Not quite two years into the implementation of the Sustainable Development Goals (SDGs), it becomes ever clearer that the cost to achieve these ambitious targets will be enormous. Yet the question of “who pays?” remains unanswered. The UN anticipates a need of roughly $4 trillion per year—an overwhelming sum that dwarfs public and philanthropic budgets. The key to financing and achieving the SDGs lies in mobilizing a greater share of the $200+ trillion in annual private capital investment flows toward development efforts, and philanthropy has a critical role to play in catalyzing this shift.
The last decade has witnessed an incredible change in the perception and understanding of social and environmental risk and return among institutional investors. These investors are finding that there are significant financial risks associated with poor ESG management—and moreover that growing demand exists for investments that yield both social and financial return. While we have reached a potential tipping point, the broadly-defined impact asset class remains relatively small and larger capital markets require a nudge from society’s risk capital (philanthropy) to reach their social impact potential. At The Rockefeller Foundation, we utilize both grant and program-related investment (PRI) funding mechanisms to enable, accelerate, and harness private capital markets in addressing the pressing social, economic, and environmental challenges of our times.
In many ways, the SDGs are more about financing than giving, and philanthropic organizations must use their uniquely flexible risk capital to broaden the appeal of investing in sustainable development while driving impact.
First, foundations can directly expand the pipeline of investable, risk-appropriate, and SDG-linked deals for investors by de-risking high-impact capital structures. By seeking below-market returns, philanthropic funding lowers risk and enhances returns for institutional co-investors. This type of blended capital model directly catalyzes investment in high-impact transactions while facilitating institutional investors’ participation in impact-oriented deals. For example, a group of foundations, including The Rockefeller Foundation, unlocked more than $300 million in lending for low-income housing in the United States through a $32 million subordinated PRI commitment to the NYC Acquisition Fund. The fund provided market-rate returns to investors and was able to finance a follow-on facility with less philanthropic capital.
Second, foundations must ensure their limited resources catalyze investment only in those transactions that meet a high threshold for impact, aligned with SDG and other philanthropic targets. As foundations, we must not only be selective about deal participation but must also leverage our risk capital to structure meaningful impact measurement and evaluation metrics within transactions. This approach offers a dual mandate for achieving maximum impact with philanthropic dollars, measured by both investment dollars catalyzed and impact differential achieved through participation. For example, The Rockefeller Foundation is currently evaluating an investment in a venture capital fund focused on smallholder agricultural development in India—on the condition that Rockefeller Foundation-developed impact metrics are integrated into the legal terms of the deal for all investors, the rest of whom are for-profit players.
Finally, foundations can indirectly expand the pipeline of investable and SDG-aligned deals by demonstrating the financial viability of high-risk, innovative financial structures—particularly in underserved regions of the world. Through our Zero Gap portfolio, we support a diverse array of new financial vehicles designed to generate market returns while addressing societal needs. To finance green infrastructure, for example, Zero Gap is funding the development of Environmental Impact Bonds—pay-for-performance U.S. municipal bonds—that provide cities across the country with capital to fund green infrastructure projects that have a positive environmental, health, and social impact, while also offering private investors a return. While the first iterations of such innovative financial structures are inherently higher risk, their potential to catalyze future commercial investment towards SDGs makes them an ideal investment for philanthropic capital.
Philanthropic capital is unique among capital markets participants with respect to its flexibility and impact-first mandate, along with its inherent partnership with and access to philanthropic expertise. PRIs and innovative finance-oriented grants are therefore uniquely positioned to in some ways act as social venture capital—mitigating risk, ensuring impact, and investing in innovation with the goal of enabling and spurring institutional capital to address development goals. And just like any bold venture capitalist, foundations cannot be afraid to fail in pursuit of these goals. The potential payoffs are immense.