How Social Impact Investing Is Quickly Growing

How Social Impact Investing Is Quickly Growing

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John Rockefeller
Image courtesy Wikipedia

The nonprofit sector grew sharply following World War II, and in 1969, John D. Rockefeller III first introduced the term “venture philanthropy.” His model, which he described as “an adventurous approach to funding unpopular social causes,” gained momentum and served as one of the leading alternative philanthropic models, beyond the traditional grant-making foundation, until impact investing took off in the early 2000s.

Impact investing entered the vocabulary of philanthropists when The Rockefeller Foundation advanced the idea of investing in private companies that benefit some social or environmental cause, in order to gain returns. In essence, impact investing rejects the idea that profit and social good are mutually exclusive. Venture philanthropy is less concerned with obtaining financial returns, although some venture philanthropists do seek them.

In the arena of philanthropy, impact investing has, in many ways, displaced some of the appeal of venture philanthropy. Given the importance of this shift, here is a short list further comparing and contrasting the two models, as well as considerations for the future.

Financial objectives

Venture philanthropists typically design their funding initiatives with one primary consideration in mind: generating positive social change. Several businesses and corporations fit this model and tackle important social issues. One example of this approach is the Chan Zuckerberg Initiative, LLC, founded by Dr. Priscilla Chan and her husband, Mark Zuckerberg, the creator of Facebook. Although in many ways it resembles a traditional charity, the company is registered as a limited liability corporation, not a foundation, which allows it the flexibility to invest in private, for-profit companies that it believes will have a positive impact on the world.

In contrast, impact investing is geared toward profit and social change. Taken from the innovative funding practices found in the financial sector, strategies for this form of philanthropy range from investing in social impact bonds to backing microfinance loans. In 2013, Goldman Sachs Group, Inc., instituted the GS Social Impact Fund, and the corporation offers bonds to investors interested in supporting medical research and early childhood education, among other causes. Bank of America Corp., JP Morgan Chase & Co., and UBS Inc. have set up similar options for clients.

Microfinance loans are an investment vehicle through which individuals and organizations can help entrepreneurs, many of them in third world countries, open a business with a small amount of capital. With the business backed by investment capital, the chances for its success increase and the returns for investors also grow. In sum, the entrepreneur and the local economy benefit, alongside the impact investor.

Overall scope

business officeOnce an organization or group of investors commits to an issue, how long do they pursue that interest? In most cases, venture philanthropists plan to allocate funding and resources to a cause for a set period of time, and the baseline for such an initiative is about three years, though longer engagements of five to seven years are also common. During that window of several years, the venture philanthropist will help develop the organization’s capacity for self-sufficiency—much like how venture capitalists support start-ups in the business world. The goal is to empower the organization with seed capital and other investments, so it can operate on its own in the future.

Impact investing, defined as “mobilizing large pools of private capital from new sources to address the world’s most critical problems,” operates on a different schedule. In fact, under this paradigm, investors typically start without a clear timeframe, and may take an “as long as it takes” approach.

The future of impact investing

One key factor in the growing popularity of impact investing is its relative accessibility. While venture philanthropy is typically limited to high-net-worth individuals and firms, impact investing allows interested parties from a greater range of financial backgrounds to participate. With the combination of government organizations, philanthropists, and the private sector, impact investing holds a vast amount of potential for producing real solutions to real problems.

As impact investing continues to grow in popularity, another point to observe is the activity of the Millennials—a generation known for their interest in social and environmental causes. Many are drawn to the impact approach because it presents a viable way to support their convictions, while simultaneously helping them earn returns and improve their financial security. Although their income may not reflect that of more established investors, Millennials merit attention because they now represent the largest demographic in the U.S. workforce. More and more members of this demographic have enlisted the help of financial advisors, and many are looking for value-based investment vehicles, instead of or in addition to traditional investment opportunities. In the years to come, their money and social interests will arguably dictate the impact investing sector, as well as the broader philanthropy landscape.

In a publication of The Rockefeller Foundation, executive members of the organization predicted that impact investing could potentially account for one percent of professionally managed assets. Other projections estimate that impact investments, which totaled $50 billion in 2009, will reach roughly $500 billion by 2019.

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