Chapter 1: Overview
By Mark M. Newberg
What is Impact?
This is a common question. You might already have an answer you like (if so, great). You might be trying to define impact for the first time (if so, don’t worry). Either way, we can guarantee you’ve already encountered it before. In fact, you’ve probably generated impact, just using different words.
But that’s not really an answer. So, what is “impact”?
At the broadest level is something called the Impact Economy. This is an umbrella term and refers to a broad collection of for-profit, non-profit, and governmental entities using:
Rigorous management practices
To address endemic social issues
Plainly stated: if an organization is intentionally using its resources to solve an issue for the common good, it is part of the Impact Economy.
(To learn more about what this looks like in the context of governmental engagement, see this report from the District of Columbia’s Economic Strategy.)
Impact is the beneficial outcome or outcomes sought by an activity.
For example, “increased access to preventative health care,” “decreased carbon emissions,” and “improvements in educational achievement” are all specific, beneficial outcomes. They are “impacts.”
The process of achieving impact should include both:
Measurable outcomes (goals)
Management practices designed to deliver those outcomes
It’s not enough to say, “we want to have impact.”
We have to focus on the processes that enable us to generate (and measure) those outcomes—just like effective policymaking.
Impact frequently combines traditional private sector approaches (like business or investing) with public and/or philanthropic sector goals (like good job creation, reduced air pollution, or improved student achievement).
Blending approaches from these sectors creates greater impact that can be sustained over time.
Once you’re familiar with the most common organizational approaches and methods in the Impact Economy you’ll have a solid foundation from which to make more effective policy.
Here are the practices and terms you’re most likely to encounter:
For-Profit Sector
The for-profit sector is comprised of both businesses and investors. In the Impact Economy, both businesses and investors are focused on “doing good” and “doing well.” This intersection, where making money meets measurable benefit to society, is the defining feature of the impact-focused for-profit sector.
Impact Investing
Impact Investing involves investment funds, firms, institutions (whether for-profit, philanthropic, or governmental), or individual investors that invest capital with the intention of generating both:
a measurable societal benefit and;
a positive rate of return.
Impact investors deploy capital with the expectation that they will receive a return on investment (ROI). The expected rate of return will vary by investment and asset class.
Impact investors also expect that their investments will generate a measurable benefit to society. The expected benefit, and metrics for that benefit, will also vary by investment and asset class. But an impact investment should always have an intended impact that is clearly stated and clearly measurable.
Environmental, Social, and Governance (ESG)
ESG focuses on a set of measurable criteria for incorporating societal benefit into investment and corporate decision-making. The measurable criteria are organized into E, S, and G, with additional layers of detail for each. Frameworks include the GRI Standards, the SASB Standards, the EU Taxonomy of Sustainable Investing, BlackRock, Morgan Stanley, UBS, and Goldman Sachs.
ESG is an investment approach (generally focused on publicly traded companies), a management practice, and a reporting methodology. ESG was traditionally used as a tool by institutional investors to assess risks hidden inside a company’s supply chain, operations, and business model. Increasingly, effective implementation and management of ESG-related practices have been linked to improvements in corporate performance and reductions in future risk.
Impact Businesses
There isn’t a single type of impact business. And businesses that are “impactful” don’t always self-identify as “impact businesses.” But they’re all around. They range in size from self-employed individuals to large corporations, and everything in between.
For those that self-identify as “impact” businesses, you may hear them refer to themselves as “social enterprises” or “social entrepreneurs.” This means (generally) that the business has a specific societal issue it seeks to solve, through its business.
You may also hear businesses referred to as “B-Corps” or “Benefit Corporations.” This means that the business has chosen to pursue (and achieved) a specific impact certification (B-Corps). Or, the business has chosen as its corporate form a structure that requires it to state, and pursue, a specific social mission (Benefit Corporation). For more information, see here and here.
You may also encounter a set of businesses and think to yourself, “Isn’t what they’re doing impact?” Perhaps it is a provider of renewable energy. Or a developer of quality affordable housing. Or a manufacturer of recycled (and recyclable) packaging. In these instances, ask yourself:
Is the product or service they provide intentionally designed to address an identifiable social issue?
Are they addressing that issue directly through the product or service they provide?
