A good investment

Impact inves­t­ing is more than just a form of inves­t­ing. It chal­lenges philanthropy’s tradi­tio­nal one-direc­tional flow of wealth. It disrupts our under­stan­ding of what funding is and how it differs from capi­tal invest­ment. The sector is grap­pling with this ques­tion. New possi­bi­li­ties call into ques­tion tried-and-tested approaches.

With this market-based approach, phil­an­thropy is deve­lo­ping an important coun­ter­point to ‘non-repa­ya­ble’ phil­an­thropy. It is not a repla­ce­ment but a coun­ter­part that can boost the impact it has. Martin is convin­ced that tradi­tio­nal funding will remain important for certain issues. People will conti­nue to want to get invol­ved them­sel­ves by using their own resour­ces. Howe­ver, market-based approa­ches provide fresh impe­tus. Exis­ting approa­ches are not enti­rely suffi­ci­ent to over­come current social and envi­ron­men­tal chal­lenges. ‘That’s why we’re now taking the next step, just as our ances­tors have been doing for 300,000 years,’ he says, adding: ‘It is important to pursue both phil­an­thropy and impact inves­t­ing where each approach makes the most sense.’

Fresh impe­tus

This means compe­ti­tion for foun­da­ti­ons’ funding acti­vi­ties. He sees seve­ral reasons for this trend, mentio­ning the strin­gent regu­la­ti­ons in the US foun­da­tion sector, which leave people keen to use money in other ways to achieve the desi­red purpo­ses. The finan­cial crisis also gave impact inves­t­ing a boost, says von Schnur­bein. There was nothing to be earned on invest­ments at the time – or rather, not without risk – so inves­tors incre­asingly saw the sense in using their money where it would at least have a posi­tive impact on society.

A perso­nal vision

The youn­ger gene­ra­tion is incre­asingly assum­ing respon­si­bi­lity for large fortu­nes. The fact that this gene­ra­tion hand­les these funds based on its own perso­nal vision is an addi­tio­nal driver of this trend. For these young inves­tors, impact inves­t­ing outside the foun­da­tion sector is an inte­res­t­ing option, allo­wing them to achieve a sustainable or social impact as they see fit. At the same time, the money is not defi­ni­tively inves­ted: they can use it in a diffe­rent way down the line. Georg von Schnur­bein says, ‘The poten­tial of impact inves­t­ing is much grea­ter than “just” the money that used to go to foun­da­ti­ons’. He considers it very likely that, in the future, private funds will be inves­ted more in support of gene­ral, non-profit inte­rests and the common good. Society bene­fits, accor­ding to von Schnur­bein, because the fact that more money is available for social and sustainable causes is parti­cu­larly posi­tive for the project owners. This is a new oppor­tu­nity for them to receive money.

Time for a rethink

But this is not a given: project owners need to rethink things. ‘The tradi­tio­nal dona­tion-based non-profit orga­ni­sa­ti­ons in Switz­er­land and Europe, in parti­cu­lar, still have a long way to go,’ he says. They must now posi­tion them­sel­ves in such a way that they are eligi­ble for impact inves­t­ing at all. Projects must be clearly delinea­ted in order to show the possi­bi­li­ties for retur­ning the money. ‘If they don’t, they don’t get the money,’ says von Schnur­bein. Progress has been made in deve­lo­p­ment coope­ra­tion and in other count­ries. There’s alre­ady a lot of money to be found here. In prin­ci­ple, von Schnur­bein sees it as a posi­tive that new private funds are being inves­ted via impact inves­t­ing. It is not just about the finan­cial aspect. He is convin­ced that, when diffe­rent play­ers make an impact through impact inves­t­ing, this stimu­la­tes the sector as a whole. There is fresh impe­tus. He cites the Global Health Invest­ment Fund as a speci­fic exam­ple. This orga­ni­sa­tion invests in chari­ta­ble projects as well as in start-ups in the field of public health, with the Bill and Melinda Gates Foun­da­tion cove­ring 50% of the fund’s losses. For other inves­tors, this protec­tion redu­ces the risk and lowers the entry threshold.

