Philanthropy as Investment: Potential Benefits to Viewing Nonprofit Funders as Impact Investors
The concept of “investing for social good” has become increasingly prominent and now encompasses philanthropy, concessionary investing (where investors expect to receive an investment returns less than the market rate of return in exchange for evidence of positive social impact) and market rate investing (where investors expect to receive a similar investment return as if they had made a traditional investment). An impact investor is usually defined as a capital provider that invests in businesses and companies that have some element of social or environmental impact as part of their business model. In this way, financial returns from the businesses should also correlate with positive social or environmental “returns”.
There are benefits and drawbacks to viewing philanthropy with the same lens as concessionary and market rate impact investing. Private investors often demand a robust set of metrics by which to assess their investment performance and holding philanthropic organizations and nonprofits to the same rigid standards could be counterproductive.
However, recent research in the field of impact investing indicates that impact investors are able to match and sometimes financially outperform traditional investors all while optimizing for social good. The reasons for this are many and are often difficult to disaggregate. Yet, there are general conclusions that can be drawn around the positive influence of impact investing on financial performance that are useful to keep in mind when thinking about philanthropy.
For businesses looking to raise capital, impact investors are seen as uniquely additive to firms and are branded as better long-term partners with more patience around long term growth as opposed to traditional investors. Furthermore, there are many thematic impact investors focused on one impact theme or sector such as climate or healthcare. Thematic impact investors are often sought out for their industry-specific expertise. When impact investors are sought out as capital providers due to their mission alignment and expertise, it expands the opportunity set both for investment and potential social impact.
Some impact investors deploy specific frameworks to guide businesses they invest in to their targeted impact objectives. Such frameworks include processes around improving sustainability practices or creating quality jobs. These frameworks can yield tangible results that increase the value of businesses.
Another important component of impact investing is the rigorous processes around developing and quantifying metrics to measure social and environmental impact which are used as a strategic tool to demonstrate investment success. Investors who set specific impact objectives prior to investment, collect data throughout the investment lifecycle, and report outcomes achieved as part of their reporting are able to demonstrate social and environmental benefits as part of the value they provide for businesses.
Finally, impact investors often form mission-alignment with business management teams early in the investment process. This has the positive long term effect of creating strong partnerships between capital providers and business leaders as they are both aligned around the vision, mission and potential impact of the company. Generally, when a capital provider and business have a strong and meaningful relationship they are better able to work together to drive business and impact growth, leading to better investment outcomes.
Many parallels can be drawn between the discussed themes for impact investors and implications for philanthropic funders. Being a targeted capital provider (with potential expertise in a specific area), having a strong impact framework and reporting process for impact metrics, and being aligned with investees (or in this case grantees) are all benefits that thoughtful and strategic nonprofit and philanthropic funders can also enjoy.