Interview – Antony Bugg-Levine

The Rockefeller Foundation launched its Impact Investing initiative in 2007 to help scale the field of impact investing.  What exactly is the Rockefeller Foundation trying to do, how will it know it has succeeded, and where does the Global Impact Investing Network fit in, Caroline Hartnell asked Managing Director Antony Bugg-Levine. Success will ultimately be defined by the extent to which social and environmental challenges have been solved, says Bugg-Levine. The initiative will not fall back on the proxy variable of whether money has flowed or not.

The Rockefeller Foundation has invested $30 million for scaling the field of impact investing. How do you plan to use this money?

The Rockefeller Foundation’s initiative is focused on supporting and accelerating the development of an efficient and effective impact investing industry. We will not measure our success by how we deploy our capital as impact investment directly but rather by what we can do to help create an industry that enables others to move much more capital into investment that solves social and environmental problems.

To answer your question specifically, in 2007 we began speaking with investors, posing the simple question ‘what would it take for you to use for-profit investments more efficiently to solve social and environmental problems?’ We have now spoken with more than 1,000 investors around the world, and their answers cluster around four basic challenges. These have informed the design of the initiative.

What are the four challenges investors identified?

The first thing they said to us was that they need a way, as impact investors, to work together to develop this industry. They feel the current platforms for collective action are inadequate. They focus either on helping major investors to be more effective in their work or on enabling those focused on non-profit solutions to social problems to work together. So the first challenge they identified was the lack of collective action platforms.

The second thing they told us was that impact investing lacks basic infrastructure to facilitate investments. When they make mainstream investments, there is a whole set of supportive scaffolds, such as sets of standards or accounting principles or investment bankers who can support them. When they turn to impact investment, that kind of facilitating infrastructure does not exist.

The third challenge is the lack of intermediaries who can take impact investors’ money and place it with those businesses that can most effectively generate both solutions to social problems and profit. Finally, there is a basic lack of research on this new industry, which would enable investors to share lessons and identify best practices. Again, this sort of research exists for mainstream investing.

So we have developed our initiative as a response to the four challenges identified by investors. The initiative therefore has four prongs. The first is helping to support collective action. The launch of the Global Impact Investing Network (GIIN), which works with an investors’ council comprising leading impact investors to increase the scale and effectiveness of impact investing, is a marquee component of that part of the initiative. The second is to help develop basic infrastructure to support impact investors. The development of the Impact Reporting and Investment Standards (IRIS) as a common framework for measuring the social and environmental impact of investments is a major initiative here.

On the third point, the lack of intermediaries, we are both making impact investments ourselves that can help bring the most promising intermediaries to scale and working with other impact investors in informal investment clubs to put together new investment structures in areas where impact investing capital has not yet flowed. Finally, research: our first move here was collaborating with the Monitor Institute to produce a report on the impact investing industry. We continue to support other research efforts that seek to identify both the scope of the sector and potential challenges to realizing it.

I would broadly describe the work you’re doing in all four areas as developing the infrastructure for impact investing. Would you agree with that?

You could call it all infrastructure, but we tend to describe infrastructure in a more contained way as the second of our four prongs. This goes back to the core of our approach, which is to see the role of the Rockefeller Foundation as supporting the development of an effective industry in which others can participate. Whether you call it infrastructure or not may be semantics, but the core idea is that our role as a foundation is to catalyse an industry whose success will ultimately be measured by its ability to enable others to invest.

That’s quite a big ambition. How will you know you’ve succeeded, or how well you’ve succeeded?

I think for us success will ultimately be defined by the extent to which social and environmental challenges have been solved. It is too easy to fall back on the proxy variable of whether money has flowed or not. We think that’s a necessary condition for success but ultimately insufficient. What we really want to influence and monitor is the extent to which social problems have been solved on a different scale from what would have been possible without impact investment capital. If I look a decade ahead, I would need to know that there are communities in the world whose lives have been improved with, for instance, access to better education or basic services or a more environmentally sustainable community, facilitated by impact investing capital working in complement with thoughtful philanthropy and government subsidy.

That might sound like a bit of an abstract notion, but for us it really has two parts: one is measuring the amount of money that has flowed into an effective solution and the other is observing where impact investing money is able to make a difference in a sector that it currently does not reach.

Impact investors are already making a substantial difference in three areas. The first is community development and low-income housing development in the US; this is a sector that has developed following decades of substantial government support. The second is microfinance, where impact investors are able to make capital available through intermediaries to very poor people operating very small businesses. In that case 40 years of a combination of philanthropy and government subsidy has helped refine the business model to the point where it can absorb impact investing capital at scale. The third area is supporting a range of green investments.

We see opportunities for impact investors to make a similar difference in a far broader range of sectors and geographies, including affordable schools, provision of basic services such as water and sanitation, and development of a new green revolution in Africa. This last is a priority of the Rockefeller Foundation and one where we see the impact investing initiative having substantial potential to make a difference.

It seems you’ve got to do a very challenging amount of measurement. Will you start by tracking where GIIN members are investing?

The first challenge is to develop a workable definition of what an impact investment is. Then we can develop a baseline for understanding how much and where impact investing capital is currently at work. Then we can start to understand how the industry is growing.

