Background

Impact investing field-builders have demonstrated increasing interest in additionality—ensuring that investments generate impact that likely would not occur without their involvement. However, confusion surrounds various terms used to describe approaches that intend to achieve additionality. Two terms in particular, “impact-first” and “catalytic,” are often used interchangeably or ambiguously, potentially confusing practitioners unfamiliar with them. This memo presents findings from a review of reputable sources to delineate where these terms overlap and differ in meaning. The appendix provides an overview of sources consulted.

Findings

Across sources, impact-first investing consistently refers to investment strategies that prioritize achieving deep social or environmental impact over competitive financial returns. Impact-first investors are willing to accept concessionary returns in pursuit of their impact goals. This strategy occupies a space between traditional grantmaking and market-rate investments. It allows for some financial return but is fundamentally driven by the desire to maximize impact. There was no evidence in the reviewed literature of the term being used to refer to sequencing, where an investor prioritizes market-rate returns but identifies as impact-first because they screen for impact before screening for return potential. Instead, definitions of impact-first investing uniformly emphasize the acceptance of financial trade-offs to achieve greater impact.

According to the sources reviewed, catalytic capital is closely related to impact-first in that it also accepts concessionary returns, but it carries three additional nuances:

1. Catalytic capital has a more explicit focus on unlocking further investment. Often catalytic capital plays a role in crowding in mainstream investors by taking on disproportionate risk or providing patient, flexible capital that enables other investors to follow.

2. Definitions of catalytic capital often refer to disproportionate risk in addition to concessionary returns. In practical terms, disproportionate risk should mean concessionary returns over time if “disproportionate” refers to how risk is compensated, but this is still a nuance worth noting.

3. Market-building potential is emphasized more commonly in definitions of catalytic capital than in definitions of impact-first investing. For example, ImpactEurope’s definition notes that catalytic capital can “facilitate the testing and expansion of models that can create new markets.”

In summary, impact-first investing and catalytic capital are closely aligned in their acceptance of concessionary returns, but catalytic capital seems to be more expansive, relating more broadly to 1) crowding in other investors, 2)  acceptance of disproportionate risk (in addition to below-market financial return) as a vehicle for achieving additionality, and 3) building new commercial models

Appendix: Sources consulted

Sources on impact-first investing

Bridgespan — “Back to the Frontier: Investing that Puts Impact First”
https://www.bridgespan.org/insights/investing-that-puts-impact-first
In short, impact-first impact investing puts people and planet ahead of financial returns. Putting impact first doesn’t mean, as some fear, bad investing, or that you don’t care about returns. It simply means that the returns that matter most are measured in lives changed, not solely financial gain.
Impact-first investing stakes out an unfamiliar and largely neglected middle ground between market-rate impact investments and philanthropic grants. Practitioners often call this underused form of investment “catalytic capital” in recognition of the fact that, but for impact-driven investors, viable enterprises would never get a chance to deliver their full impact.

Bruce Usher — “Impact First Investing,” Chapter 14 of Investing in the Era of Climate Change
https://www.degruyter.com/document/doi/10.7312/ushe20088-016/pdf
Impact first investors focus on solving social and environmental problems and are willing to accept a below-market financial return in exchange for greater impact. An impact first strategy is, therefore, not a better way to invest, but it might be a better way to solve climate change.

Morrison & Foerster — “What Is Impact Investing?”
https://www.mofo.com/impact-investing/what-is-impact-investing
These investors primarily seek to maximize the social or economic impact of their investment. Financial returns, if there are any, are a secondary goal.

Social Finance — “The Untapped Potential of Impact-First Investing”
https://socialfinance.org/insight/the-untapped-potential-of-impact-first-investing/
Increasingly, market-based impact solutions are emerging that are unable to attract commercial capital—either because investment strategies are unproven or because market rate financial returns are not possible given impact goals for the communities they aim to serve. In these cases, “impact-first” impact investing is more appropriate. Rather than finance these solutions via grantmaking (i.e., with a -100% financial return), impact-first investing enables the achievement of deep impact while generating some financial return.

Sources on catalytic capital

Catalytic Capital Consortium website
https://www.macfound.org/programs/field-support/impact-investments/catalytic-capital-consortium/
Debt, equity, guarantees, and other investments that accept disproportionate risk or concessionary returns compared to a conventional investment in order to generate positive impact. The aim of catalytic capital is to unlock additional investment that would not otherwise be possible.

Harvey Koh — “5 Myths Preventing Catalytic Capital From Going Where It’s Needed” (SSIR)
https://ssir.org/articles/entry/impact-investing-catalytic-capital-myths
Capital that is flexible in pursuit of positive impact that otherwise would not be possible, typically because it accepts disproportionate risk and/or concessionary returns.

ImpactEurope — “Catalytic Capital 101”
https://www.impacteurope.net/insights/catalytic-capital-101
Catalytic capital intentionally fills gaps left by mainstream finance, in pursuit of social and environmental impact that otherwise could not be achieved. As a fast-growing subset of impact investing, it is a relevant approach to seeding, scaling, and sustaining impact-driven solutions in underserved and underfunded areas. It helps impact enterprises start innovative projects, build a track record to attract follow-on investors and support their long-term impact and financial stability, facilitating the testing and expansion of models that can create new markets.

Impact Terms Project — “Catalytic Capital”
https://www.impactterms.org/catalytic-capital/
In essence, catalytic capital is investment capital (debt, equity, guarantees, etc.) with which the investor accepts reduced financial expectations in order to bring about a greater social or environmental impact.  Lowered financial expectations refers to not only higher risk or lower return profile, but also a longer liquidity window or subordinate position in the investment structure than a more conventional investment. Other terms for this type of capital include concessionary capital, patient capital, and flexible capital, among others.

Mission Investors Exchange — “How Foundations Are Using Catalytic Capital to Amplify Their Impact”
https://missioninvestors.org/resources/how-foundations-are-using-catalytic-capital-amplify-their-impact
Catalytic capital investors often accept lower returns or higher risk than others to ensure that a deal succeeds. Their investments attract mainstream investment dollars to more high-impact projects or sectors that don’t fit the parameters of traditional investments, because of the economics of the industry, the nascency of the market, or factors unique to the deal. In many cases, foundations can play an important and particular role in investing in this manner.

Tideline — “Catalytic Capital: Unlocking more investment and impact”
https://tideline.com/wp-content/uploads/2020/11/Tideline_Catalytic-Capital_Unlocking-More-Investment-and-Impact_March-2019.pdf
The term catalytic capital has been employed in different, nuanced ways over the years. In the interest of building on those uses and moving the conversation forward, we define catalytic capital as debt, equity, guarantees, and other investments that accept disproportionate risk and/or concessionary returns relative to a conventional investment in order to generate positive impact and enable third-party investment that otherwise would not be possible.

Wharton ESG Initiative — “Catalytic Capital in Impact Investing: Forms, Features, and Functions”
https://esg.wharton.upenn.edu/wp-content/uploads/2023/09/Catalytic-Capital-in-Impact-Investing-Forms-Features-and-Functions.pdf
Catalytic capital refers to debt, equity, or other investments that accept disproportionate risk and/or concessionary returns compared to conventional investments. The objective of catalytic capital is to generate positive impact and enable third party investment that would not be possible with higher return expectations, lower risk tolerance, or less flexible/patient investment terms.