Sometimes you can support a worthy project or field and can get a return on your money. Yes, a return.
It’s what’s known as impact investing, essentially investments made in organizations, funds or companies with the intent to generate a social or environmental impact as well as a financial return. It includes for-profit companies that intend to have a social impact using their business model as well as nonprofits with revenue streams.
Some philanthropists use impact investing as a complementary tool with their grantmaking as a way to diversify their portfolio or to use the returns as a way to fund more giving. Either way, the attraction is the same: to make money and achieve a measurable impact.
The term impact investing was first coined only in 2007, but it has acquired some high-profile champions including the Omidyar Network, the Rockefeller Foundation and the Case Foundation, which all believe in the premise that capital markets can be a catalyst for positive social change.
According to the Global Impact Investing Network, a nonprofit that helps impact investors, impact investments typically have these characteristics:
- A positive social or environmental impact, such as to increase access to education, improve healthcare services, promote affordable housing or enhance workforce development. For now, these investments are typically made in developing and emerging markets. Impact investing has a very small footprint in the U.S.
- A return on the money invested or, at minimum, a return of the initial capital invested.
- Measurable results. Investors need tangible evidence that what they’re funding is having a positive effect.
Investing for social and financial returns is a laudable concept, but how does it actually play out? A definitive picture has yet to emerge. Impact investing is still in its infancy, so there isn’t much in the way of hard data, though some observers suspect too many investors in the field are seeking a return at the expense of impact.
“Today, impact investors have developed a more realistic set of expectations about what is possible. Most now realize that with rare exceptions, it’s not possible to generate both high financial returns and high social impact,” Eric Nee wrote in the Stanford Social Innovation Review. “To create real social impact, investors have to work harder, take on more risk, and accept lower returns. Unfortunately, many impact investors aren’t willing to do that.”
At the same time, numbers can also be skewed by the fact that some investors are willing to absorb a lower return in order to have an impact. Some investors may view that as a form of philanthropy minus the charitable tax deduction. And like with any investment, returns will vary based on the sector, location, the asset class and skill of fund managers.
For now at least, impact investing should be just one part—and maybe a small one at that—of any financial portfolio that supports a program of charitable giving. Still, it remains an innovative way to support businesses and sectors that want to have a positive social impact. Or, as Matt Bannick and Paula Goldman of the Omidyar Foundation wrote: “Indeed, we would assert that the primary goal of impact investing is to see and nurture socially impactful innovations so that commercial markets can eventually take them to scale.”
If impact investing may sound appealing, there are many funds—most on the small side when it comes to assets—that can facilitate your entry into the field. You can begin your research at ImpactBase, an online directory of impact investment vehicles. The nonprofit Impact Assets puts out the ImpactAssets 50, a showcase of leading investment funds.
Article: Sectors, Not Just Firms, Stanford Social Innovation Review; a series of articles from the Omidyar Network on the need for a sector-based approach to impact investing.
Articles: When Can Impact Investing Grow Up? Stanford Social Innovation Review; essays on many aspects of impact investing, including some that why achieving impact and market-rate returns is often a lot easier said than done.
Article: Philanthropists Weigh the Returns of Doing Good, The New York Times.
Blog post: 7 Things We’ve Learned About Impact Investing in 7 Years, by Judith Rodin, president of The Rockefeller Foundation.
Blog post: Give Impact Investing Time and Space to Develop, by Sasha Dichter, chief innovation officer, Acumen.
Op-Ed: It’s Time to Cut Through the Hype of Impact Investing, by William Burckart, Chronicle of Philanthropy.