This is an excerpt of a Standford social innovation review article by David Wood

“Impact investing,” as a term of art, was coined at Rockefeller Foundation retreats in northern Italy in 2007 and 2008. The attendees visiting the foundation’s Bellagio Center near Lake Como—people working in organized philanthropy, asset management, social enterprise, and consulting—discussed how to describe the wide variety of their activities that had for decades engaged private sector money to help solve social problems. Their goal was to unite the disparate investment practices—involving everything from community development to clean energy to microfinance—into a larger field that could bring the scale of private capital markets to bear on the kinds of issues that philanthropy addresses.

In many ways, the ambitions and anxieties driving their conversations embodied a world that I have spent time in and work with—a collection of unique practices, people, outlooks, events, and organizations I think of as “Foundationland.” In this realm, philanthropic practitioners and those they fund gather at convenings like Rockefeller’s to debate and refine theories of change, all in the hope of making a better world. They build new mechanisms to measure and manage social impact. They identify levers essential to achieving their goals and use grants to help pull them. But those who live in Foundationland know that they do this at a remove from the world. In their conceptualization of impact investing, they view finance as a potent force in a real economy that is separate from philanthropy, a force that can be influenced toward better social outcomes. Impact investing also reflects the idea that foundations see themselves as less powerful than finance—it is a strategy that hopes to persuade institutional investors and wealthy families to do better for the world with their vast financial resources.

In 2009, the term “impact investing” made its public debut in Investing for Social and Environmental Impact: A Design for Catalyzing an Emerging Industry, a report from the Monitor Institute that was funded by the Rockefeller, Annie E. Casey, W.K. Kellogg, and JPMorgan Chase Foundations. The document laid out a plan for growing the field to both promote impact investing and change how conventional investment engaged with social issues. By promoting impact investing as an industry, organized philanthropy could do what it had helped do for microfinance—grow the field into a mature, commercially viable financial practice and make it, for a time, “the best brand in development,” as Antony Bugg-Levine and Jed Emerson wrote in their 2011 book Impact Investing: Transforming the Way We Make Money while Making a Difference.

A key challenge in building the field was, and remains, uniting the different cultures of financial institutions and foundations. Finance and organized philanthropy are often seen as opposites. One makes money; one gives it away. One is cutthroat; the other is communal. One is hard-nosed and efficient; the other is soft-hearted and fuzzy. And so on. (The almost absurdly caricatured gendering of these identities is its own topic to explore.) Even so, there is a significant upside to bridging the divide. Financial markets are an attractive target for philanthropy because they represent so much money—real money! The kind it takes to go from billions to trillions, the phrase used to describe the funding gap for the UN’s Sustainable Development Goals. And impact investing proponents sometimes see in finance a rigor and efficiency they feel philanthropy lacks. On the other hand, their colleagues in philanthropy may see finance as seeking profits at the expense of people and planet, externalizing costs onto society. From this point of view, impact investing is a tool to critique finance, to inject moral purpose into financial activity.

The field, and the foundations that support it, must navigate these tensions, alternately enticing, cajoling, redirecting, reimagining, or taming the field of finance. It’s an ambitious undertaking, and foundations have deployed a range of philanthropic tools to bring private capital to public purpose. How have impact investing advocates gone about trying to influence other people’s money? And what does this tell us about the challenges that come when philanthropy turns to the private sector? Breaking down the roles that foundations play in impact investing can help us answer these questions, and tell us something about the field more generally:

1. Exemplary Investor

The F. B. Heron Foundation pioneered a particularly influential model for investing foundation endowments for impact in the 2000s. It involves a foundation’s search for investments that mimic market returns as measured against conventional asset class benchmarks, but provide increased social value in comparison to their peers. One example is fixed-income investments that target low- to moderate-income areas while providing commercial returns.

The goal is to convince other investors that these choices are prudent—that there is no necessary trade-off between impact and returns. Foundation participation in these investments may also signal social value, creating a halo effect that pulls in other kinds of investors who believe foundations are better suited to evaluate social impact. By building a track record of success, pioneer investors open the door to their peers and other impact investors, and create demand for asset managers to create new impact investment products.

