It has been less than a decade since the varied concepts of socially responsible investing, corporate social responsibility, and generally “doing well while doing good” all got folded into the new idea of impact investing. But the Calvert Foundation has been at the cutting edge of the trend for even longer, as a nonprofit that channels proceeds of debt securities it issues into community development initiatives.

Margot Kane, vice president of strategy at Calvert, spoke with Nick Ashburn, director of emerging marketing strategies at the Wharton Social Impact Initiative, about the evolution of impact investing, the role it plays in emerging markets, and how to get capital to the high-impact projects that need it the most.

An edited transcript of the conversation appears below.

Nick Ashburn: Let’s start at the beginning. What is the Calvert Foundation, and where did you start?

Margot Kane: That’s a great question. We started thanks to the genius of our founders, Wayne Silby and John Guffey, who started the first socially responsible mutual fund company in the U.S., Calvert Investments. They really wanted to figure out a way to capture all of these incredible investment assets that are circulating through our markets at any given time, and direct them towards high-impact community development investments, both in the U.S. and internationally.

At the time, most funds — and most funds under management – were limited to investing in public equities and public debt. The kinds of high-impact projects that needed capital, in low-income communities especially, had no access to that kind of capital. So they created the community investment note, which is a way to basically bridge those pools of capital circulating in the much larger capital markets, and use that money to invest in the relatively smaller, niche, community development and international development markets.

Ashburn: We know that impact investing is a large umbrella term in the industry, but you all play a pretty unique role in that. Can you talk a little bit more about Calvert’s role in impact investing, and where you see your place in it?

Kane: We really view ourselves as one of the pioneers of the movement, from before it was called “impact investing.” It has had a lot of monikers over the years.

We have been doing it for 20 years. We’ve raised $1 billion from thousands of investors. And the “investors” part is where it gets interesting, because we raise money from retail investors — everyday people in the United States who have access to a checking account or a savings account, or a brokerage account. Basically, you can buy our securities based on the state you live in. That’s pretty unique in the impact investing world.

Partly because of regulatory barriers, and partly just because of the economics of it, most of those who invest for social impact are high-net-worth people or institutions. [But] we are able to  tap into a much broader market, which makes us very unique, and gives a totally different window to the capital markets for high impact investments in the U.S. and in emerging markets.

“We raise money from retail investors — everyday people in the United States who have access to a checking account or a savings account, or a brokerage account.”

Ashburn: Because you’ve been at this for so long, you’ve really seen the industry evolve. What are some of the big changes you and the Calvert Foundation have seen over time, and what are the trends that we should be paying attention to now?

Kane: Billions of dollars are starting to move into investing for social impact, so it’s a really exciting moment right now. You have this huge range, with philanthropic institutions that have been doing this for 20 or 30 years, paired with entities like Goldman Sachs or BlackRock that are just getting into it but have massive resources from Wall Street and their investor base to bring to bear.

But there are a few areas that the industry broadly is going to have solve for, and these are some of the trends that we are picking up on. One of the issues is scale. Let’s say if you take impact investing today, where you have an average fund size in any given market of … I’m just picking a number at random, but $30 million. And you have pension funds that — based on the recent Department of Labor issuance, and the ERISA [Employee Retirement Income Security Act] guidelines — have been told that they can now invest for social and environmental purposes as well. Say one of them wants to make investments in an impact investment fund.

Well, a pension fund’s minimum investment size is like $75 million. You have these tiny funds, and these large pools of capital, and there is very little intermediation between the two. So one of the things that we see happening in the industry is more people are focusing on building the channels of intermediation, which means creating a step-by-step process to allow that pension fund money or that foundation endowment money to be invested in a better society for everybody.

On the other side of the equation, where the money is being invested, we see a great explosion of a lot of different markets. It’s not just financial access anymore, which is microfinance, and small-business lending. Renewable energy is a really exciting space right now. Affordable healthcare services and innovative healthcare tech are exciting areas [as well]. Food access and food systems and processing are fast growing areas, which taps into the earlier fair trade, and producer/smallholder agriculture investments that many people like Root Capital have been doing for 20-odd years. It’s just growing all over the place, and it’s really exciting.

Ashburn: We’re seeing this explosion of interest in impact investing. How do you view competition in your space, especially considering which areas of the country, and in this market, that you play in?

Kane: Most of it is good. We want competition, because on the money-raising side of our business, we spend the vast majority of the time trying to explain to people in financial services what we are. We are always the square peg in a round hole. So the more square pegs there are out there, the more we will generally start to be accepted, and this will start to be a movement.

