Do you want to contribute to a better world? I was researching how to support charities, and get a return on my investment and found impact investing. Think of it like this…
Philanthropy + Investing = Impact Investing
Is for anyone who has some money they want to invest in projects or organizations that are creating a better world. It applies to any cause, or issue. And can reach any community or group that is near and dear to your heart. If you feel uneasy about investing in companies that do more harm than good, impact investing is for you.
Why it’s better than pure philanthropy
When wealth is accumulated in one place for too long it stagnates. Money needs to move and connect people and their ideas. It’s energy manifested as human productivity. When money is given as a grant or donation, that is taking money from one place and putting it in another.
What is the economic incentive to be productive when the money was given as a gift?
When your grandma sends you a check for your birthday, do you spend it on education? What about investing it in your retirement account? Gifts and donations don’t have the same obligation as a loan.
If you look at a tree, it provides sugars that it secretes into the soil for the benefit of the microorganisms that live in the soil. However, this is not a simple donation. The tree is able to photosynthesize the energy of the sun and turn it into a valuable “product” that it shares with his homies underground. In exchange, they provide the tree with nutrients, including access to water and vital elements the roots of the tree wouldn’t be able to access on it’s own.
By sharing the love (plant sugars, to use a very simplified term) all creatures in the forest ecosystem benefit.
This is what happens when money is provided as a long-term low interest loan to a social enterprise. This allows them to create what they need to impact their target audience. And this impact affects all areas, NOT just the bottom line.
So instead of having money disappearing after the grant or donation, the money can be reused over and over again. Helping the same group, or multiple groups for as long as you want.
This is one reason why I think impact investing is better than regular philanthropy. There is an integrated accountability to produce something with the money so that real change can occur, and a profit can be made to repay the investor. The cycle can continue indefinitely!
Greater Flexibility for Donors
Being able to test out different ideas, especially through micro-financing, donors become investors and can provide lessons as they share not only money, but business ideas across different sectors.
As corporations have grown and merged, it’s become prohibitively expensive to buy in. If you only have a small amount of money to invest, you’re not able to benefit as much as those who started 20 to 30 years ago. With impact investing, you may not make the same returns as on the stock market, but whatever money you have will be incredibly valuable to the groups you invest in.
If you’re reading this article, you care more about the future of humanity and our planet, than you do about making the most amount of money from your investments. You care and you want to help. And up until now, you felt powerless.
Well I’m here to tell you that even your $20 extra dollars could be put towards a project that could use your money. And this greater flexibility means that more people can get involved and feel like they’re contributing to improving life for everyone.
There are more options too! You could use some form of private debt, (this is a loan provided by an individual instead of an institution or bank) which is the most common financial instrument according to the 2017 GIIN Annual Survey. And there are new instruments as well, like pay-for-success contracts.
From this perspective, more companies are creating hybrid organizations that blend for-profit with not-for-profit goals to achieve greater access to implementing social change. By aligning profit with purpose, the entrepreneurial spirit to solve problems shifts into high gear. And without a moment to lose!
An important aspect of impact investing is bringing together investors who want to support worthy causes, and people with new and different ideas who formerly were excluded from traditional financing. This is an incredible paradigm shift that rewards diversity in all areas.
Diversity of investors
Many people are turned off from investing because they don’t like the gambling aspect of the capital markets. They also may have a distrust for large corporations who often do more harm than good. This has meant that a large portion of the population hasn’t even been in the game! They left their savings to rot in their bank account, making no interest and no long-term impact for either themselves or their communities.
If they did invest their money, they probably paid a professional to take care of it for them. There is nothing wrong with this strategy. It can be a wise choice if you’re worried about losing your initial investment. However, you lose the excitement of making a difference.
There are many different micro-financing options that would allow even beginner investors to test the waters, and watch how their money creates positive change.
Democratizing venture capital
On the flip side, there is a lot of unconscious bias in regards to the kind of entrepreneurs or businesses who get venture capital. The exclusion isn’t always done consciously, but the result is the same. The vast majority of people who win investment dollars are white males. Why is this?
Because there is an unconscious bias for traditional investors to favour people who look and behave like them. And it won’t come as a surprise that most venture capitalists are white males. And so the cycle has continued over many generations.
As we move into the impact investing space, we become aware of these biases and learn to look past the traditional “markers of success” and consider the purpose behind the projects. In this case, the project itself matters more than how much you have in common with the entrepreneur who is running it.
It’s also important to note that the largest growing sectors in entrepreneurship are women and minority groups. Learn more about how black women are outpacing all other demographic groups in the US, (USA facts).
By supporting more diverse people, the world gets access to more diverse solutions and ideas.
Scaling Innovative Ideas
Possibly the best part of this whole concept is the idea of scaling great ideas. Just like any child, a small business needs support in order to grow up and become independent from its parents. The whole rationale behind impact investing is not to create dependent systems, but to enable entrepreneurs to find success in their field.
Once the idea has been proven and a system is in place, there is massive potential to share these new processes with others.
How to Get Started with Impact Investing
It needs to be said that we cannot provide you with investing advice. You will need to perform your own research and analyze what projects or initiatives are the most important to you.
And just like any form of investment, before you commit any of your hard earned dollars you have to first assess your risk tolerance. In other words, how open are you to losing all of your money? The more risk you are willing to take on, the broader your scope when choosing projects or investment vehicles.
You may be motivated to help achieve one or several Sustainable Development Goals, or perhaps you would like to work directly with entrepreneurs. One field to explore is microfinancing, where you provide small amounts of credit to the businesses who are innovating or creating positive change. You can work with local businesses or entrepreneurs in developing nations.
Another question to ask yourself is how much direct engagement do you want to have? The types of investments you choose will largely depend on whether you intend to “get your hands dirty” or if you want to take a hands-off approach.
Developing your investment strategy is the same in this space as it is anywhere else. However, instead of thinking only about the bottom line, you now have a triple bottom line.
- What is the social impact?
- What is the environmental impact?
- What is the economic impact?
Taken together, you might choose an option that provides less financial return, but creates positive impacts in the other areas. You also need an exit strategy. Just because you’re working in this less traditional investment space, doesn’t mean you should abandon your objectivity.
Only you can decide how and when you need access to your capital. So you still need to consider your time horizons and whether you can afford to not have access to your money for a certain period of time.
The world of Impact Investing is already several years in the making, and if you’re seriously interested in getting started, you can read more about turning your strategy into action from the Rockefeller Philanthropy Advisors . There are a lot of questions you need to ask yourself, and part of the fun is discovering the wealth of opportunities waiting for you. When it comes to making positive change, it’s never too late and never too little.