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.
f 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.