We’ll become more mainstream, and less “Oh, this is this niche little thing over here in the corner.” Which, by the numbers, it still is. Then, in terms of the investment area, competition is always good, right? It’s good for borrowers or people who are raising capital, because it lowers their cost of capital. There is, though, sometimes a lot of distortion in the market, where you have a lot of subsidized capital that can flood a market. And that is not good, because it will crowd out private capital.

There are some nuances to that, but generally speaking, thinking about how vast the resources of the capital markets are, the more competition the better because we’ve just got to keep growing the pot.

Ashburn: What are you seeing globally? We’re seeing impact investing being a real global movement. Are you focused only on the U.S., or are you focused on other emerging markets too?

Kane: About half of our portfolio is invested in emerging markets. We only raise our money in the U.S., that’s how we’re currently structured, but we often will co-invest with international investors and funds, from sovereign development funds to private international foundations.

One thing we’re seeing is a lot more institutional capital being mobilized, particularly in the E.U. and in the U.K. We’re also seeing a lot of interest in places like India to support impact investing. It tends to be limited more in the equity markets, which makes a lot of sense, partly because of the stage of development in emerging markets. You often need good equity markets to be functioning before you can have good debt markets functioning. Also, it’s where you can take a lot more risk, and investors are willing to bear more risk.

“Billions of dollars are starting to move into investing for social impact, so it’s a really exciting moment right now.”

Right now, you are seeing a surge — certainly in the private equity arena but less so in the fixed-income space, which is where we tend to specialize. We are often the first or only investor in a leveraged fund, where there are a lot of equity investors, and we’re coming in with a little piece of debt. Which is great, because we get to learn a lot.

But one of the biggest trends is this collaboration idea, which is that you need multiple kinds of capital, you have to stack the capital, in order to meet the market needs that you are trying to get to. And that usually includes grant capital for technical assistance and capacity building. Because if that market were already investable — if, for example, affordable private education in India, was already investable — chances, are the banks would already be investing in it.

The capacity on the ground needs to get built. You have to get creative with the sources of capital you are using, to responsibly meet the needs on the ground. That’s probably the biggest trend we’re seeing.

Ashburn: Thinking of those capital stacks, and the importance of grant capital, what implications do those factors have for the long-term viability of a market? How do you use grant capital effectively in the capital stack?

Kane: That’s a really, really good question, and it’s really critical, I think, to the survival of the broader industry. There are good examples and bad examples, but what I always remind myself is that, for example, the U.S. government subsidized our coal industry and our railroad industry for decades, if not centuries. And no one thinks of those as subsidized industries.

A lot of the markets we think of today as market industries have been subsidized, or continue to be subsidized in various ways. So the question of subsidies is a very complicated one. But thinking at the next level of granularity about grant capital, and where it is most useful, there are a couple of things that go into that.

One is leverage: Understanding that every dollar of grant money can either go straight into funding a program or straight into building a building, or it can be leveraged, five, 10, 20 times, if you are pairing it appropriately with private capital, as that first, risk-taking piece. And that is probably one of the most effective ways grant capital can be used.

“Renewable energy is a really exciting space right now. Affordable healthcare services and innovative healthcare tech are exciting areas [as well].”

On the other side, it’s essential in funding innovation and R&D in the industry. What kind of interventions really work to improve the quality of life for people that are living in poverty, or that are moving out of poverty? What sorts of civil infrastructure, what sort of public goods and services are most important?

Investors don’t have the resources to invest in that kind of R&D and say, “OK, this kind of intervention works in these scenarios, and here’s how we’re going to replicate and scale them.” Capital will come to that call to action, but philanthropy and public services have to fund it. And that’s not unique to impact investing in general. R&D in most industries requires some level of subsidy. I think those are two areas where we really need philanthropy to be active.

Ashburn: What are the challenges when you are working with retail investors, to doing this type of work and fitting into that capital stack?

Kane: We do have an extra burden of proof to demonstrate. … We can’t ask our investors to take the kinds of risks that institutional investors and foundations will take. Because people are investing their savings with us, and the state regulators are looking at that, and saying, “Hmmm, what are [they] doing with these people’s savings?”

We have to be incredibly prudent fiduciaries. We have to have a strong balance sheet, we have to repay everybody 100% and on time, which we have always done in the past. It’s not the kind of scenario where you can have a major misstep, go through a restructuring, and have everybody be OK. There’s no room for error when you’re this small and [fill] this niche in the retail investment market. We have to have perfect performance, and that’s a pretty high barrier when you’re on the frontline of a lot of these experiments with society and capital markets.