The Impact Investing Mystery Revealed

If you have major donors, then chances are someone has spoken to you about impact investing. Even if you haven't had the experience yet, it's an idea that you should know. Impact investments are becoming more popular in the philanthropic sector. That, in turn, may make a huge change in the industry.

What if donors start moving from nonprofits to corporations that are making a social impact? What happens to smaller nonprofits if they are competing against large companies with more money? These are some of the questions that leaders are now considering as people seek new ideas.

Impact investing is for people who want to improve their financial goals while helping others. That idea is attractive to donors. Investors make an investment that provides them with a return on money. And the investment also helps them in making a social difference. What could be better? The Global Impact Investing Network (GIIN) created four criteria for impact investing:

• Intentionality. Intent to have a positive social impact accomplished through investments.
• Investment with return expectations. The expectation of positive financial performance. At the least, the return of capital.
• Range of return expectations. Target impact investment returns can be below market (i.e. concessionary). It can also be risk-adjusted market rates across assets, like cash, venture capital and private equity.
• Impact measurement. An impact investment must measure and report on social performance. But investors also seek corporations or nonprofits that are accountable and transparent. Again, let's remember: People can make a social impact not only through nonprofits. They can also support corporations making a difference. And in today's world of distrust, many prefer corporations over charities. Why? One of the reasons is because corporations have the money to invest in social change. Many nonprofits don't. Also, companies can help many people around the world. Small nonprofits can help those in their local communities. It's more attractive to people who seek to make a bigger positive change.

One-third of family offices offer impact investments for their clients. Impact investments are also offered through donor-advised fund (DAF) sponsors.  And 77 percent of Millennials have impact investments in their financial portfolios. That last fact should tell you which way the wind is blowing. With younger people caring about having impact investments, it stands to reason that it will only gain in popularity.

Donors like creative ideas, but they also want it when they’re making social investments. And you have to think that more people will like the idea of both making money and a difference. Financial companies understand this idea and are all too happy to create investment tools to help investors, as they make fees. It's likely in the coming years that there will continue to be a shift away from nonprofits and toward for-profits for social good. And the more it all becomes mainstream, the more it will grow. This will leave nonprofit leaders having to adapt and change, or risk closing their doors.

Impact Investing in Practice

A good example of impact investing is LGT Impact Ventures. That company invests in “purpose-driven companies,” which can grow larger. For instance, it made an equity investment of $10 million in Dr. Consulta. That's a company in Brazil that provides “high-quality, low-cost specialty health care” services. Dr. Consulta targets low and middle-income families.

Social Venture Circle (SVC) is an angel network based in the U.S. It's also the largest and oldest impact investing system. SVC has invested in some of the biggest global brands, such as Zipcar. That company seeks to help the world by having people carshare instead of own cars. Other companies include Ben & Jerry's, KIND, The Body Shop and Honest Tea. That last business uses an ethical supply chain for their iced tea. More $220 million has been invested into over 330 early-stage groups.

The Nonprofit World at Risk With Impact Investments?

In conclusion, it's an exciting time for donors; but there's concern. Today, donors can use tools such as DAFs and impact investing. Some worry that if impact investing continues to grow, donors may move from nonprofits. Wealthy donors enjoy making money, and doing that while supporting social good is an incentive. It could draw away supporters from nonprofits. But that's also a chance for charities to step up their game.

Nonprofit leaders must be creative and disruptive. They have to get outside of their comfort zone and what others think they should be doing. For instance, Charity:water has created a new initiative called The Pool. That fund allows them to accept investments from donors. Those investments will go to their employees who are paid less than their for-profit peers. The Pool rewards the employees who work at Charity:water and have helped make it such a global brand. The Pool is also a first; it has been created to make nonprofit workers more money. That's an idea that would have been impossible to think of only a decade ago.

The time has come for nonprofits to realize that donors are seeking measurable solutions. Old ideas that don't work and have kept people with the same problems for years is no longer acceptable. Technology has forced the world to live in a continual and rapid stage of evolution. New ideas, such as through impact investing, are shifting the playing field. It's also giving donors in much more control about who they will support and how. In other words, nonprofits and their old-school ways are no longer the only game in town. As impact investing grows, it could be a game changer.