Can the impact of the business’ product or service be measured?
If the answer to each of those questions is “yes,” then it’s likely an impact business.
Non-profit and Philanthropic Sectors
Non-profits operate by receiving donations, and then use those donations to meet specific social purposes embedded within their organizational missions.
They may also operate revenue-generating businesses, such as the Dog Tag Bakery, Homeboy Industries, and Cafe Reconcile. This type of non-profit may be financeable, in order to further their charitable missions.
Tax-exempt non-profits are designated as 501(c) organizations by the Internal Revenue Service.
Most non-profits are 501c(3) organizations, but additional nonprofit classifications also exist within the Internal Revenue Code.
Note: We discuss private foundations here, but foundations can also be public. For more information, see the Council on Foundations. Also, the Council provides a comprehensive Glossary of Philanthropic Terms here.
Private Foundations
Private foundations are tax-exempt organizations, established in order to further a specifically defined charitable purpose or purposes. These foundations are most frequently operated through an endowment model, where the endowment funds both the charitable activities of the foundation, and the foundation’s continued operations.
Foundations have many ways to fund, or generate, impact. These are three that you will encounter most frequently:
Grants
Grants are the primary vehicle used by charitable foundations to deliver impact. A grant involves the transfer of money from the foundation, to a qualifying organization, in exchange for that organization pursuing a designated set of activities. These activities must be in pursuit of the socially beneficial goals around which the foundation is organized (its charitable purpose).
As a general rule, a foundation is required to deploy at least 5% of its endowment toward this charitable purpose each year.
Grants are generally made with no expectation (or requirement) of money being returned to the foundation.
Program-Related Investments (PRIs)
A program-related investment is a specific tool available to foundations. A PRI allows a foundation to make an investment in an entity or activity, using money from its annual 5% allocation requirement, as long as the primary purpose is the pursuit of its charitable mission. PRIs can take many forms, including loans, equity investments, or guaranties, but they are made with the expectation of returns well below market-rate. PRIs can be made in either non-profits or for-profits, provided the primary purpose test is satisfied.
Mission-Related Investments (MRIs)
A Mission-Related Investment (or Mission-Related Investment strategy) is applied to the endowment side of a foundation.
You may hear this called the “corpus side.” It refers to the bulk of the foundation’s assets (also called the “95%”). These assets need to generate the “return on investment” that supports the foundation’s charitable activities, as well as the foundation’s ongoing operations.
A Mission-Related Investment is made when the foundation seeks to align its endowment (or a portion of its endowment) with its charitable purpose, in a way that generates “risk-adjusted returns.”
MRI approaches can include both active investments (a foundation invests in a specific fund or company whose purpose aligns with that of the foundation), or active realignment (a foundation exits investments in companies whose businesses are at odds with the purpose of the foundation).
MRIs must be “non-jeopardizing,” which generally means that they are made with an expectation of market-rate returns.
Here’s a handy chart to keep track of the distinctions.
Public Sector
If you are reading this Manual, the chances are that you have more than a passing familiarity with each of these governmental functions. You may work at the local, state, or federal level. You may work in the legislative branch, or on the executive side.
But the tools of government are the tools of your trade.
The government’s primary impact tools are policymaking and regulatory implementation. This can take the form of:
passing new laws;
implementing new (or updated) regulations;
providing low-cost financing to spur beneficial outcomes in communities; or
forging partnerships between multiple sectors to advance clear, beneficial goals.
However, there is one tool that is often overlooked. Especially at the intersection of “impact” and “policymaking.”
We call that tool “Existing Authorities.” Invariably, if you’re a policymaker, you’ve been asked to do (or create) something new. Often, this isn’t the fastest, most logical, or most effective way to achieve a goal.
This is especially true with impact. So, before determining that it’s necessary to draft new legislation, or form a new department, or promulgate a new regulation, ask yourself:
Do the authorities to achieve our impact goal(s) already exist?
What are they?
How can we best use them to deliver impact?
Those three questions might save you months of effort and deliver decades of impact.
The Importance of Management
Impact Management is essential for a policymaker to understand. As impact has grown from a compelling theory, to a daily imperative, managing how that impact is implemented has become increasingly important.
