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Can Impact Investing Further Your Organization’s Mission?

Impact investing can offer a complementary strategy to grantmaking by filling capital gaps in communities to drive positive social outcomes.

Due to the diverse nature of the sector, there is often a lack of clarity on what “impact investing” means, despite the increasingly ubiquitous use of the term in news media and boardrooms. At its core, however, the concept is straightforward: Impact investing deploys capital in underserved communities in order to drive positive social outcomes.

Sometimes referred to as “place-based investing” or “program-related investing,” impact investing differs significantly from socially responsible (SRI) and environmental, social and governance (ESG) investing. While SRI and ESG strategies seek to make investments in managers who perform well on certain measures, or exclude those who perform poorly, impact investments prioritize creating positive social change over achieving market rate returns: The ultimate goal is to drive measurable change in communities while providing capital that may otherwise not be available alongside modest financial returns.

Issues that impact investing addresses:

Affordable housing
Homelessness
Access to health care
Educational opportunities
Employment opportunities
Helping small businesses
Food insecurity and food deserts

Why consider impact investing?

Foundations provide grants to charitable organizations that serve their target issue area and/or community. Impact investing offers a complementary strategy. Long-term “patient” capital, or impact investments, in debt, equity and tax-advantage vehicles, alongside grant-making funding, creates a multi-tiered approach to addressing community needs. As discussed below, these investments have the potential to drive positive impact, as opposed to other market-return investments commonly held in foundation portfolios, such as Treasuries or corporate bonds.

Today’s most pressing issues are being addressed by a variety of groups, including grassroots organizations. Each issue and organization requires different forms of capital to build effective and sustainable solutions. By leveraging both investment capital and grants, foundations can more effectively bridge capital gaps in local communities.

Five Steps for Implementing an Impact Investing Program

By filling “capital gaps” that would otherwise remain unfunded, an organization can advance its mission, generate modest returns and utilize those funds to create change. This capital can then be recycled and repurposed rather than making a one-time grant.

Below are five steps to help identify the appropriate opportunities for your organization.

Conduct a community scan to understand the needs and service gaps.

Engage an experienced professional to survey the nonprofit landscape and identify anchor organizations already working in the community. Work with key stakeholders that may benefit from the investment and are committed to the cause.

Develop a roadmap to the desired outcome and the capital required.

Clearly articulate the intended impact you or your organization aim to achieve. Identify a feasible outcome, determine the capital commitment and establish a time frame to accomplish the desired results. The investments should align with your mission, vision and strategic priorities.

Evaluate impact investment vehicles.

There are a wide range of options to consider, including debt, equity and tax advantage investments.

Note that CDFIs and local non-profits are often closest to the issues at-hand, and benefit from low-interest loans that enable them to enhance their impact. Building a program and portfolio will require expert advice on the range of options, along with the risk and return expectations for each.

Set realistic goals for the capital you are deploying.

Impact investing requires an understanding of performance expectations, as these investments consider both financial and social outcomes. For an impact investment, a low interest rate, below-market return — or just the return of principal — may create the most meaningful impact. Once returned, that capital can be redeployed with the goal of creating more positive change.

Determine how the impact will be evaluated.

To optimize an impact investing program, it is important to understand which initiatives are generating impact and which are not. Your organization should develop consistent processes for collecting data and procedures for evaluating impact. Standardized methodologies, such as the United Nations Sustainable Development Goals, or the Global Impact Investing Network’s Impact Reporting and Investing Standards, may be helpful. It is also critical to create a framework for pivoting the strategy as needed in response to the results.

Case Study

Northern Trust’s Approach: Deploying Our Own Capital

Impact investing is a diverse field with many different stakeholders, financing structures, funders and intended outcomes. At Northern Trust, our approach has been to use our capital for communities that our institutional clients are working to support. We have made investments in CDFIs, community development enterprises, nonprofits, affordable housing providers, social enterprises, and women and minority-owned financial institutions. As of December 31st, 2023, Northern Trust had $4.6 billion of capital outstanding.

We design innovative financing structures to drive positive impact in the underserved communities in which we operate. For example, one recent program involved a social impact bond that funded transitional housing to address homelessness in Denver. Northern Trust worked with the Colorado Coalition for the Homeless and the City of Denver to incentivize stays of more than a year by residents in the program. The initiative had almost a 90% success rate, greatly reducing recidivism and positively affecting the city as a whole.

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Drive Positive Social Outcomes

Learn ways we can help with your organization’s impact investing.

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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