A challenge for this model is that it reinforces conventional investment benchmarks, subordinating social goals to financial imperatives. Foundations can also serve as examples by adopting measurements of portfolio success that break free from conventional benchmarks, a direction that the Heron Foundation is now headed.

2. Catalytic Capital Investor

Catalytic capital is a tool foundations use to entice conventional investors into a deal they typically would avoid. Foundations may accept a lower rate of return, subordinate their position, extend their time horizon, take on idiosyncratic risk, or do something else that conventional investors won’t or can’t. In some ways, this is easier than acting as an exemplary investor because catalytic capital can come from the grant-making side of the house, and so doesn’t challenge the financial conventions that typically govern endowment management.

Investments involving affordable housing provide a paradigmatic example. Foundations provide program-related investments that accept less return in exchange for subsidized rents. Their financial compromise attracts commercial investment by filling the gap between the returns commercial investors expect and a project’s funding requirements.

Catalytic capital deals take significant skill and creativity. Real estate developers sometimes call them “brain damage” deals, because of the complexity of meeting the various social and financial needs of multiple investors. These deals are also hard because neither the returns investors need, nor the social return that catalytic capital should receive, are always clear.

3. Intermediary Developer

Foundations play an important role in supporting the organizations who identify or launch much-needed impact investment products or find existing opportunities.

The support takes the form of grants or direct payments to asset managers for product development, resulting in impact investment funds focused on community development, offshore small- to mid-size enterprise, clean energy, or other social issue. Once intermediary developers of investment products have gained traction, they might move beyond the grant cycle and become self-perpetuating, commercially viable channels for impact investment capital. But in practice, many of them, especially those working in the most marginalized communities, require ongoing grant support to continue their work.

Foundations have also played important roles in developing capacity in existing and launching new investment advisors, the gatekeepers who link investors and products through their recommendations to investment committees. Building up these intermediaries makes impact investment possible, although there is a constant tension between the financial conventions that consultants employ—such as return, track record, and industry background—and the relative newness and idiosyncratic nature of many impact investment products.

Foundations may also try to challenge financial conventions through intermediary development, backing investment funds with unconventional investment propositions, return profiles, or governance structures. Or they may back place-based strategies that prioritize community control over the needs of investors. These intermediaries tend to be smaller in scale; they typically are not intended to attract commercial capital.

4. Data Provider and Standard Setter

When the Rockefeller Foundation began promoting impact investing, it emphasized the creation of metrics for social impact. It put forth two tools: the Impact Reporting Investment Standards (IRIS) to generate comparable data on social performance; and the Global Impact Investment Ratings System (GIIRS) to allow investors to compare the social impact of fund portfolios. The initiatives arose from the work done by philanthropically supported organizations like Consultative Group to Assist the Poor (CGAP), which provided research and advanced data disclosure in microfinance.

More recently, the grant-funded Impact Management Project (IMP) has sought to create broad consensus on impact measurement and management standards. Their effort encompasses a wide range of conventional and mission-oriented investors.

Foundations have also made significant grants to the Sustainable Accounting Standards Board (SASB). The organization has tried to change the information environment in which institutional investors make their decisions by creating disclosure standards for material environmental, social, and governance (ESG) data.

To be tractable to investment professionals, social performance metrics and disclosure standards are often designed to look like and serve alongside financial data. Organizations even name themselves to draw the worlds of profit and purpose closer together. For example, SASB intentionally invokes FASB (Financial Accounting Standard Board) to accomplish two goals:  to insist that conventional finance needs to account for ESG data, and to communicate that ESG information is as real and trustworthy for conventional investors as financial metrics.

But putting ESG data in a suit and tie doesn’t always mean they’ll be taken up. As Brian Trelstad, partner at Bridges Fund Management, senior lecturer at Harvard Business School, and an active participant in the formation of the IMP, wrote to me: “The flow of actual impact data that has been generated by these standards, to date, remains a relative trickle that the capital markets have largely ignored.”

