If this business were a sport, then philanthropy would be a team comprised of gentleman amateurs who turn up ten minutes before the start of the game, think nothing of downing a couple of pints and having a few cigarettes in the interval. The professionals — the social and impact investment ‘teams’ — arrive several hours before the game to get in plenty of practice, work out an elaborate sequence of moves and focus on tactics with a precision equalled only by Stephen Hawking.
This is of course an almost complete distortion of how things actually are — but not a bad representation, perhaps, of how people think things are.
Historical origins
For many, philanthropy smacks of amateurish do-gooding; a little ad hoc, a bit self-indulgent perhaps, even a bit hit and miss, depending on how well a foundation or family office has done this year. Sometimes that characterisation is true. And it is a fundamental flaw of philanthropy that long-term funding often depends on the whims of an individual or family.
But philanthropy been around much, much longer than impact investment, which by comparison is a mere toddler, growing in the shadow of its more established grandfather. Philanthropy dates back to at least the second century AD, in the form of Herodes Atticus, a Greek aristocrat who served as a senator in Rome. Born into a very wealthy family, Atticus generously founded many public works including baths, a theatre, aqueducts and religious statues. Try as we might, we can only date the use of the term impact investing back to 2007.
So to pose a question along the lines of: what importance might philanthropy have in stimulating growth in impact investing? is a trifle odd; for without philanthropy’s machete having once slashed its way through the jungle of red-in-tooth-and-claw capitalism, impact investing might never exist. And indeed today the two overlap so much that perhaps the only distinction that will soon exist is that of regulation. Whereas philanthropy by definition exists within a fairly loose regulatory framework, impact investment is and will be ringed by very tight — and necessary — regulation, to protect the investor, who often will not be very rich at all.
Focusing attention
Philanthropy is, in my view, best regarded as setting an example for impact investment. Not so much a moral example (though that is important) but an example of how social progress can be effected through the directed attention of powerful wealth. Eminent philanthropists such as Bill Gates help to demonstrate that catalytic philanthropy, where personal and family wealth can fill a gap between public and private sectors, works.
And it has worked, for centuries. But it is no longer enough. The structural problems faced by governments everywhere are so massive — nothing less than the unsustainability of the welfare state in its current form, or the overwhelming difficulties of tackling climate change, to take just two examples — that a more widely-based social investment is needed from the private sector.
Shifting views
Moreover, the financial crash has, I believe, changed individual’s perceptions of their own financial and social futures. The middle classes of the developed nations have seen their pension prospects devastated. The return they can expect on their investments has, on average, been crushed, while the world they and their children can look forward to seems darker than perhaps at any time since 1939.
This explains, in part, the rapid growth of impact investing. The number of funds involved in impact investing has grown fast since 2007. According to JPMorgan’s latest industry report on impact investing, the current market opportunity is estimated at $46 billion globally and may grow to $650 billion by 2020. Such capital may be in a range of forms, including equity, debt, working capital lines of credit and loan guarantees, with investments in microfinance, community development, clean technology, and many others.
Impact measurement
Social or impact investing is typically defined as investments made into companies, organisations, and funds with the intention to generate measurable positive social and environmental impact alongside a financial return. The definition itself outlines some of the key characteristics of impact investing, namely intentionality, measurability and profitability.
Regardless of the variability of which aspect asserts greater ‘importance’ the notion of intentionality means there must be an explicit and measurable intent to deliver positive social impact and this must be just as much part of the investment thesis as the financial return. For a company, this means the delivery of social impact must be at the core of its business.
Measurability implies that this impact can be quantified and should be actively measured and this is where impact investing differs the most from other socially responsible investing strategies.
Potential return expectations
Finally, the notion of profitability means that the investor also expects a financial return, thus differentiating impact investing from donations or grants. Note, however, that this possible financial return does not always mean a risk-adjusted rate of return or a ‘market rate’ of return.
Expectations of the potential returns vary depending on the asset class and the investment itself, but also on the type of investor. ‘Impact first’ investors attach more importance to the social impact, but with a financial floor and can be willing to accept a below market rate of return.
‘Financial first’ investors place more importance on the financial factor, but with an impact floor. With many of these latter ‘financial first’ investments the actual, potential returns (growth or income) can indeed be risk-adjusted or market rate returns as, for instance, in social housing, renewable energy, community banking or microfinance.
The development of social stock exchanges will, over the next few years, transform the possibilities for impact investment, by offering ordinary retail investors genuine alternatives for their savings — alternatives that offer a highly diverse portfolio of ways to make a potential profit that is more ethical, more socially beneficial, more moral. A profit yet with purpose in other words. And the world of philanthropy will continue to enable massively wealthy individuals and families to work in their own ways, towards achieving particular, specific goals.
