funds with the goal of generating both social and financial returns – has been described by some as the “new philanthropy.” Social impact investing is breaking through nonprofit norms and offering new and exciting opportunities to create sustainable solutions to society’s challenges.

We recently partnered with McKinsey and Company to host an informative conversation that explored what social impact investing means, the various forms it can take, and how an organization’s mission should shape how it might engage in the space. We heard from experts from BDO, McKinsey and Quantified Ventures and discussed some important questions about the shift that impact investing is driving in the field and the implications to work in the social sector.

We rounded up five key takeaways from the conversation about what nonprofits should consider and how social impact investing can help nonprofits achieve and scale outcomes.

1. Nonprofits should look through the entire door rather than the keyhole. Nonprofits often view their funding models in a traditional way – seeking gifts and grants to fund the programs that have been built to support their missions and short-term outcomes. Although these funding models are effective, nonprofits should also consider long-term solutions and innovations that that can come from the programs and core competencies.

Some questions to reflect on include:

• How can our programs scale or be monetized in other markets or in other ways?
• What assets, products, services or solutions do we have that no one else has?
• How can we explore and discover ways in which those unique assets can be developed?

When nonprofits start to ask themselves these questions they begin to open up a wide range of possibilities for the future.

2. Mission is an important part of discovering where a nonprofit fits in on the spectrum of impact investing. Because impact investing is on the rise, there is an increase in market-based approaches to creating impact and outcomes that lead to new sources and forms of impact capital. On one end of the impact investing spectrum is a focus on financial return. On the other end of the spectrum is a focus on social or environmental impact. When determining where your nonprofit fits in on the spectrum, think about where you fit within the risk-return or mission-outcomes profile.When you establish your nonprofit’s placement on the spectrum, then you can start to determine which financing mechanism might be most appropriate.There are different types of finance mechanisms that lead to positive social impact, including:

• Responsible Investments: for-profit investments made by asset managers to encourage ethical corporate practices
• Impact Investments: investments that seek to combine high returns and high impact.
• Program Relevant Investments: investments that foundations and other organizations make to supplement their grant making
• Social Impact Bonds: public-private nonprofit partnerships in which investors receive government payment if social outcomes improve
• Philanthropic investments: investments that seek to improve long-term capabilities of nonprofits

3. Collecting data for the sake of data isn’t effective. Everyone struggles with data, but to be able to finance around outcomes, it is necessary to have data that demonstrates that your action will produce the outcome that you are expecting. You must be able to prove that your actions save or make someone money or delivers the outcomes you work toward. Nonprofits often have a long history of messy outcomes. It is tough to cut through some of the mess. But, lately there has been a movement of defining common outcomes that can help.

It’s also important to be on the ground to verify what you’re doing. Ray Dalio, the founder of Bridgewater, explains it best in his book Principles. As Dalio recommends, don’t fall in love with your own ideas. Be very rigorous in what you collect and get others with an element of objectivity to give feedback.

4. Use outside research to prove why something that has never been done before can work. As mentioned above, it’s important to show that your actions save or make someone money or produce the outcomes that you want. Sometimes that requires you to incorporate research that has already been done and apply it to the system you want to impact. In other words, find evidence that already exists about the area you want to impact and use that information to your advantage.

The article “Audacious Philanthropy” published in the Harvard Business Review gives 15 great examples of how research of the challenges in society helped to drive success over time. One example shared how the National School Lunch Program scaled by 2012 to serve about 31 million U.S. children.

The challenge was that hungry children were not able to learn at school. Although the efforts to address this issue began in the 19^th century, it slowed down during World War II. Two foundation-funded reports drove the demand again by proving that child hunger still remained a problem. These reports, in addition to localized efforts in Philadelphia and Boston, helped spur action and make it a priority across the nation. Today, almost every public school offers free or reduced lunch for children.

5. Nonprofits can start positioning themselves now if they want to engage in impact investing in the future.  There are several ways that nonprofits can begin to position themselves to engage in impact investing:

• Conduct an audit of your nonprofit by identifying core competencies. Start to differentiate capacities and figure out how you might pay back a loan vs. a traditional grant.
• Engage your board – not by asking them for money or to fundraise, but by asking them to brainstorm ways that the organization can get involved in impact investing. Set up a committee of board members who can work on figuring out who can save money from what your organization does.
• Pull apart the claim that you can save a system money by creating a series of “if, then” statements that can lead to a specific entity saving money in a specific way. Then you can evaluate it with your own programmatic data and third-party research data.
• Think of ways that you can lower the barriers between sectors. Ask yourselves which areas of your nonprofits have opportunities to collaborate with other sectors to keep moving things forward.

Has this blog post piqued your interest in impact investing? Here are a few of our favorite resources where you can find more on this topic: Stanford Social Innovation Review’s Impact Investing Column, The Case Foundation’s Short Guide to Impact Investing and McKinsey’s Social Sector Blog.