An estab­lished tool

Impact inves­t­ing is no longer a niche topic: it has become estab­lished. ‘A few years ago, many people were still wonde­ring whether we really needed new models to promote grea­ter colla­bo­ra­tion between impact inves­tors and huma­ni­ta­rian workers on the ground,’ says Maxi­mi­lian Martin, noting that we are further ahead today. ‘The view that impact invest­ments can play a key role in crea­ting oppor­tu­ni­ties in fragile envi­ron­ments is widely held.’ Fonda­tion Lombard Odier is commit­ted to deve­lo­ping the impact inves­t­ing market as a whole. It wants to break down further barriers. With the Programme for Huma­ni­ta­rian Impact Invest­ment run by the Inter­na­tio­nal Commit­tee of the Red Cross (ICRC), it crea­ted the first impact bond in the huma­ni­ta­rian sector in 2017. In addi­tion to Switz­er­land, other count­ries also parti­ci­pa­ted in this. At the time, the ICRC wanted to test a new way of finan­cing rese­arch and deve­lo­p­ment invest­ments in order to increase opera­tio­nal produc­ti­vity by supple­men­ting its annual budget with private capi­tal. To this end, the ICRC iden­ti­fied longer-term acti­vi­ties where addi­tio­nal impact capi­tal could be useful outside the frame­work of tradi­tio­nal finan­cial plan­ning, such as the trai­ning of physi­cal reha­bi­li­ta­tion specia­lists. Maxi­mi­lian Martin says, ‘The struc­tu­ring that impact invest­ment offe­red along­side an urgen­tly needed addi­tio­nal source of funding was an oppor­tu­nity to address the chall­enge using an invest­ment logic and the oppor­tu­nity to support longer-term projects.’

Funding and investment

Maxi­mi­lian Martin considers these kinds of funding models to be a good idea, provi­ded that the foun­da­tion takes a stra­te­gic approach. In this way, impact invest­ments can contri­bute to fulfil­ling the foundation’s purpose. ‘Foun­da­ti­ons can use their assets to achieve grea­ter impact them­sel­ves,’ he says. ‘Further­more, the broad range of instru­ments and target returns, coupled with the aim of making an empi­ri­cally veri­fia­ble contri­bu­tion to the common good, offer an extra­or­di­nary oppor­tu­nity to streng­then a foundation’s own grant-giving prac­ti­ces and thus better imple­ment its mission.’ It is important to consider what impact inves­t­ing entails. Accor­ding to the defi­ni­tion provi­ded by the Global Impact Inves­t­ing Network (GIIN), this includes gene­ra­ting a finan­cial return on capi­tal, in addi­tion to the inten­tion to create a posi­tive social or envi­ron­men­tal impact through invest­ments. The range of asset clas­ses is broad, with returns that are risk-adjus­ted or below the usual market cost of capi­tal. Measu­ring and report­ing on the impact is also key.

Measu­ra­bi­lity is key

Toge­ther with other private stake­hol­ders, they were able to amplify the impact of their acti­vi­ties. They iden­ti­fied perfor­mance defi­cits as busi­ness oppor­tu­ni­ties that they could intro­duce to resource-poor regi­ons. Inno­va­tions led to new solu­ti­ons. ‘EdTech compa­nies – tech­no­lo­gi­cal approa­ches in the educa­tion sector – can provide effec­tive solu­ti­ons, for exam­ple. These help teachers deal with highly diverse class­rooms so they can spend more time teaching, and using data to under­stand indi­vi­dueals’ perfor­mance and needs,’ he says. Support and invest­ment acti­vi­ties are closely intert­wi­ned. The aim is for them to be mutually rein­for­cing. For the Jacobs Foun­da­tion, both support grants and invest­ments count as programme-based (earmarked) finan­cing. All of these funds aim to promote measura­ble prac­ti­ces in educa­tion. Segura notes a lack of evidence-based approa­ches in both the state and private sectors. Often invest­ments are made without evidence of impact. To increase its over­all impact, the Jacobs Foun­da­tion aligns its support acti­vi­ties for nonpro­fit orga­ni­sa­ti­ons with its impact invest­ments in for-profit compa­nies. It is important that they achieve measura­ble social outco­mes in addi­tion to finan­cial returns. ‘Invest­ments and support acti­vi­ties are aligned with our stra­te­gic prio­ri­ties and must have a clear theory of change,’ he says. This dual approach makes it possi­ble to support a wider range of solu­ti­ons and to use diffe­rent types of capi­tal to further the objective.