The issue of attribution is an important one for the Rockefeller Foundation in the context of measuring our own impact, and this will certainly not be a trivial task. As the industry grows, it’s a judgement call for us to measure the extent to which our work has been a cause of that growth. But ultimately we are more concerned that the industry does grow than necessarily needing to attribute that to our own work.

The Impact Reporting Investment Standards (IRIS) project is setting out to develop a credible global standard for measuring and reporting the social impact of investments. The project is also, in partnership with Hitachi, developing a data aggregator so that anyone who is putting impact investing capital to work and measuring social impact will be able to input data about their impact into a data aggregating system. Over time, this will allow us to track how much social and environmental impact is being made by impact investors.

If you had a magic wand, what barrier to success would you most like to see removed?

More than anything, I’d like to remove the established systems of intermediating capital that force us into a binary choice between using for-profit investment purely to maximize financial return and using charity and subsidy when we seek to solve social problems. This is a systemic barrier to the development of the impact investing industry. Policy and regulatory frameworks are organized to support this binary system. At a very broad level, this initiative seeks recognition that it is both economically feasible and morally legitimate to address social problems with for-profit investment in order to break down this over-arching barrier.

Are any parts of the initiative particularly geared towards breaking down that mindset barrier, or is it a general focus?

I think that altering entrenched perspectives takes multiple approaches; certainly the research work can create an information base to support a new approach. So too will the development of analytically rigorous standards for measuring social impact. Through GIIN, the leaders of the impact investing industry can both develop more compelling demonstration projects and more effectively work together to communicate both their successes and their challenges. Breaking down the existing system is certainly going to be an all-hands-on-deck effort.

Which actors in the financial space do you think are most likely to lead the way in this – foundations, commercial banks, equity investors?

We can look at the history of the development of other new subsectors within the financial services industry to help us answer that question. Look at the 40-year history of the microfinance industry, from a set of donor-funded experiments in the early 1970s to the involvement of major investment banks and pension funds in the first decade of the 21st century. Both that trajectory and the trajectory of mainstream innovations such as development of venture capital point to the need for an early leadership role to be played by those investors who have greater autonomy over their investment decisions. Most notably this includes the leading family offices, high net worth individuals, private bank clients and the more innovative foundations. All of these have the legal ability to make investment decisions with greater discretion and autonomy than the institutional investors and pension funds that ultimately control most of the world’s capital, but do so under a set of conservative fiduciary rules that inhibit their ability to be early adopters of innovations like this.

As with those earlier financial services innovations, these leaders will play a very important role in laying down the path that the institutional investors can then follow.

So where do you see the larger private endowed foundations in all this? They have more manoeuvre room than pension funds, but they’re not as free as family offices or high net worth individuals.

As a whole, foundations are not substantially more progressive on this front than other institutional investors, but some foundations are certainly taking a leading role in pushing innovation in impact investing, both through supporting infrastructure such as GIIN and through their own investments.

Foundations in the US have for 40 years been using for-profit investments as a tool for pursuing their social purpose, through the programme-related investment provision within the tax code. In the last few years, we’ve seen a rapid acceleration in foundations looking to tap into their endowment assets as well as their programme-related investment dollars to source capital for impact investments.

Large foundations using their endowments for impact investing would be a pretty big breakthrough, wouldn’t it? A lot of money is involved.

It is – in the US, foundations hold around $300 billion (depending on how you count) of assets in their endowments. This seems a lot until you look at the mainstream capital market, which moves more than $30 trillion a year. Foundation capital is substantial by any measure, but as a percentage of the overall capital market it’s quite small. While foundations clearly play a signalling role because of their leadership on social problems, ultimately unlocking institutional assets from the private banks, pension funds and insurance companies is where the big victory is going to be.

One example of this is the US pension fund TIAA Cref, which is a founding member of GIIN. They have a $600 million commitment to a broad range of impact investments, which represents a tiny percentage of the almost $400 billion that they manage in total. If the goal is simply to unlock more capital for impact investing, getting 1 or 2 per cent of the capital held by mainstream pension funds and insurance companies will be a far faster way to get there than focusing on foundation endowments. These certainly represent more money than I have in my wallet but they’re not a substantial part of the overall capital market.

So you’re not going to be kicking against the brick wall of foundations and mission-related investment?

No, there are other initiatives like the More for Mission campaign that fulfil that role. We are supporters of the PRI Makers Network, and we do see the programme-related investment tool as an important one. But we do not think that just focusing on foundations will be adequate either for the challenges of unlocking capital or for the opportunities of putting the impact investing industry to work to solve the range of problems it can potentially solve.

What do you find personally most challenging in this initiative?

Because the industry is proliferating and remains highly fragmented, understanding what is going on and trying to connect all the various players is an exhausting task. But it is exhausting rather than exasperating – it is incredibly fulfilling and inspiring to be part of an industry as it begins to evolve. Because of the difficulties posed by the lack of a common language and the informality of networks, it will take individual energy rather than more formal organization to put the pieces together.

Over the last year, the work has become even more gratifying. The launch of GIIN last September was a real milestone because it marks the beginning of a transition from this work being something that we were leading from within the Rockefeller Foundation to being something that a much broader range of leaders in the field have embraced.

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