For Your Financial Radar: Social Impact Investing

Posted on Jan 17, 2013

In the course of writing TrendsWatch 2013, Phil Katz and I found many interesting leads that won’t make it into the final copy (coming soon), either because the trends aren’t quite well defined enough, yet, or because there just isn’t room for all the cool stuff we found.

One interesting trend that we left out: Social Impact Investing. This is a system under which governments put together hybrid public/private financing measures premised on pay-for-success. Simply put, social impact investing brings together:

From Bafford, 2012, Stanford Journal of Public Policy V3.1
The Feasibility and Future of SocialImpact Bonds in the United States

Non-profit entities that need start-up money to launch or scale up programs
Investors willing to take a risk with their money in return for a potential payoff that includes doing good as well as making a profit
Governments who need delivery of crucial services, but don’t have money to invest in innovative programs, and have a low tolerance for risk

The government entity contracting for services repays the investors if the nonprofit organization successfully delivers the results it has promised. If the nonpo falls short, the investors take the loss. The White House started promoting this kind of financing last year, and the Departments of Justice and Labor both began favoring, in their grants funding, programs that incorporated elements of this approach.

Philanthropy wonk Lucy Bernholz has tagged this as a developing trend. While we have only seen a few social impact projects so far, Lucy predicts in her new report for the Foundation Center—Blueprint 2013: Philanthropy and the Social Economy—that six new social impact bonds will be issued in the coming year.

I find social impact investing to be an intriguing approach to funding nonprofit work because it:

Tries to create a sustainable model for scaling up good works.
Addresses the downturn in government funding by providing a way for governments to fill critical needs by funneling support to nonprofits.
Forces nonprofits to quantify the good they do, and to be ruthlessly accountable for their results.

This recent article in the NYT profiles social impact investing experiments in prep or in process in New York, Connecticut, Massachusetts, Ohio and California. Most of these programs, as the journalist points out, involve addressing needs that, if neglected, cost society more in the long run —for example, programs helping people on parole find jobs or housing the homeless. That’s because social impact investing isn’t charity—it’s philanthropic capitalism. If the initial investment project proves, for example, that a city saves money on emergency room services when a nonprofit group provides preventative health care to the homeless, the city may transition to contracting directly with the nonpo for these services. The philanthropic contribution comes from the investors, in the form of the increased risk they assume (since they almost certainly could find a safer place to put their money were they only interested in financial ROI). This approach can help nonprofits develop a more stable funding stream: the funding priorities of a foundation are almost guaranteed to change over time, as program officers and CEOs come and go, but a city has to make pragmatic decisions based on their bottom line. Value for money is an enduring proposition.

Many museums would be hard put to name any existing goals they could fund via social impact investing. That doesn’t mean, however, that they will remain unaffected by the trend. The results-based accountability approach is increasingly informing other forms of government support, as well. In Wisconsin, for example, Republican Gov. Scott Walker proposed making public funding for schools, technical colleges and universities contingent on outcomes, including the employment rate of their graduates. When states, dealing with severely constricted income in the wake of the mortgage loan crisis, work on reducing expenditures, they may well question museum funding first. For several months,Louisiana Secretary of State Tom Schedler has been warning the 17 museums under his purview that they have to develop new sources of support, as the state continues to taper off their funding. If museums quantified how they help a state’s financial bottom line, would they be buffered from these cuts?

It is hard to measure the economic impact of many of the social goods that museums provide—things like increased happiness or better community cohesion. Which isn’t to say there is not a financial impact, in the long run, just that it is hard to capture. Recent research, for example, shows that social ties within a neighborhood may be as or more important than formal infrastructure in helping residents survive natural disasters. Community-centered museums help build these social ties.

But reading up on social impact investing made me think about what kinds of results-based programs with concrete, quantifiable financial impact museums could potentially fund with such bonds. Some examples that come to mind of museum projects that provide measurable economic benefits to local, state or federal government include:

Increasing literacy rates among at-risk students. Examples: The Tubman Museum of African American History’s “John Oliver Killens” student workshops have improved comprehension and test scores in math and reading for at-risk students in Macon, Georgia. The Milwaukee Art Museum plays an important role in the SHARP Literacy program–started by a former docent of MAM to improve reading and writing at 32 of Wisconsin’s most challenged schools. (Visits to the art museum are a key part of the award-winning program.)
Improving performance in STEM learning. Example: the “Urban Advantage” program, a collaboration between the Denver Museum of Nature and Science, the Denver Zoo, the Denver Botanic Gardens and three local school districts. Supported by a $3.27 million National Science Foundation grant, this five year collaboration is modeled on a partnership between the American Museum of Natural History and the New York City Department of Education. The goal is to improve science literacy among middle-school students in urban environments.
Lowering rates of childhood obesity. Example: The Children’s Museum of Manhattan’s Eat Sleep Play Family Health Curriculum. CMOM worked with the National Institutes of Health to adapt the NIH We Can! Obesity prevention program, and are partnering with United Way of New York City and the Administration of Children’s Services to integrate these educational methods into Head Start early childhood programs, and with the City University of New York Professional Development Institute to train childcare providers on healthy practices.

Keep an eye on the news, and see what pops up over the coming year as we test Lucy’s prediction. I think it unlikely that one of those six new bonds will go to a museum, but over a 10 year horizon? It is possible that social impact bonds will take the place of some of the government funding that used to flow to cultural organizations in less constrained times.

Elizabeth Merritt, Founding director of the Center for the Future of Museums, American Alliance of Museums

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