New perfor­mance indicators

It is an approach that requi­res care. Espe­ci­ally when it comes to non-repa­ya­ble support grants, restraint is called for. Fabio Segura empha­si­ses: ‘Foun­da­ti­ons need to be careful not to disrupt emer­ging markets.’ When commer­cial capi­tal can be deve­lo­ped, the Jacobs Foun­da­tion focu­ses on crea­ting an envi­ron­ment that encou­ra­ges private invest­ment. ‘By doing so, we ensure that our contri­bu­ti­ons comple­ment market-driven solu­ti­ons and support sustainable growth and inno­va­tion,’ he says. The focus is always on the impact. Even if a return is taken into account when inves­t­ing, the approach is ‘impact first’. With this focus, the Jacobs Foun­da­tion takes above-average risks in order to achieve a grea­ter impact in return. The foun­da­tion bene­fits from the fact that it firmly estab­lished impact measu­re­ment before it delved into impact inves­t­ing. We conti­nue to utilize estab­lished frame­works to assess and track the social outco­mes of our invest­ments, setting clear impact targets and evalua­ting results against prede­fi­ned metrics,’ he says. Impact inves­t­ing has led the Jacobs Foun­da­tion to broa­den its approach. It has estab­lished new KPIs and perfor­mance indi­ca­tors. In addi­tion to the quality of the outco­mes and their imple­men­ta­tion, it also measu­res diver­sity and equity in the distri­bu­tion of capi­tal and reviews tradi­tio­nal finan­cial and invest­ment figures.

In order to meet all requi­re­ments, the inclu­sion of impact invest­ments must be plan­ned in detail. The Jacobs Foun­da­tion has carefully desi­gned its impact inves­t­ing stra­tegy. In addi­tion to invol­ving legal and finan­cial experts, it has also worked toge­ther with the autho­ri­ties. In doing so, it has ensu­red that its poli­cies and proce­du­res are both in line with the foundation’s purpose and with regu­la­tory stan­dards. As Fabio Segura says, ‘We are reco­gni­zed as one of the most trans­pa­rent foun­da­ti­ons in Switz­er­land, and our proac­tive approach ensu­res that our impact invest­ments are both effec­tive and fully compliant.’

Increased respon­si­bi­lity

Impact inves­t­ing isn’t suita­ble for every foun­da­tion. There are chal­lenges that commit­tees must be able to cope with. Anyone who invests the foundation’s assets with a focus on impact must take on addi­tio­nal respon­si­bi­lity. This puts more pres­sure on boards of trus­tees. It is important to examine the impact of such invest­ments. ‘This task cannot be dele­ga­ted to a bank or an asset mana­ger,’ says Georg von Schnur­bein. ‘You can’t just assume an effect; it must be docu­men­ted and measu­red.’ The board of trus­tees needs to have the skills to do so, other­wise the risk beco­mes too great. ‘It is diffi­cult for exter­nal parties to combine invest­ment stra­tegy and the fulfilm­ent of objec­ti­ves,’ he says. This means that the opti­ons are limi­ted for small foun­da­ti­ons, which can hardly be active in the private market them­sel­ves. At most, products from a bank, such as a social bond, are an invest­ment option for them. The money would be used to finance social insti­tu­ti­ons. When there is a change in stra­tegy, impact inves­t­ing should be incor­po­ra­ted gradu­ally. ‘It can be useful to define an allo­ca­tion of a foundation’s capi­tal of, say, 5%, so that the foun­da­tion can initi­ally focus on impact invest­ments that are a good fit for the foun­da­tion in terms of impact and that also meet the risk and return crite­ria on the invest­ment side,’ says Maxi­mi­lian Martin. Over time, the foun­da­tion can build up exper­tise and become more ambi­tious. This approach can also be applied to the awar­ding of grants. He recom­mends events orga­nised by Swiss­Foun­da­ti­ons, for instance, to build exper­tise. In Georg von Schnurbein’s view, it is also important to lay the ground­work, as with other invest­ments: ‘If I want to do impact inves­t­ing, I have to set that out in my invest­ment regu­la­ti­ons. And the invest­ments must be balan­ced. A foun­da­tion can’t put all of its capi­tal at risk.’

