Impact Investing Changes the Way Donors Help Nonprofits

The difference between charity and philanthropy

In 2015, Goldman Sachs bought Imprint Capital, which is an investment firm that specializes in developing portfolios that are attractive to socially conscious clients. More recently, the MacArthur Foundation created the Catalytic Capital Consortium and made an investment of $150 million toward patient financing, which takes impact investing a step further to catalytic investing. MacArthur is joined by The Rockefeller Foundation and the Omidyar Network, which will provide both expertise and additional investment funds toward the goals of the consortium.

The National Christian Foundation has shifted from traditional grants that donors have set up in their giving funds to allow them to make impact investments through those funds. The fund's assets are invested into for-profit companies, venture funds, as well as nonprofits—in other words, any type of organization that is making a positive, measurable and significant social impact. The fund also provides an opportunity for donors to not only make a social impact, but also to obtain financial returns that will grow their money for social good and more significant impact.

What Is Impact Investing?

According to the Global Impact Investing Network, impact investing is defined as follows: “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.

Why Does Impact Investing Matter?

For generations, well-intentioned people have donated to charity expecting nothing in return, but only that their financial contributions help people, society or the environment. However, in a world that has within its disposal the ability to ensure no one goes hungry and the ability to eradicate poverty and cure diseases that have survived for generations, donors are not satisfied with giving away their funds and not seeing any financial returns or broader impact; which means that intractable social problems remain and go unsolved.

Billionaires and Millionaires Push Impact Investing

The dawn of the 21st Century has been marked with a vast amount of information at our fingertips through the internet. All the knowledge that has been gained by humans is available to us at the stroke of a few computer keys. However, we also live in a world where there is an overwhelming amount of data and misinformation; and with the growing desire for transparency and authenticity, it has created mistrust in the public. Nonprofits and social good groups are no longer given a pass that they, in fact, are doing what they say they are doing or going to do. In other words, trust is no longer the default position.

Billionaires, millionaires and multinationals understand that there has been a shift by the public, and there are general mistrust and even tribalism that now exist within and among societies. Because of their global reach, financial resources and power, the wealthy have set out to define new terms for philanthropy. These global leaders are not interested in maintaining the status quo, which has often meant that good money has been thrown after bad money toward charitable work that has not demonstrated significant results.

These leaders have created a situation where donors, large and small, don't want promises any longer. Further, billionaires and corporations have created conditions where it is acceptable for donors to gain financial returns—as long as they are pushing social conditions which are actually changing social and environmental conditions for the better.

Charity Is Out, and Classic Philanthropy Is In With a Twist

There is a difference between charity and philanthropy. Charity is often what most of us do, which is when we have an emotional response and decide to give toward an appeal that we saw, which will provide someone with, hopefully, immediate relief. However, philanthropy goes deeper than charity, and that is what most major donors and impact investors practice.

Philanthropy is the desire to be strategic in one's giving and often address the root causes of the intractable challenges in society. For instance, it can mean not only giving to a school in a low-income community, but to also addressing the root cause of why the children at the school have limited resources, which has to do with living in an impoverished community.

If you’re the leader of a nonprofit, it is important to understand impact investing because the more it is practiced, the more challenges you will have fundraising, especially from wealthy donors.

Leading philanthropists no longer believe that the nonprofit sector is the place where they have to place their investments to make a social impact. They can invest in a socially responsible company, or they can create a societal condition, which restructures how whole societies exist as it relates to housing, education and health care (i.e. a basic income).

Income inequality and the massive amounts of wealth that exists—a lot of it generated by the tech industry—are disrupting dated ideas about how nonprofits should operate. Charity:water is an excellent example as it seeks to provide its employees with significant monetary rewards from its new program called The Pool. The organization wants to ensure it has top talent, and it is investing in its people to ensure they stay with the organization long-term.

If you’re unsure about where to get started concerning impact investment programs, one of the first places you might want to turn is legal practitioners who partner with philanthropists to advise them on “the structuring and financing through the deployment and exit of investments.”

It is a specialized area of in the legal profession, and you’ll want to turn to an organization, such as the Global Impact Investing Network, to ensure that, as a nonprofit leader, you’re also informed about the legal concerns related to this type of relationship between your organization and high-end donors.

Today, impact investing has become an essential topic for philanthropic engagement and discussion, and even the Catholic Church has gotten on the impact investment train. Under the direction of Pope Francis, the Church understands that it also takes making money to make a difference, and these two ideas do not have to be mutually exclusive. Impact investing will continue to shift philanthropy fundamentally. According to the Global Impact Investing Network, the global investment market is currently $502 billion with 1,340 impact investors.

Editor's Note: This Legal Matters column was featured in NonProfit PRO's May/June issue.