The late, revered, Harvard Business School Professor Clayton Christensen once wrote that, “management is the most noble of professions if it’s practiced well. No other occupation offers as many ways to help others learn and grow, take responsibility and be recognized for achievement, and contribute to the success of a team.”
With well-designed management and implementation of impact, the key to merging “doing good” and “doing well” is unlocked. Without it, your policies, no matter how well-intentioned, will just be words on a page.
No longer is it enough for novel theories to be offered. Instead, to bring these theories to scale, to grow from improving the lives of hundreds to benefitting millions across the country, you need simple tools that can be used at all levels.
The remainder of this Manual will introduce you to tools for good Impact Management. They are adaptable, with specialized tools for specialized sectors of impactful policymaking, so you can use the ones that make sense for what you— not everyone else—are trying to do. They are all crucial in creating better lives at scale. They are simple, flexible, and replicable. Most importantly, they can all be highly impactful in the hands of policymakers who care.
In your hands, these tools can and will improve the communities, sectors, and institutions you serve. And they will shape the legacy you leave for generations to come.
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What You Need to Know
The Impact Economy is an umbrella term for a broad collection of for-profit, non-profit, and governmental entities using:
Rigorous management practices
To address endemic social issues
Impact is the beneficial outcome or outcomes sought by an activity.
The process of achieving impact should include both:
Measurable outcomes (goals)
Management practices designed to deliver those outcomes
This means it’s not enough to say, “we want to have impact.” We have to focus on the processes that enable us to generate (and measure) those outcomes—just like effective policymaking.
Impact Investing
Impact Investing involves investment funds, firms, institutions (whether for-profit, philanthropic, or governmental), or individual investors that invest capital with the intention of generating both:
a measurable societal benefit and;
a positive rate of return.
Environmental, Social, and Governance (ESG)
ESG is an investment approach that focuses on a set of measurable criteria for incorporating societal benefit into investment and corporate decision-making. It is also a management practice and a reporting methodology. Increasingly, effective implementation and management of ESG-related practices have been linked to improvements in corporate performance and reductions in future risk. Frameworks include the GRI Standards, the SASB Standards, the EU Taxonomy of Sustainable Investing, BlackRock, Morgan Stanley, UBS, and Goldman Sachs.
Non-profits
Non-profits operate by receiving donations, and then use those donations to meet specific social purposes embedded within their organizational missions.
They may also operate revenue-generating businesses, such as the Dog Tag Bakery, Homeboy Industries, and Cafe Reconcile. This type of non-profit may be financeable, in order to further their charitable missions. Tax-exempt non-profits are designated as 501(c) organizations by the Internal Revenue Service.
Most non-profits are 501c(3) organizations, but additional nonprofit classifications also exist within the Internal Revenue Code.
Private Foundations
Private foundations are tax-exempt organizations, established in order to further a specifically defined charitable purpose or purposes. These foundations are most frequently operated through an endowment model, where the endowment funds both the charitable activities of the foundation, and the foundation’s continued operations.
Grants
This is the first tool that private foundations use to fund impact. It involves the “granting” of dollars, towards a defined charitable purpose, with no expectation of a financial return. It is, perhaps, the most well-known philanthropic function.
Program-Related Investments (PRIs)
This is the second tool that private foundations use to fund impact. These are investments made from the “program” budget of the foundation. They must be made in pursuit of a specific charitable purpose, and are generally made with the expectation of lower rates of return.
Mission-Related Investments (MRIs)
This is the third tool that private foundations use to fund impact. These are investments made from the “endowment” side of the foundation. They must be in “non-jeopardizing” assets, and are designed to align with, and/or not counteract, the outcomes the foundation seeks to achieve through its charitable work.
Public Sector
The government’s primary impact tools are policymaking and regulatory implementation. This can take the form of:
Passing new laws;
Implementing new (or updated) regulations;
Providing low-cost financing to spur beneficial outcomes in communities; or
Forging partnerships between multiple sectors to advance clear, beneficial goals; and
Existing Authorities, or the use of powers already in existence (without requiring new legislative or rulemaking processes).
When embarking on a new initiative intended to achieve impact, always ask:
Do the authorities to achieve our impact goal(s) already exist?
What are they?
How can we best use them to deliver impact?