Back to News

Key Driving Forces of Social Innovation: Impact Investment and Social Enterprise

December 21, 2018 - By

Rockefeller Philanthropy Advisorsย and the China Global Philanthropy Institute recently held a launch for a book authored byย Vice President Heather Grady titled Key Driving Forces of Social Innovation, focused on encouraging the nascent impact investing and social enterprise sector in China.ย The following article is adapted from her talking points at the book release event on December 11, 2018 in Shenzhen.ย The book is currently available in Mandarin; for more information, email [email protected].ย 

The philanthropy sector around the world is exploring howย to become more sustainable, in both impact and financial terms.ย My new book,ย Key Driving Forces of Social Innovation,ย representsย a small contribution to that effort. Itย drew on substantial interviews with more than thirty experts, andย has been written primarily for a Chinese audience, though we believeย its key concepts and case studies will be of interest toย philanthropists and foundation colleaguesย anywhere.

Inย China, as in every country,ย governments hold fundamental responsibilities for ensuring that allย peopleย are educatedย and healthy, andย have opportunities to beย productiveย and prosperous.ย The field of philanthropy in China is growing, so there as elsewhere, philanthropyย and impact investment are finding their roles complementary toโ€”not replacingโ€”the fundamental role and responsibility of the public sector.ย Indeed, today in China as elsewhere, smart combinations of publicย and private funding will be anย essentialย component inย tacklingย complexย social and environmental challenges.

How Impact Investing Contributes to this Shared Responsibilityย 

Inย aย book that Rockefellerย Philanthropyย Advisorsย published more than a decade ago,ย Solutions for Impact Investors: From Strategy to Implementation,ย weย wrote thatย โ€œimpact investing can create social good at scale and begin to address some of the worldโ€™s most pressing problems where commercial markets and donor-based programs have not.โ€

Philanthropists who have been giving away funds through operational programs or grants can add impact investingย to their toolbox, and this presents a tremendous opportunity for foundations to put more of their assets to work toย create greaterย impact.ย A point raised in our book launch discussion in China mirrors that in other contexts: thatย there will always beย program areas and goalsย thatย require grants rather thanย investments for financialย return.ย Soย the starting pointย for Chinese investorsย is toย be sure thatย they areย selecting a tool that matches the problem. Moreover, many social enterprises can make good use of grants, and most not-for-profits useย grant funds beforeย theyย create something investible forย theirย revenue streams.ย But whereย philanthropists andย foundations have objectives that lend themselves to impact investing resources, they should see how this can reinforce and support those objectives in addition toย their current portfolio.ย Crucial to progress is a frank examination of lessons learned, exchange acrossย countriesย and sectors,ย and developing and testing successful models.

Key Concepts in Impact Investing and Social Enterpriseย 

This volume for Chinese readers stressed thatย even whenย impact investorsย support social services,ย ifย the client of those programs is the government and the government is eventually paying for those services, thenย impact investors are theย financiers, not theย donors. They are making a fixed-term investment and aim to be repaid with interest (in the case of debt) or profit (in the case of equity).ย And itย is particularly useful in certain cases:ย in piloting new approaches on which governments cannot afford to take a risk, or inย fundingย social services or social enterprises in a start-up phase where there are potential efficiency or productivity gains to be realized over time.

Theย Global Impact Investment Network (GIIN) provides a wealth of information and guidance for both new entrants to the field and experienced practitioners.ย Concepts likeย intentionality,ย and approaches toย impact measurement,ย will be important for Chinese impact investors to learn and use.ย A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments. In new markets like China, impact measurement helps ensure transparency and accountability, and is essential to informing the practice of impact investing and building the field.

Our discussion at the book launch raised the question of asset classes. Whereas some of this fieldโ€™s leaders have earlier written that impact investments will constitute oneย standaloneย asset class,ย we clarified that impact investments can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital and private equity. Impact investorsย can also earn fees by providingย catalytic instruments such as guarantees. In China as elsewhere, investorsโ€™ return expectations and the instruments in which they investย willย reflect their intent and are typically driven by the economics of the investment.ย Some willย support higher risk early-stage social enterprises in challengingย ruralย markets, though most will likely look toย finance the expansion of proven business models to reach scale, in the expectation of market or near market rate returns.

