January 10th, 2013

The consequences of impact investing on philanthropy

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January 10th, 2013

As the investment culture expands from simply the bottom-line of profit to an increased focus on the triple bottom-line of social enterprise (social, environment & profit), philanthropy will continue to be an essential catalyst in unlocking the potential of impact investing. However, these game-changing funding models may not achieve the necessary scale to produce a profit without some initial subsidies. In this new climate, it is difficult at times to keep up with the jargon and modern nomenclature. Many articles interchangeably refer to fledgling terms, such as venture-philanthropy, mission-related investing, impact investing, and social finance, etc. Also, because of the proximity of these terms, they are often treated as instruments of philanthropy, when they are much better represented in the investment domain.

With the rise of GIIRS, B Corp certifications, social and/or environmental impact metrics etc., it is clear that investors are collectively caring more about society and the environment, and not just profit. However, due to various reasons of scalability, growth rates, financial traction and the relative novelty of impact investing, donations are often required to top off successful investments. This is why bridged terms such as venture-philanthropy are being introduced, as they reflect the heterogeneity of impact investing. However, these terms are often also used to describe ‘new ways of being philanthropic,’ which is where the discourse goes off-track. For example, if philanthropists are introducing new dollars to make impact investments, they are being more philanthropic; but if philanthropists are taking previously allocated dollars for donations and redirecting them to impact investments, they are being less philanthropic. This distinction is not being made clear in the evolution of the investment culture.

Furthermore, many charitable activities cannot rely on the free-market system to dictate whether or not they are necessary or should be funded. Thus, Canada needs a strong philanthropic sector to ensure the sustainability of charitable services and programs; a sector that is not influenced by any potential monetary biases (which are inextricably linked to impact investing). So it is important to distinguish between philanthropy and impact investing, as well as any hybrid-nature of the two. This is because impact investing can actually hurt the charitable sector if confused with philanthropy. Returning to the previous example, if philanthropists begin to convert donations into impact investments, they are not only removing those much needed dollars from the sector (because many social enterprises are structured as private entities), they are also diminishing the charitable act of philanthropy itself.

However, just as it can take away from the charitable sector, impact investing can also complement it. This can be achieved by investing in ‘self-sustaining social enterprises’ that can viably replace former ‘donation-dependent nonprofits’. This then liberates those funds, decreasing internal competition among charities and consequently provides a larger pool of funds for the nonprofit/charitable sector to function within.

Thus, impact investors have two choices when it comes to influencing the philanthropic/charitable sector. They can either convert their donations into investments, where philanthropy and charity become second-rate to impact investing and social enterprise, or they can free philanthropists from inefficient burdens, helping them to focus where their donations are needed most. At this point in time, I certainly hope for the latter, as the consequences of the former could erode the foundation of the charitable sector.

 

  • Hi Mitchell, this is a great post which really delves into the detail behind this aspect of charity. I wondered if you would ever be interested in writing a guest post for our new blog? http://thecharitywebsite.wordpress.com ? We have covered quite a wide range of topics at the moment, but are looking for more posts by those working in the sector aimed at people working in the sector

  • Pingback: Industry News Round Up: 25 January — Nexii()

  • Shyam

    Fantastic post! Thanks for sharing.

  • Good read and an important distinction to make. Impact investing and social finance are quickly becoming buzz words just like crowdfunding is, yet there is much confusion about the social aspects of it vs. the financial aspects. As these become more mainstream, I’m seeing a lot more investors/fundraisers becoming too focused on the returns rather than the impacts.

    I see that you already have one guest blog post request, but was wondering if you would be willing to contribute a guest post to the National Crowdfunding Association of Canada’s website (ncfacanada.org)? We would love to hear your thoughts on how crowdfunding can help leverage both philanthropy and impact investing, especially as more regulators are looking at ways to incorporate investment crowdfunding into current legislation (http://www.ncfacanada.org/saskatchewan-proposes-new-equity-crowdfunding-exemption-for-start-ups-portals-exempt-from-registration-regulation-lite/).

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