Who are philanthropic investors? Are they any different from impact investors? Well, this guide sheds light on the differences and commonalities between these two types of investors.
Nowadays, people don’t just invest – they invest consciously. And unless you’ve not seen the effects of climate change, global warming, and social injustices on the planet, you know what I mean.
Individual investors and companies now see the need to invest with a higher purpose. They seek more than simple monetary profits. And that has brought about vital topics like impact, sustainable, and philanthropic investing.
Everyone wants to make that positive social and environmental impact. And they are doing so with each investment decision they make. This is undoubtedly a good thing. While we may know about the impact and sustainable investors, some have not heard about philanthropic investing.
So, what is it? Is philanthropic investing the same as impact investing? Or do they mean something different? Well, the truth is, they all have the same goal, especially when it comes to social and environmental changes. Both want to make the world a better place. But, they also have unique differences.
Let’s take a closer look.
What is Venture Philanthropy?
While it might sound complicated, venture philanthropy is quite straightforward. In essence, it is the act of deflecting traditional venture capital (VC) financing principles and techniques to achieve philanthropic goals. Usually, B corporations, charity organizations, and green companies benefit the most from this.
While this is essentially philanthropy, it is not just about making donations. Instead, it’s more hands-on. The focus is on how the money donated can be used to generate even more money to support the cause.
For example, a company that’s into environmental conservation might get a donation from a venture philanthropist. However, the goal here is not only to help with the cause. It’s also to ensure that the company gets back on its feet and eventually becomes self-sufficient.
This way, once the company has regained its footing, it can continue its work without needing constant handouts.
While it’s possible to profit from philanthropic investments, this is no longer the driving factor. The mission shifts to social goals, for example, socially responsible investments (SRIs), that tackle environmental, social, and governance (ESG) criteria.
Venture philanthropy covers many social investments that no longer focus on monetary returns. The emphasis is more on how specific businesses and companies can effect a positive social or environmental impact. As such, venture philanthropists often turn from capitalism to philanthropy.
It’s not enough for a venture philanthropist to offer financial support to corporations, green companies, and charity organizations. Often, they take up a role in the organization and can end up sitting on the board of organizations.
Once on the board of organizations, the philanthropic investor gets involved in the business operations and management. Such investors’ oversight and participation are common and aim to ensure the company attains set goals. They offer support, such as marketing strategies, that can benefit the company.
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When Did Venture Philanthropy Start?
John D Rockefeller III is associated with venture philosophy. He’s quoted as saying, ‘Venture philosophy was an adventurous funding approach to unpopular social causes.’ He founded the Rockefeller Foundation in 1969, and it is still a significant participant in philanthropic investment.
At that time, there was a growing belief that various financing mechanisms didn’t benefit nonprofit organizations. These included university grants, government funding, and investments. Consequently, nonprofit organizations found it hard to build capital, which inspired the rise of philanthropic investments in the US.
Issues like the deteriorating state of the environment and climate change were gaining more focus. And venture philosophy came about to offer much-needed financing for social ventures. But, there’s always the growing concern that it risks focusing on profit making, which is associated with impact investing.
Benefits of Venture Philanthropy
Venture philanthropy aims at impacting the world positively by bringing about social and environmental change. As more venture philanthropists fund such causes, the world stands a better chance of thriving.
The most significant benefit of philanthropic investment is strengthening nonprofit organizations. Since these organizations have no business plans or goals, they rely on donor funding.
Therefore, receiving funds for different projects makes change possible in other parts of the world. Now, donor-advised funds continue to make nonprofit organizations more sustainable and efficient.
What is Impact Investing?
Impact investing aims to pursue and achieve specific environmental or social goals. But they must also make profits while doing it.
In essence, the impact investing industry has funds for different causes. And these causes are what they use to generate returns for their investors while making a social or environmental impact.
For instance, an impact investing firm might invest its money into a company providing clean water in Africa. The goal is not only to make a profit but also to help improve the quality of life in Africa.