Compli­ant

Güggi makes a distinc­tion between invest­ment and funding and states that, from an invest­ment perspec­tive, the foun­da­tion must not lose any money. If the focus is on funding, the invest­ment must be in line with its statu­tory purpose. And importantly, ‘After all, it has to make trans­pa­rent decis­i­ons, record them and correctly disc­lose them in the annual finan­cial state­ments.’ Once this has been achie­ved, impact inves­t­ing is not much more diffi­cult for the FSAF to moni­tor. Güggi says: ‘Howe­ver, things usually get really compli­ca­ted for us as the super­vi­sory autho­rity for foun­da­ti­ons when there are complex, opaque cons­tructs, when the volume of invest­ments is unclear, or when the whole thing could become a finan­cial problem for the foun­da­tion.’ The appli­ca­tion of entre­pre­neu­rial funding approa­ches is also rele­vant to the ques­tion of tax exemp­tion. The canto­nal autho­ri­ties that make this decis­ion handle this in diffe­rent ways. In gene­ral, Güggi says: ‘The more influence a foun­da­tion can have on an orga­ni­sa­tion funded with market-based approa­ches, the more criti­cal the view of some tax authorities.’

Um allen Anfor­de­run­gen gerecht zu werden, gilt es, die Aufnahme von Impact-Inves­ti­tion detail­liert zu planen. Die Jacobs Foun­da­tion hat ihre Impact-Inves­t­ing-Stra­te­gie sorg­fäl­tig aufge­baut. Neben dem Beizug von Rechts- und Finanzexpert:innen pfleg­ten sie auch die Zusam­men­ar­beit mit den Behör­den. So stell­ten sie sicher, dass ihre Richt­li­nien und Verfah­ren sowohl dem Zweck der Stif­tung entspre­chen wie auch den regu­la­to­ri­schen Stan­dards gerecht werden. Fabio Segura sagt: «Wir sind als eine der trans­pa­ren­tes­ten Stif­tun­gen in der Schweiz aner­kannt und unser proak­ti­ver Ansatz stellt sicher, dass unsere Impact-Inves­ti­tio­nen sowohl effek­tiv als auch voll­stän­dig regel­kon­form sind.»

It’s about the impact

Compli­ance with the rules is the basis. But the goal, the impact, must not only be speci­fied – it must also be measu­red. Impact inves­t­ing is only effec­tive if impact measu­re­ment is used to assess the use of the funds. Fonda­tion Lombard Odier does this on two levels. At the foun­da­tion level, it uses report­ing to deter­mine the impact. At the project or instru­ment level, it uses measura­ble data. In the case of the ICRC, this means sustain­ably incre­asing the produc­ti­vity of staff in the physi­cal reha­bi­li­ta­tion centres in Maidu­guri (Nige­ria), Mopti (Mali) and Kinshasa (Congo) so that they can provide better care to more pati­ents. Maxi­mi­lian Martin says, ‘The staff effi­ci­ency ratio is calcu­la­ted for this purpose.’ This metric records how many and which pros­the­ses, ortho­ses, wheel­chairs, etc. are provi­ded by how many employees, with what level of trai­ning, in how much time and with what result. He empha­si­ses that meaningful measu­re­ment means deli­bera­tely focu­sing on areas that do not require too many assump­ti­ons. Other­wise, the results are virtually impos­si­ble to verify, or to do so would require dispro­por­tio­nate effort. ‘It is also important to select every invest­ment on the basis of an ESG and impact manage­ment frame­work,’ he says. ‘The areas of impact to be targe­ted ulti­m­ately depend on the purpose and the fields of action defi­ned by the foundation.’