Have you noticed the new labels that are being attached to established sectors of the sustainability field? Resilience, for instance, now refers to risk management operations in the environmental sustainability sector. And Inclusion and Diversity (ID) is now a streamlined term for what was previously a major portion of Diversity, Equity, and Inclusion (DEI) programs.
In the capital investment space, many are now utilizing the phrase catalytic capital to refer to a branch of the market. The word catalytic refers to the goal of employing investment capital to “catalyze” (or initiate) meaningful change.
But isn’t meaningful change the goal of all impact investments? Yes, and to a certain extent, catalytic capital simply refers to a rebranding of a longstanding branch of impact capital. While relatively risk-cautious impact investors tend to seek market-level returns that are commensurate with market-level risks, catalytic capital investors tend to accept below-market returns and greater levels of risk.
Why would any one be attracted to lower returns and higher risk? It’s because catalytic capital investors tend to be more interested in jump-starting significant improvements in our environment, our society, and our economy. For instance, whereas a general impact investor may be content to allocate funds to a well-established utility company that offers generic renewable energy contracts, a catalytic capital investor may be more willing to invest in new transportation technologies that rely on miniaturized solar panels.
Investors who require technical information about the catalytic capital market may wish to begin their research activities by perusing the general guidance of the Catalytic Capital Consortium (CCC). Interestingly, the CCC defines the mission of catalytic capital investors as the achievement of the United Nations Sustainable Development Goals (SDGs). Many traditional impact investors, of course, adopt precisely the same mission.
For more advanced technical information, investors may need to review white papers and other specialized guidance. The Impact Finance Research Consortium of The Wharton School of the University of Pennsylvania, Harvard Business School, and the Booth School of Business of the University of Chicago, for example, has published a concise set of guidance titled Catalytic Capital in Impact Investing: Forms, Features, and Functions.
Investors who fit the profile of today’s catalytic capital community have always existed within the impact investment market. Now that a new label is being attached to this community, financial professionals must become familiar with its evolving terms, definitions, standards, and other professional guidance.
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