What is Impact Investing?
Impact investing is the placement of capital into businesses, organizations and funds with the intent to create measurable social or environmental benefits alongside a financial return.
Traditionally, charitable donations and business investments are considered separate or even antithetical activities. Impact investing provides a third option for financing social impact between a 100% financial loss of a donation and a market rate return on a conventional investment. It seeks a blended return, the overall return achieved by combining an investment’s social impact with the financial return.
- The US has $trillions of philanthropic need and only $billions of philanthropic donations, yet American households could unlock $28.6 trillion in investable assets.1
- Adjusted based on population %, Michigan has approximately tens of billions of philanthropic need and only $9.8 billion of philanthropic donations, yet Michigan households have $880 billion in investable assets.2
- Hersch, Warren S. “Household Investable Assets Top $28 Trillion.” LifeHealthPro. 4 Jan. 2013. Web. 09 Oct. 2013.
- “Giving USA: Charitable Donations Grew in 2012, but Slowly, Like the Economy.” Lilly School of Family Philanthropy. IUPUI, 13 June 2013. Web. 09 Oct. 2013.
Donations alone are insufficient and unsustainable ways to fund the programs and services provided by non-profit organizations.
Impact investing provides the option to accelerate positive change by tapping into a much larger pool of capital currently invested globally in conventional portfolios. Even devoting just a fraction of these investable assets will make a marked difference.
Who receives impact investments?
Social Enterprises, which are mission driven organizations (non-profit or for-profit) that use business strategies to generate sustainable social impact.
How do for-profit social enterprises deliver social impact?
These businesses provide critical goods and services directly addressing key social issues traditional businesses do not. Their performance is determined by measuring their financial, social and environmental impact, also known as the “Triple Bottom Line.”
How do non-profit social enterprises deliver financial return?
Many non-profit organizations provide goods and services to paying customers in the same manner as traditional businesses. Earned income often accounts for a small portion of the total resources needed to cover expenses. Donations are raised to balance budgets, and impact investments may supplement donations.
How do non-profits use impact investing?
Program Related Investments (PRIs) are used by foundations for their potential to meet charitable purposes while generating financial returns. PRIs are tools such as low-interest loans or equity investments that provide opportunities for foundations to go beyond grantmaking to allocate a greater share of their resources to support and assist nonprofits and achieve the foundation’s philanthropic goals, while growing their assets. In turn, this allows foundations to recycle their funds and leverage them for greater impact. Private foundations can count PRIs as part of their annual minimum payout.
Is impact investing widespread? Who else is doing it?
Pioneering foundations, banks, fund managers and individuals are actively using impact investments to drive specific social outcomes aligned with their missions and values. They are turning to their own communities recognizing that they can create a positive impact close to home while generating financial returns.
Do you think impact investing should be used instead of traditional funding methods?
Impact investments should be deployed alongside traditional investments and charitable donations to create sustainability and drive community impact. Impact investing offers a new tool for funding social impact while delivering financial returns.