In this light, impact investors must find the right company with a mission to impact social change. Such companies commit to corporate social responsibility (CSR) or aim to benefit society. According to a Global Impact Investing Network (GIIN ) report, 88% of impact investors managed to achieve or supersede set aims.
Impact investing goes hand in hand with socially responsible investing. Some people might even interchange the term. But, there is a slight difference between the two.
For instance, socially responsible investing considers how a company’s business operations might affect social issues. On the other hand, impact investing goes beyond that. It also looks at how the company’s products or services can address specific social or environmental problems.
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Understanding Impact Investing
Impact Investing has been around for quite some time. However, it was only in 2007 that the phrase was coined, and investors started embracing it.
In the past, businesses have had a profoundly negative effect on the environment and society. The aim of impact investing is to change these effects and create a better society. This explains why impact investing bears a resemblance to philanthropy.
The first task in impact investing is to observe a company’s corporate social responsibility (CSR) commitment. Such companies must have a mission that positively impacts the environment and society.
Impact investing has varying impacts, depending on the type of company and industry. Some common ways companies exert change are investing in renewable energy or helping marginalized communities.
The whole aim of impact investing is to exert positive change through investing. For example, some companies that invest in clean energy intend to conserve the environment. They are aiming for a future with fewer greenhouse gases from fossil fuels.
Currently, numerous institutional investors are participating in impact investing. You can easily join any of them to achieve your goal. Such investment institutions include pension funds, hedge funds, private foundations, and fund managers.
There’s also a chance for individuals to participate through web-based investment platforms, socially conscious financial services enterprises, and investor networks. For example, women from all across the world have benefitted from micro-financing and micro-finance loans. These are funds connected to impact investing to help transform people’s lives while making a profit through loan repayment.
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Types of Impact Investments
Impact investing focuses on two impact points – social impact and environmental impact. As such, every investment decision made is aimed at creating a positive social and environmental impact. At the same time, it must generate financial returns for the investors.
Some impact investors opt to put their funds in emerging markets (EM) since there are different impact investing opportunities. Others will look at the stable markets as they present fewer risks.
All in all, impact investments cover several industries, including:
- Renewable Energy
The two main categories of impact investing include:
1. Socially Responsible Investing (SRI)
This type of investing focuses on the impact a company or an investment has on society. There are specific ethical guidelines that socially responsible investing (SRI) focuses on when choosing the right company for impact investing.
Those that don’t meet these ethical standards are immediately eliminated. Usually, there are underlying motives for such strict guidelines, including political beliefs, religion, or personal preferences.
2. Environmental, Social, and Governance (ESG)
This is a broader investment strategy that considers a company’s environmental, social, and governance (ESG) factors. The aim is to invest in companies that have good ESG ratings.
These days, more and more investors are interested in ESG investing because they want to ensure that their money goes into companies with sustainable business practices.
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Impact Investor Categorization
There are different ways of participating in impact investing, as seen above. However, investors in this field can also be categorized based on the investor’s intentions. According to the Monitor Institute, two major categories arise here.
- Impact first investors: These kinds of investors focus more on their investments’ environmental and social impact rather than financial returns. While they still expect good returns, their priority is more centered on the positive impact they make. They are also more willing to shoulder higher risk as they aim to achieve their social and environmental goals, which might be hard based on prevailing market rates and anticipated financial return.
- Financial first investors: These prioritize financial returns but still aspire to achieve their social and environmental goals. They look for investment vehicles that promise good market-rate returns while minding social and environmental issues.
Are There Special Considerations in Impact Investing?
Impact investors seek out environmental and social practices that they can fund. This makes it easier for such companies to access financing and continue socially responsible acts. The millennials are by far the majority of impact investors in the world.
Millennials seek to conserve the environment and also give back to communities. As a result, more financing is available for worthy CSR practices, which hugely impacts the market. While these practices have a positive impact, there’s also the profit-making aspect for the investors.
