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.