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Impact Investing and Strategic Philanthropy

Impact investing has grown rapidly over the last decade, and a number of philanthropic organizations have been a part of this growth. In 2017, the Ford Foundation announced that it would allocate $1 billion of its endowment to mission-related investments, while continuing to award $500 million to $550 million a year in grants. The Austin Community Foundation, the Cleveland Foundation, and the San Francisco Foundation are just a few grant-making organizations that have made the move to impact investing.

Impact investing may be a natural fit for philanthropic organizations given that, like strategic philanthropy, it can be used to pursue measurable, lasting benefit. As awareness of impact investing grows, organizations and individuals increasingly face choices between the two.

Impact Investing vs. Strategic Philanthropy

Under strategic philanthropy, donors set impact goals, research the social or environmental issues they want to address, and come up with funding strategies. After deploying funds, they measure impact and may refine their strategy. This is an outcome-oriented form of charitable giving that goes beyond simply granting money to worthwhile causes.

Impact investing is similar in that investors set goals, deploy capital, and measure and manage impact. However, impact investors also expect their contributions to result in financial returns for themselves alongside social or environmental benefits. Impact investors support revenue-generating initiatives rather than programs that distribute funds until they run out.

Sustainable investing brings more resources to bear in addressing social and environmental challenges, which is necessary if the world is to realize the UN’s Sustainable Development Goals.

Although sustainable investing diverges from charitable giving in its focus on financial returns, some argue that it offers advantages over philanthropy. For example, it may be more feasible to sustain impact initiatives when capital can be used repeatedly to continue creating positive social and environmental outcomes. Sustainable investing may also be more scalable, and it allows organizations to generate impact with capital that was previously dedicated only to making money. Additionally, sustainable investing can bring more resources to bear in addressing social and environmental challenges, which is necessary if the world is to realize the UN’s Sustainable Development Goals.

Philanthropy’s Ongoing Role

While mission-related investing presents opportunities for philanthropic organizations, philanthropy is still needed. First, impact investing still faces some challenges, from providing suitable investment options across the risk spectrum to clarifying regulatory views of the industry and developing standardized management tools. Although none of these challenges should prevent an organization from aligning its portfolio with its mission, these challenges may require extra effort and resources for organizations to fully transition to impact investing.

In addition, some contend that accepting financial losses may be important for combating economic inequality, chronic homelessness, and other injustices. Those who take this position might be reluctant to abandon conventional grant-making, at least in the areas where they believe grants are more effective.

In fact, impact investing is not ideal for every project stage. Grants may be the better tool for offering technical assistance or preparation for an impact investment, or for spearheading a project when risks are unknown or too high for market investors. In these cases, stakeholders may choose to harness blended finance, which allows philanthropists and impact investors to work together.

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