5. Network Builders

Foundations have made considerable efforts to spread impact investing amongst their peers. The PRI Makers Network was formed in 2005 to accelerate foundations’ use of program-related investments; it merged a few years later with More for Mission, a network promoting the use of endowments for impact, to become Mission Investors Exchange. Foundations sponsor networks of investors devoted to the topic. The Global Impact Investing Network (GIIN) grew out of the Rockefeller Foundation’s program to convene asset owners, managers, and service providers who identify as impact investors. Other organizations include Confluence PhilanthropyToniicthe ImPact, and Pymwymic. Specialist associations for intermediaries have also grown with the help of foundation grants as well as membership dues. Specialist associations for intermediaries—such as Opportunity Finance Network (OFN) for community investment or the Aspen Network of Development Entrepreneurs (ANDE) for small and growing businesses in emerging markets—have grown their organizing and advocacy with the help of foundation grants in addition to membership dues.

These networks help bring coherence and community to the field, helping to set norms and standards. Their meetings provide places where investors challenge themselves and each other to change their behavior, and reassure each other that they can manage the risks of investing a different way. For some, they provide comfort that the field isn’t too risky. For others, they encourage risk-taking and a willingness to break free of convention.

6. Thought Leaders

Foundations support an array of publications, organizations, people, studies, and projects to help set the terms of debate around impact investing and shape the narratives of the field: papers by academics, research centers, and trade associations; conferences and other events; and speakers who evangelize impact investing.

This circulation of people and ideas, and the marketing opportunities it engenders, has helped define the field, producing the papers that new entrants read and investment funds and strategies they hear about at conferences and workshops. Research and its dissemination generate answers to field-defining questions like: How much money is impact investing attracting? To which issues does it flow? How are portfolios designed? How does impact investing comport with investors’ fiduciary duties?

Foundations can shape the investment landscape and process by integrating programmatic concerns like racial justice or climate resilience into engagements with investment consultants and asset managers. Here as elsewhere, the tensions between philanthropy and finance complicate their interaction. Foundations may argue the business case and try to demonstrate that the issues they care about negatively affect long-term returns; or they may try to subordinate financial imperatives to programmatic goals, rather than bending impact investments into profit-pleasing contortions.

Occasionally, foundation-backed research critiques finance itself: How should the field systematically change to better serve society? What are the perils of financialization? The answers filter into the impact investing conversation, although they aren’t the main fare on the conference circuit by a long shot.

What’s Next?

To date, foundations involved in impact investing have mostly played an inside game, trying to convince private financial actors that impact investing can fit into their ways of working, or at least that financial tools can be repurposed to achieve social goals. Much of their work involves banging social impact into a financial frame: Here’s social data that will sit alongside financial underwriting; here’s why climate change will affect the long-term returns to your portfolio. We understand what you need. We have something you can use. At the same time, philanthropy creates a starting point from which to critique finance: Here’s why you need to take social and environmental issues into account; here are ways to focus on social utility rather than profit. We think the system needs to change.

A bit more than ten years after the coining of the term, the challenges of the inside game are showing, not least because it reinforces financial logics that cause or exacerbate the problems that foundations wish to solve with impact investing. As Harry Hummels—a practitioner, advocate, professor, and researcher working in the field—wrote to me: “Sometimes I believe that Foundationland can (and maybe even should) help us to rethink and redirect the existing economic paradigm. … We need more radical change than what foundations—and the impact investors that receive their support—currently provide.” I hear this sentiment more and more, both in the hallways of conferences and in the language of systems change that has become more prevalent in public discourse.

If critiquing finance becomes more central to impact investing than embracing or enticing finance, then how will foundations respond? The six roles I’ve discussed here will surely remain—impact investing can’t exist as a field without engaging financial logics. But foundations may also play other parts—agitation and organizing, policy advocacy, building radically alternative investment channels—that look more like the roles embraced by critical outsiders.

There’s no escaping the tensions that are inherent to impact investing’s simultaneous critique and embrace of finance. But the mix of embrace and critique can lead to very different approaches to driving private finance towards public purpose. So far, a concern with financial returns has dominated the conversations about investing for impact. It’s time for a change. COVID-19, climate change, structural racism, and soaring economic inequality can’t be fixed with tweaks to our system—we need to ensure that financial returns are subordinate to, and serve, societal well-being. What would it mean for foundations to help make that happen?