Impact investing, as an emerging concept, sits at the intersection of philanthropy and traditional profit-seeking investment. It aims to generate measurable social and environmental impact alongside financial returns. The key difference lies in the investor’s intention and approach. Unlike commercial investors focusing solely on financial returns, impact investors actively target social objectives. And unlike philanthropists who donate without expectation of any financial gain, impact investors do seek some financial returns on capital deployed. As such, impact investing can help channel much-needed capital to address pressing societal and environmental challenges, while maintaining certain financial discipline and business rigor. When well executed, impact investing has the potential to align different stakeholders and bridge the gap between philanthropy and business. This article will analyze the relationship between impact investing and philanthropy, and discuss how they can complement each other.
Impact investing adopts some key features from philanthropy
Impact investing originates from the concept of venture philanthropy, which emphasizes close partnerships between funders and investees to create social impact. As such, impact investing borrows some key philanthropic principles:
– Intentionality: Impact investors actively target specific social or environmental objectives, just like philanthropists intend to further certain causes.
– Impact measurement: Impact investors emphasize measuring and tracking impact performance, similar to how philanthropists evaluate programs against charitable missions. Robust impact measurement is critical for understanding impact creation.
– Blended capital: Impact investing funds often blend different types of capital with varying return expectations. This is similar to how philanthropists provide flexible and patient capital to social organizations.
Impact investing diverges from traditional philanthropic mentality
While impact investing is philosophically aligned with philanthropy, it diverges from a traditional philanthropic mentality in some important ways:
– Financial returns: Impact investors expect some financial returns, whereas philanthropists provide donations without requiring direct financial gain.
– Commercial rigor: Impact investing applies certain business and financial rigor in analyzing investment opportunities and managing portfolio, different from a philanthropist’s approach.
-Scaling solutions: Impact investing aims to identify and scale financially sustainable solutions to social issues, as opposed tophilanthropy’s reliance on grant-dependency.
Impact investing can unlock larger capital for good
The mainstream investment community oversees massive capital that can potentially drive tremendous social impact. According to some estimate, professionally managed assets totaled around $100 trillion in 2020 globally. However, the vast majority of capital is invested agnostically without social considerations.
The emergence of impact investing offers an opportunity to channel significantly more capital to tackle social and environmental challenges, by appealing to investors who also seek financial returns and adopts investment rigor. The Rockefeller Foundation once estimated that impact investing could realistically mobilize $400 billion to $1 trillion from private capital in the next decade.
Impact investing demands specialized skills and networks
While impact investing seemingly combines the elements of philanthropy and business, effectively executing impact investing strategies requires specialized skillsets and dedicated efforts. Some key capabilities include:
– Identifying impact solutions: Sourcing and evaluating early-stage impact ventures requires understanding social contexts and challenges.
– Conducting diligence: Assessing impact business models demands focus on impact viability and pathways to scale.
– Portfolio management: Managing an impact portfolio to balance financial and impact performance is different from pure commercial investing.
– Impact ecosystem: Engaging stakeholders like philanthropic sponsors and impact partners requires unique relationship building.
Impact investing sits at the intersection of philanthropy and business. It adopts some key philanthropic principles like intent, measurement and blended capital. But it diverges from traditional philanthropic mentality by incorporating financial returns and business rigor. If executed strategically, impact investing can be a powerful Force for Good, aligning mainstream capital with societal objectives at scale.