Impact investing brings together impact investors who support worthy causes and messages, especially regarding social and environmental practices. By supporting the companies and individuals, they’re showing full support for the message.
That way, they have a stake in the company and add their voice to the cause. More companies are now focusing on CSR since they understand the benefits of impact investing.
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Benefits of Impact Investing
Like any other type of investing, several benefits come with impact investing. These benefits include:
1. Impact Investors are Part of Social Change
More people believe it’s not only the government that should be responsible for social change. This has led to more companies taking up CSR to better the environment and society.
By funding such worthy enterprises, impact investors can also play a significant role in impacting social change. A good example is that now, more investment focuses on tackling climate change and environmental degradation.
2. Less Volatility
Market volatility has a massive impact on investment. However, impact investing is spared from this because it’s not too susceptible to market fluctuations.
Such balance in risk and reward continues to attract more impact investors who want a diverse portfolio. They are now seeking more social impact instruments that benefit businesses and the environment.
3. High Returns
Impact investing is about creating social change while also aiming at making profits. The good news is that as impact investing becomes more popular, investors benefit from high returns.
Most people now seek clean goods and services that don’t affect the environment. As the demand increases, companies that focus on social change are reaping the rewards.
4. Moral Satisfaction
Impact investors get a sense of moral satisfaction when they support businesses that focus on CSR. They can enjoy the profits and know they participated in positive change.
Are There Challenges to Impact Investing?
Despite having numerous benefits for the investor, society, and the environment, impact investing still has its downsides.
At the top of the list is the challenge of measuring the success of impact investing. Remember, the goal is to bring about social and environmental change. But how is it possible to measure if impact investing has been a success or not?
Well, some data is quantifiable. A good example is CO2 emissions. Businesses can now quantify how much CO2 emissions they’ve reduced. Also, they can quantify the amount of renewable energy produced.
But, these are only two areas in the broad impact investing opportunity arena that can be quantified. The challenge comes when trying to quantify more areas to see if impact investing works or not.
There must be a balance between the success of the CSR goals set by the business and returns for impact investors. And as more impact investors seek to make impact investments across different markets, the lack of quantifiable data continues to pose a challenge. There’s a growing need for data to prove that CSR projects are working to better the environment and society.
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3 Examples of Impact Investing Funds
There are impact investment funds that have become quite popular and continue to influence change across the world. Here are three notable examples.
1. The Ford Foundation
Edsel and Henry Ford launched the Ford Foundation in 1936. At that time, they put up an initial endowment of $25,000. But with time, things have changed as the endowment has grown to over $15,000,000.
The Ford Foundation gives out a considerable percentage of the money as grants. It aligns itself with causes that support the Ford Foundation values. Such support makes the Ford Foundation one of the biggest impact investment funds in the world.
2. The Gates Foundation
Bill and Melinda Gates have created one of the most well-known foundations in the world. At the time of its launch, the Bill and Melinda Gates Foundation had an endowment of $50 billion.
The majority of the fund supports philanthropic investment in different parts of the world. However, $2.5 billion is placed under a strategic investment fund.
3. Soros Economic Development Fund
Billionaire philanthropist George Soros launched the Soros Economic Development Fund under the umbrella of Open Society Foundations. Soros made an enormous contribution of $18 billion to the Open Society Foundations. $90 million went to impact ventures with the goal of bringing about social and environmental change.
Final Thoughts: What is the Difference?
It’s not uncommon to confuse philanthropic investors and impact investors. However, the two are different, which is crucial to note. Philanthropic investors have been around for many years, long before impact investing was a thing.
Philanthropic investing is all about social causes, and there’s no focus on monetary returns. However, impact investing focuses on social change and expects a return on investment.
In other words, impact investors expect to make a profit from impact investments that also have a positive impact on the world. As for venture philanthropy, the goal is to impact the world positively.