Clarifyingย how Changeย will Happenย 

Impact investors, like philanthropists, will need to think about how they believe change will happenโ€”a theory of changeย leading them toย make an informed choice.ย We make assumptions with these investments just as we make assumptions when we decide which traditional businesses to invest in to make a good financial return, or how to give away our charitable money.ย These assumptions must be tested over time through monitoring and evaluation, itself a growing field in China.

While Chinese audiences are curious about terms like Program Related Investments and Mission Related Investments known and used by many U.S. foundations, their entirely different legal framework means they will create their own nomenclature and practices. What will be similar isย that below-market mission investmentsย will increasingly be made acrossย asset classes, in the form of loans, loan guarantees, cash deposits, equity investments,ย and other investments made for specific purposes, like elderly care andย workforceย development.

Social Impact Bonds, or Pay for Success models, are being actively explored in China, with the city of Shenzhen aiming to be a locus of experimentation on these instruments and social finance more broadly. Sections of the book devoted to this topic, including famous case studies form the U.S. and UK,ย shouldย help expand the important exchange of lessons learned across national boundaries on this effort-intensive tool.

Getting Started in Impact Investing

RPAโ€™s impact investing workshops in China have emphasized the importance of preparation. Our early volume on impact investing listed sevenย steps in the cycleย that illustrate the investor preparation and reflectionย needed before a deal flow is even generated:

Given the complexity of this endeavor, philanthropists, foundations, and new investors will need to educate not only themselves,ย but their board, staff, and investment committees.ย This can be helped along byย providing examples of investments and what they should be looking for in investees,ย helping them identify whether they want to invest in funds or direct investments, andย creatingย user-friendlyย tools in-house to do this, orย finding and usingย external asset managers.ย Risks can be mitigated through the way investments are structured or management assistance.ย In China as elsewhere, some investees are more impact investment ready than others, a reality for whichย impact investors should simply plan.

Case Studies and Examples ofย Impact Investing andย Social Enterprise in the U.S. and Chinaย ย 

The bookย concludes withย severalย notable examples from the field ofย impact investment and socialย finance in the U.S. and China. The worldโ€™s most famous foundation is always a topic of interest in China, so a section describesย howย theย Bill & Melinda Gates Foundationย launchedย PRIsย in itsย programโ€ฏareas of education, international development, and global health.ย A second example isย Morgan Stanleyโ€™sย Institute for Sustainable Investing.ย Case studies onย social enterprises and social impact bonds in education in the U.S. offerย in-depth illustrations of the opportunities and challenges.ย Chinese case studies written by the Social Finance and Innovation Center of the China Global Philanthropy Institute focus on Dao Ventures, Tsing Capital, and the Aiyou Foundation. But whether examining the U.S. or China, the field is moving fast and there are a growing number of examples to learn from.

As the many examples and case studies in this book show, important factors for success are collaboration, patience,ย and communication. These are social endeavors that build on processes of listening, discovery, experimentation, sometimes failure, and integrating new knowledge of what works and what does not.ย Chinaโ€™s place in this landscape of philanthropy and impact investing is important, and rapidly evolving. Philanthropyย and impact investingย that crosses borders helps to increase the mobility of ideas and greater understanding between different cultures. We hope this book makes a contribution to that in the years to come.

****

More aboutย Impact Investment and Social Enterprise: Key Driving Forces of Social Innovation:

This book capturesย years of personal experience in philanthropy as well asย insights gained from well over thirty experts interviewed. The book discusses:

  • Partnerships between philanthropy and government;
  • The five steps in the Rockefeller Philanthropy Advisors Philanthropy Roadmap;
  • Keyย philanthropyย concepts;
  • How to manage impact investing, particularly for organizations and individuals who have been generouslyย givingย away funds;ย and
  • How to predict, measure and evaluate impact.

Weย also includeย case studiesย to further illustrate the concepts.ย For more information, please emailย [email protected].

Heatherย Gradyย is a Vice President in RPAโ€™s San Francisco office and leads the organizationโ€™s strategy and program development in global philanthropy, including collaboratives, global programs, research, and publications.ย Sheย also serves as an Adjunct Professor for the Executive Managementย in Philanthropyย Program at the China Global Philanthropy Institute.ย ย 

Back to News