Capital Market Shaping: Redefining Investment Strategies
A range of investors challenge widely held assumptions about what capital could achieve.
Philanthropists and policymakers work with these investors to advance social and environmental goals. These activities take many names, but innovators start to recognize they are on a similar path. A field emerges with common language, efficient collaboration, and established practices for delivering and measuring results.
You may recognize this as the story of impact investing 15 to 20 years ago.
I hear loud and consistent echoes as a range of investors take on the challenge of shaping the capital markets themselves. There’s growing excitement about the role investors can play not just in deploying capital, but in redesigning the systems that determine where capital flows in the first place.
I hear these echoes in Jenn Pryce’s description of Calvert Impact’s strategy to address challenged markets in sectors and geographies both new and familiar (disclosure: I am an advisor to Calvert). And in Beth Bafford’s explanation of Climate United’s efforts to shape and accelerate markets for clean technologies so that the benefits of cheaper, cleaner, more reliable energy can reach more Americans, quickly.
In the last year, I’ve had dozens of quiet conversations with investors, foundations and policymakers about how to shape capital markets to finance under-capitalized solutions to a wide range of social and environmental challenges.
What is capital market shaping?
As Jenn and Beth describe it, capital markets resemble a dammed lake: capital pools behind the dam wall, while dry ground – full of potential – lies beyond. Traditional impact investing is like carrying buckets of water to nourish those dry areas. Over the last 20 years, the impact investing movement has organized an inspiring bucket brigade to shift pools of capital from foundations, family offices, and increasingly institutional investors to finance a wide range of crucial solutions.
Capital market shapers aim to build on this work by digging trenches—permanent channels that allow capital to flow more freely and sustainably to where it’s needed most. Impact investors enable trees to grow now. Capital market shapers aim to turn that arid land into verdant forests over the long term.
This isn’t just a metaphor. Capital market shaping names a set of practices, many decades old, just as impact investing was a new term in 2007 that described activities that had taken place for decades. As Chris Hughes details in his engaging new book, Marketcrafters, US capital markets have always been shaped by regulation and policy, from the national investment bank that helped revive the housing market in Roosevelt’s New Deal to restoring the stability of the financial system during the Great Financial Crisis.
Consider these examples:
Debt-for-nature swaps were first envisioned in 1984 and pioneered in 1987 as a way to unlock funding for forest and ocean conservation. The first deal between the Bolivian government and environmental nonprofit Conservation International led to additional swaps in the Seychelles, Ecuador and Belize. The proliferation of such debt-for-nature restructurings in recent years is reshaping the sovereign debt market into an ally to the environmental movement. Most recently, Builders Vision collaborated with the IDB to provide a $70 million guarantee for a “blue bond” with The Bahamas, the first for an impact investing family office. This reflects Builder’s founder Lukas Walton’s broader recognition that addressing climate change will take much more capital than even his sizable family office can muster itself. The concept of “debt-for… ” swaps is now inspiring proposals to adapt this idea to fund everything from rural agricultural lending to public health investments in Africa.
The Equitable Facilities Fund was launched in 2017 around a simple premise: that high-performing public charter schools should have access to the same financing for their buildings as public schools that are supported by municipalities that can issue bonds. Equitable Facilities Fund was seeded with a $200 million grant from the Walton Family Foundation, which had been supporting charter schools with grants for 20 years. The fund, designed with support from institutional asset manager, Nuveen, is building a new trench connecting charter schools to the deep pool of bond financing. Its investment-grade rated bonds have reached price parity with the municipal markets.
The affordable housing industry in the US is a decades-long result of capital market shaping efforts. Building on the transformational impact of the government-backed, 30-year fixed rate mortgage innovation of the 1930s, the industry was shaped by Ford and MacArthur Foundations and others seeding early community development companies starting in the 1960s. That funding aligned policy efforts that led to the passage of the Low Income Housing Tax Credit in 1986 and to growing the community development finance industry since the 1990s.
This decades-long trench building effort to connect capital markets to historically marginalized communities has supported the development of millions of units of affordable housing. Organizations like Impact Community Capital are building new trenches to bring institutional investment from pension funds and insurance companies into the affordable housing market.
