What Happened?
A paper from Living Cities and ImpactAssets makes the case for municipalities to utilize state and federal grants to prepare transactions for impact investments while reducing risk. Impact investments focus on producing social and environmental changes, not just generating profit, and can benefit from sustainable financing models.
The Goal
According to Living Cities and ImpactAssets, investing has been separated from philanthropy and grantmaking in the past. However, the emergence of impact investing suggests an opportunity for investment practices to be applied to socially-focused projects led by local governments or nonprofit organizations.
The research argues state and federal grants can be used as the foundation for socially-driven financing models that attract impact investors. Impact investing generates funding from different types of capital, including grants. If grants are structured in a way to attract more impact investments, municipalities may be able to take the funding farther for more sustainable projects, and financial and social returns.
TOAH Fund
The paper illustrates how grants have been used in several cities to increase impact investment and expand the reach of the initiative. One such example is the Bay Area Transit-Oriented Affordable Housing (TOAH) Fund, which is a $50 million fund providing financing for affordable housing and community services development along transit lines in the San Francisco Bay Area.
The fund makes capital available to developers interested in building housing and commercial units near transit lines, which help support rising population demands and economic growth. The Metropolitan Transportation Commission invested $10 million into the fund, acting as a grant. The $10 million grant accepted the most risk in the project, which made the fund attractive to three types of impact investors looking to accept less risk. An additional $40 million in capital was then obtained from a variety of impact investors in the private sector, all based on the foundation of capital from the public sector.
Evolving Impact Investing
According to a study from JP Morgan Social Finance and the Global Impact Investing Network $10.6 billion in impact investments were made in 2013, and $12.7 billion has been committed to this year by investors, marking a 19 percent increase year-over-year. Furthermore, 70 percent of impact investments are being placed in emerging markets where there is a strong focus on both financial and social changes with each project.
Devex reported impact investing is being used by companies in emerging markets interested in using market-based solutions to overcome development challenges. Impact investing offers the potential to scale projects faster and more effectively where market-based approaches are possible compared to just donor funding. To do so, however, definitions, measurements and achievements must be altered to speak more directly to traditional capital markets:
- Language: Impact investing is typically equated with funding high-risk social enterprises. Using grants to absorb more of the risk, municipalities may attract more risk-conscious investors.
- Measurements: It is difficult to track results of impact investments. The Global Impact Investing Network has created a common set of metrics and methodologies to benchmark progress for more transparent reporting to potential investors.
- Track Record: Similar to measurements, showcasing positive results of investments can be challenging. A system to demonstrate viability of investment is in the works. Until then, projects can partner with organizations with an established track record to generate credibility.
Devex also points out the importance of establishing realistic growth potential upfront. Some impact investments may achieve scale, while others will not.
GrantFinder
Gov1 not only offers news about grants used by local governments nationwide, but a grants database is also available to search funding sources.