Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

Impact Investing is not new: the Rockefeller Foundation coined the term in 2007. However, a growing number of mega donors and traditional organisations (incl. banks and venture capitalists) are looking to make investments with a purpose.

Impact Investing 

Impact investing, with the dual goal of making a profit and creating positive social or environmental improvements, can take place in developed or emerging markets. In emerging economies, micro-finance projects are popular, but impact investing also funds improving employment and education opportunities, supporting sustainable agriculture, making healthcare or housing affordable, and developing clean technology.

Today, Impact investing is experiencing an explosive growth, with assets in the sector expected to grow to U$ 3 trillion from $500 billion in 2020.

Impact investing offers an alternative to philanthropists who reject the notion that there is a binary decision between investing for profit and giving money to a social cause. While traditional grantmaking often overcomes market-based failures, impact investing leverages the power of markets to create change.

When applied to specific social causes, impact investing also has the potential to bring more capital and fresh approaches to targeted issue areas. For example, efforts are growing to coordinate impact investing with the Sustainable Development Goals (SDGs), 15-year global goals that all the world’s governments and many businesses and nonprofits committed themselves to beginning in 2016. More than 60% of investors reported they are actively (or soon will be) tracking the financial performance of their investments with respect to the SDGs.

It’s a powerful tool for leveraging philanthropic dollars. Investment returns can be reused over and over again to compound the impact.

Impact investing allows donors greater freedom and flexibility to test innovative ways to achieve a financial return as they seek impact. Donors use it to breathe new life into or complement their philanthropic strategy. Many report great satisfaction after incorporating impact investing in a redesign of their approach to social change.

As the problems societies face become more entrenched and complex, it’s clear that government and philanthropy can’t solve them on their own. A look at the amounts of capital bears this out: in the U.S., philanthropy is approximately $390 billion, government spending is $3.9 trillion, and capital markets (all debt and equity investments) encompass $65 trillion. On a global scale, total investments are estimated at $300 trillion. Thus, a 1% shift in global capital markets towards impact investing or investments that work toward social good–could cover the estimated outstanding $2.5 trillion annual funding gap to achieve the United Nations’ Sustainable Development Goals (SDGs). As this example shows, harnessing capital markets can have a huge societal benefit.

Impact investments can be as straightforward as banking with a community-based financial institution that helps to expand economic opportunities for low-income stakeholders, or supporting entrepreneurs in the developing world through a micro-finance fund.

Impact investments can also be incredibly complex, sometimes creating new financial vehicles or new types of arrangements between partners. These pioneering deals—which could include infusing capital into startup social enterprises, for example, or investing in pay-for-success contracts—often require expert advice, especially for newcomers.

With impact investing, the investor is looking to make a profit while also having a positive impact on the world’s social or environmental concerns. With venture philanthropy, the goal is usually (but not always) to make a profit while having a positive social impact on the world.

While impact ventures are unable to accept tax-deductible donations while running “for-profit,” they are still able to qualify for various “philanthropic grants” alongside raising more traditional debt and equity finance. Despite the seemingly numerous potential financial vehicles available to fund impact startups, raising capital is not always easy.

Venture Philanthropy  

Venture Philanthropy is a high-engagement and long-term approach whereby an investor for impact supports a social purpose organisation to help it maximise its social impact. Venture philanthropy specifically focuses on social causes, while impact investing has a broader remit of social and environmental causes. Both generally aim for a financial return while having a positive impact on the world, but not all investments yield a financial return.

Venture philanthropy is more focused on capital building than general operating expenses, and there is a lot of involvement with the grantees to help drive innovation. There also is a lot of emphasis on performance measurement, with the primary goal of improving systems and sectors as opposed to promoting individual organizations and funding individual projects.

While philanthropy and impact investing may not be mutually exclusive pursuits in many respects, it is essential for investors to identify their own objectives in order to determine how best their giving can serve these as well as not inadvertently to cause a negative impact.

Venture Philanthropy vs. Impact Investing

Venture philanthropy and impact investing share some similarities; both utilize investment capital for philanthropic efforts. The impact Investing model encourages expanding your investment portfolio to make socially responsible investments and/or divesting away from investments that aren’t making a social impact.

Venture philanthropy, on the other hand, is driven by foundations and private firms giving grants to a range of social entrepreneurs, nonprofits and other philanthropists. There are higher levels of engagement between the grantees and a strong emphasis on measuring impact, while supporting capacity, infrastructure and driving innovation.

Perhaps an easy way to understand these differences is involvement (via philanthropic grant) vs. investment. Venture philanthropy favors involvement while impact investing is central to specific investments and the social returns associated with them.