For years, philanthropy and investing have been treated as separate disciplines—one championing social change, the other financial gain. The idea that the two approaches could be integrated in the same deals once struck most philanthropists and investors as far-fetched. Not anymore.
Impact investing, which seeks to generate social and/or environmental benefits while delivering a financial return, is expanding as a promising tool for both investors and philanthropists. From the US SIF Foundation’s 2016 Report, assets under management that incorporate ESG (environmental, social and governance) considerations totaled $8.72 trillion—which represents a 33 percent increase over 2014.
If your clients haven’t yet asked how to better align their values with their portfolio, they soon will. No longer an either/or question, impact investing and philanthropy can be complementary in a socially committed investor’s portfolio.
Five Ways Impact Investing And Philanthropy Can Complement Each Other
1. Impact investing makes more money available to drive social change. Investment capital vastly outweighs government spending and philanthropic funds. In the United States, 2017 philanthropy was approximately $390 billion, government spending was $3.9 trillion, and capital markets (all debt and equity investments) encompassed $65 trillion—an order of magnitude difference between each. Though philanthropic dollars are more flexible towards impact, investment dollars allocated with a thoughtful impact lens have the potential to make enormous impact due to the scale of available capital.
Even those who already have a private foundation can make use of investments to drive more impact. In addition to the 5 percent required annual minimum payout, they can leverage the other 95 percent —the endowment—to help drive the change they are seeking. These investment returns can be reused over and over again to compound the impact.
When applied intentionally to specific social causes, impact investing has the potential to bring more capital and fresh approaches to targeted issue areas. For example, efforts are growing to coordinate impact investing with the United Nations Sustainable Development Goals (SDGs), the global goals established in 2016. The 2018 GIIN Annual Impact Investor Survey found that 76 percent of investors reported are actively (or soon will be) tracking the financial performance of their investments with respect to the SDGs.
2. Considering philanthropic goals when deploying capital can reduce misaligned outcomes. When the two traditional mindsets of investing and giving are not aligned, investment holdings have the potential to work in opposition to impact goals. For example, a family may pursue high investment returns through significant oil and gas exposure while directing its charitable giving toward combatting global warming. Taking a holistic approach can change this potential disharmony.
Though this may sound complicated, there are some relatively easy ways to move these investment dollars towards impact. For example, an investor can easily move cash from a traditional bank to a community bank, which in turn can provide loan capital to under-resourced communities.
3. Impact investing can help companies and nonprofits towards both sustainability and impact. Socially minded organizations, especially nonprofits, can often benefit from a measure of organizational efficiency. Sound internal operational and financial practices can lead to more effective and sustainable social organizations. For example, a nonprofit can grow its budgeting and cash flow management skills when receiving a loan as opposed to a traditional grant. Assuming fit and readiness, impact investments can encourage nonprofits to use market-based approaches to create social good.
For more traditional investible companies, impact investors can help companies remain attentive to their impact on the world. There is a growing movement of active shareholders encouraging companies to employ sustainable practices, in addition to the broader influence of conscious consumers and employees.
4. Philanthropy can help produce a viable pipeline of impact companies for traditional investors. Philanthropic dollars are risk-free capital. Every grant is a guaranteed 100 percent financial loss for the donor. How does this inform one’s investment mindset? Freedom. Freedom to pursue uncertainty, to have a long time horizon, and to go where other money might not go. In other words, philanthropy can be risk capital, patient capital or early capital in order to prove models and seed companies for institutional money to follow.
A loan guarantee is one example of this “risk-free” capital, allowing a social enterprise to access credit at a favorable rate. Consider the Catalyst Fund, which—with philanthropic support from the Gates Foundation and JPMorgan Chase—addresses a common problem among early-stage startups in the inclusive financial technology (fintech) space.
Young fintech enterprises are often challenged in securing the capital and expertise to complete and test their products. Colloquially known in business as “the valley of death,” this resource gap limits innovation and impact. The Catalyst Fund helps solve this problem by seeding and mentoring 20 innovative fintech startups annually that promise to shape the future of global financial inclusion. The Fund illustrates how the blend of philanthropic and investment dollars can be used to develop promising business opportunities.
5. Philanthropy can help develop the impact investing field through research and knowledge transfer. Philanthropy plays a key role in advancing critical impact investing infrastructure and insights through associations, benchmarks, market-mechanisms, regulation and research.
Impact investing practitioners across the impact/return spectrum are better informed and empowered because of associations such as Confluence Philanthropy, GIIN, Mission Investor’s Exchange, TONIIC, UN PRI, and many others. While member dues play a role, philanthropic dollars empower these associations to provide key services, collaboration and tools as more families and foundations seek education and best practices for blending their giving and investing capital.
Getting Started
Some clients may find it daunting to integrate giving with their investment strategies, but there are simple ways to begin merging the two depending on the desired approach. A few quick tips are to:
• Start from strength. If your client knows a charity well that has revenue generation dimension to its operations, they may want to consider a loan in addition to philanthropic gifts. If your client is coming from an investment angle, they might slowly integrate an ESG consideration to a portion of public equity holdings.
• Consider aligning impact goals for both philanthropy and investing. Review your client’s current and potential portfolio for social or environmental challenges that might be better served by an investment than a grant; and evaluate investment strategies in light of philanthropic goals.
• Focus on a single or small set of investment opportunities. This can help your client feel comfortable moving forward with their first investment, and towards increasing the social as well as the financial impact of their portfolio.
For more insight on getting started, refer to Rockefeller Philanthropic Advisors’ guide on Impact Investing: Strategy & Action.
Patrick Briaud leads impact investing services at Rockefeller Philanthropy Advisors and helps individuals, foundations and corporations use a range of assets to achieve their social impact goals. He is a frequent speaker at investing, philanthropy, and impact investing events. Patrick’s background includes investment management and professional tennis.
To learn more about impact investing, read RPA’s newest Philanthropy Roadmap guides: Impact Investing: An Introduction and Impact Investing: Strategy and Action.