Lessons for today’s market shapers
Patience. Capital market shaping is not for the short-term investor.
More than three decades passed between the early experiments with microfinance group lending in India and Bangladesh and the first institutional microfinance bond, issued by Morgan Stanley in 2006 that connected European pensioners to microfinance borrowers. A well-organized field can speed the diffusion of innovative approaches, but results will still take years or longer to become clear.
Perspectives. Capital market shaping requires collaboration with government because regulation has often molded the topography of the capital markets (the valleys and the dam walls that keep capital pooling where it goes). And because social and environmental benefits are hard to monetize, capital markets shaping solutions often require grant subsidies. Successful capital markets shapers know how to create compelling solutions that are profitable for investors and compelling for governments and funders. This often requires individuals able to build bridges between them.
The International Finance Facility for Immunization, for example, is credited with accelerating vaccination for 142 million children and raising more than $5 billion for the GAVI, the vaccine alliance, since issuing its first bond in 2006. The facility was developed in a collaboration between a pair of Goldman Sachs bankers in London and an official in the UK Chancellor’s office who had built professional trust over years of working together.
Perception. You can’t move capital without understanding what blocks it from flowing. Successful capital market shaping efforts are built on a foundational understanding of the barriers that prevent capital from flowing to high-potential opportunities. Too often, governments, and foundations especially, assume that investor bias and risk aversion explain their reluctance to invest. These factors may be present, but they often do not fully explain why capital market barriers exist. Not probing deeper leads many capital market shaping efforts to wither.
For years, various donors and governments have set up risk guarantee programs to entice African banks to make more loans to small and medium-sized agricultural enterprises. Aceli Africa, a nonprofit market catalyst, took a different approach. It spent two years gathering data on more than 9,000 loans from 30 lenders to understand how banks made or lost money on these types of loans.
The findings enabled Aceli to identify why banks remained reluctant to lend even with access to traditional guarantees and led Aceli to offer a novel form of risk-sharing paired with impact-linked operating subsidies. With each $1 of guarantee now supporting $9+ of bank lending, Aceli has enabled capital to flow from local banks to rural areas in an accelerating stream that has totaled $335 million since 2020 and could become a permanent trench with government reforms Aceli is advocating for now..
Where do we go from here?
The modern impact investing movement was galvanized ~20 years ago around the simple observation that while there is not enough money in philanthropy and government to solve all our social and environmental challenges, there is enough money in our capital markets. Impact investors have been shifting that capital to where it can solve social challenges. The trillions of dollars needed to address climate change, reduce wealth inequalities, finance technology that supports human flourishing, etc. dwarfs the amount of money we can mobilize through investing directly.
The need for trench building does not diminish the importance of bucket carrying. There are many opportunities to invest for impact now that will not be reached by trenches soon enough. And most impact investors are not in a position to mobilize the flexible capital, grants, policy advocacy, and communications campaigns that effective capital market shaping often requires.
For those who are in a position to build trenches, it’s time that we recognize capital market shaping as a distinct field worthy of attention. Capital market shaping is complex. It demands coalition-building, regulatory insight, product innovation, and long timelines. As with any high-stakes investment strategy, dabbling is a recipe for wasted capital and missed opportunity.
We know the playbook. As one foundation leader, who has studied how philanthropy seeded 20th-century fields like public health, put it: new fields thrive when people coalesce around a shared identity, clear ideas, and consistent practice. In early conversations and focus groups, capital market shaping resonates deeply as an identity—especially with impact-first investors managing flexible capital.
The next step is building the clear ideas and consistent practices that make a field: codifying the practices, connecting the pioneers, and investing in the repeatable tools and trusted intermediaries to accelerate this work. And we need to learn how to measure and manage the efficacy of capital markets shaping efforts that will require a different set of analytical approaches than deal- or fund-level impact measurement.
We’ve seen this before. We know how it begins. We can act with intention. And with the momentum behind the impact investing movement, we can shape capital markets to finally release the money needed to finance social and environmental resilience and progress at the scale commensurate with the challenges.
Antony Bugg-Levine is an impact investing advisor to foundations and family offices.
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