Different funding models rise and fall in popularity and right now it is impact investment that is riding the crest of the wave. A quick look at #impinv will connect you with any number of events, articles and organisations. Here in the UK, Aberdeen Standard Investments and Barclays are the latest to launch new impact investment funds.
Social investment is also known as program-related investing, mission-related investing, socially responsible investing and now most often as social impact or just impact investing. Impact investments are designed to achieve a measurable social or environmental return and a financial return. Since its emergence in the 1980s, impact investing has grown. The latest statistics for the UK market show social investment was worth at least £1,950 million at the end of 2016, a 30% increase from the end of 2015. The Global Impact Investing Network (GIIN) estimates the global market at $114 billion.
But just how welcome is the rise in impact investing? It all depends where you are standing. If it is diverting funds from non-impactful, anti-social, unethical investing then it is definitely a good thing. But if it is moving funds away from equivalent donations then it is less appealing. Whilst there are social good projects that lend themselves to an investment model such as housing projects or charities supporting people into jobs, there are countless small ventures with no likelihood of being able to generate a financial return. Philanthropy and grant funding will continue to be the life blood of these projects e.g. foodbanks and campaigns to tackle injustice. These not-for-profits often have no assets and operate a lean financial model with no ability to repay loans.
I recently interviewed Sally Briton of Investing for Good for the University of Kent. She explained the difference between philanthropy and impact investing clearly: philanthropy is what you do with your spare money and impact investing is how you make your existing money work harder. Just as you make purchasing decisions to buy local, go with a green electricity provider, or work for a values-driven company, so you look for an ethical dimension for your investments.
With younger wealthy people attracted to impact investing instead of philanthropy, is there a danger that funds will be diverted from gifts and grants? A number of trusts and foundations e.g. Esmee Fairbairn Foundation have already added social investment to their funding methods. In his book, ‘How philanthropy is changing in Europe’, Christopher Carnie quotes Wolfgang Hafenmayer of the European Venture Philanthropy Association: “If the bulk of investments were to shift toward impact investing then the logical conclusion would be that the field of philanthropy could become much smaller. In theory there should then be no need for philanthropy."
I would like to see a blended model becoming the norm: trusts and foundations investing their endowments in socially impactful ways that align with their mission and spending their income on grants; And impact investors including donations within their portfolios. I don’t want to see impact investing’s growth to be at philanthropy’s detriment and there is no reason why it should be. They complement each other well and I was pleased to read in the recent Investing for Global Impact 2018 report that so far the increase in impact investing has not been at the expense of philanthropy.
Despite the hype, impact investments really are still just a drop in the ocean when compared to non-impact investment, for example, $73 trillion is invested in all the stock markets combined and there are $544 trillion in derivatives. So, before we talk about the reduction in philanthropy, let’s first focus on transforming mainstream investing into impact investments.