Nextracker - SJF Ventures III - courtesy of MacArthur Found

Why Impact Investing Needs Philanthropy and Catalytic Capital

By Debra Schwartz, MacArthur Foundation

Above photo from Nextracker (an SJF Ventures III portfolio company); Courtesy of MacArthur Foundation

Debra Schwartz - MacArthur FoundOver the past several years, the global impact investing field has expanded like never before. Looking ahead, it is worth considering what impact investing’s further growth and mainstreaming could mean for philanthropy and foundations and the dynamic role they have long played.

Informed by almost 40 years and more than $700 million of impact investing, the John D. and Catherine T. MacArthur Foundation sees three main ways that philanthropy should continue to engage.

First, grant funding is needed to support further development of sound, widely accepted standards and policies for impact measurement and verification. Second, foundations provide critical support to the networks, experts, and thought leaders who help investors, investment advisors and asset managers connect, learn, and innovate. Third, philanthropy can practice impact investing directly.

By example and through partnership, foundations help advance growing engagement in values-aligned and sustainable investing. And, by leveraging our rich legacy of catalytic capital leadership, foundations help the impact investing field expand and accelerate its progress toward a more just, resilient, and inclusive world. Pioneered by the Ford Foundation and followed by the Packard and MacArthur foundations in the early 1980s, catalytic capital is patient, risk-tolerant, and flexible investment that seeds, scales, and sustains impact-generating organizations, usually with the goal of mobilizing capital from other sources, often in large multiples. This can happen by shifting risk and return through a guarantee or blended finance structure, or by making an early bet that helps an unproven but promising enterprise build its scale and track record to attract more investors over time.

Our experience as an early investor in the U.S. field of Community Development Financial Institutions (CDFIs) demonstrates the important role of catalytic capital and its lasting, outsize impact. In the early 1970s, pioneering, community-focused development banks and loan funds arose in Chicago and elsewhere, often in direct response to the devastating policy and practice of redlining, which denied Black and under resourced communities access to mortgages, insurance, and other essential forms of capital for decades. The early impact investments made by the Ford and MacArthur foundations throughout the 1980s and 1990s helped seed and scale dozens of promising new loan funds, banks, and credit unions. By 1998, CDFI leaders made the case for a new U.S. Treasury program which accelerated the industry’s spread and development nationwide.

When the COVID-19 pandemic reached the U.S., roughly 1,300 certified CDFIs were at work nationwide, managing more than $222 billion in assets. Through fast action and collaboration, backed by foundations and mission-driven family offices, they provided critical financial support to hard-hit small businesses—during the pandemic’s early days and as mainstream lenders implementing the federal government’s massive Paycheck Protection Program left out thousands of eligible nonprofits and small businesses, many led or owned by women and people of color.

Next, when the murder of George Floyd, nationwide protests, and a widespread racial reckoning motivated corporations, foundations, and individuals to finance Black and Brown communities and entrepreneurs, CDFIs met the moment again, with established capacity and ready opportunities.

Ultimately, these recent events and other developments helped to draw billions of dollars in new public and private capital to CDFIs over the past few years, including major donations from philanthropist MacKenzie Scott and both grants and investment from Google and other firms.

As an early and longtime CDFI investor, we found this surge of engagement and new resources incredibly exciting. It showed us that $300+ million in catalytic capital, provided to the earliest CDFI pioneers and to other promising groups over time, had ultimately helped build a durable infrastructure for impact at a scale we never imagined originally—with strong potential to continue multiplying the results of our original catalytic capital investments in the decades ahead.

The trajectory of a pioneering “triple-bottom-line” impact capital manager, now known as SJF Ventures, illustrates the lasting and outsize impact of catalytic capital invested in a for-profit, growth equity fund. In 1999, MacArthur made a $1 million investment to help this unproven, mission-driven fund manager seeking to find companies that could generate quality jobs and a greener economy as well as outstanding financial returns. If SJF could successfully demonstrate its innovative approach, its later funds should prove compelling to endowments, pension funds, and other institutions with relatively conventional risk-return objectives and capacity for sizable investments.

Today, SJF has raised and managed five funds, launching its most recent one in 2021 with $175 million in capital from dozens of leading endowments, pension funds, and accredited individual investors seeking risk-adjusted, market-rate returns and authentic social and environmental impact.

Along the way, it has invested in 81 companies which have created more than 12,000 quality jobs across 25 states and that mitigate more than 3 million metric tons of CO2 annually. The positive ripple effects of MacArthur’s $1 million investment in SJF have continued well beyond anything we could have predicted all those years ago.

MacArthur’s 20 year affordable rental housing initiative also shows how catalytic capital can fuel social innovation, strong organizations, and infrastructure for ongoing impact. Abt Associates, in a 2020 evaluation, found that direct enterprise loans MacArthur made to support leading, nonprofit housing developers from 1999-2011 helped these organizations accelerate their growth, strengthen their finances, and generate substantial impact. The affordable rental properties they preserved and improved while our loans were active, plus remarkable results they have continued to achieve, benefit tens of thousands of lower-income seniors, families, and individuals with special needs in communities across the country. Likewise, the New York Housing Acquisition Fund and other, multi-investor funds that MacArthur helped establish have demonstrated how catalytic capital can drive innovation, mobilize other investment through a blended finance structure, and yield lasting impact. Since launching 17 years ago, the fund has deployed $533 million help preserve or create more than 14,000 units of affordable rental housing.

Looking ahead, we anticipate similar long-tail impacts from other elements of our current $500-million portfolio, including a growing set of climate-related investments, over $100 million dedicated to Chicago, and ten funds and NGOs chosen for investment through our Catalytic Capital Consortium initiative.

To help the global impact investing field expand its reach and deepen its impact in the years to come, philanthropy must help catalytic capital secure a strong and enduring role: fueling innovation, cultivating both promising and proven institutions, and supporting enterprises with exceptional impact but moderate returns and/or outsize risk. By working with today’s dynamic, fast-growing community of catalytic capital practitioners, and with other investors across the capital spectrum, we can use catalytic capital to help unleash additional resources and powerful impact to meet our world’s current and future challenges.

 

Article by Debra Schwartz, managing director for impact investments at the John D. and Catherine T. MacArthur Foundation and serves on the Executive Leadership Team of the John D. and Catherine T. MacArthur Foundation – a private, global philanthropy with approximately $6 billion in assets and annual grantmaking of roughly $250 million. A pioneer in impact investing, MacArthur has dedicated $500 million of its assets to this purpose. Debra’s group serves as a Foundation-wide resource and engages deeply with selected program teams to devise impact investments that advance key goals. Her group also makes investments and grants that advance innovation, knowledge and connection throughout the impact investment ecosystem, with a focus on fostering the use of catalytic capital.

Debra joined MacArthur in 1995, having previously worked as an investment banker at John Nuveen & Co., and as CFO for a nonprofit child welfare agency. A frequent speaker and guest lecturer, Debra was a presidential appointee to the United States Treasury Department Community Development Advisory Board and a founder of the Mission Investors Exchange.

She holds a master’s degree from the Kellogg School of Management at Northwestern University and a bachelor’s degree from Yale College, summa cum laude.

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