Philanthropy Today: Key Approaches Against the Backdrop of Impact Investing

Paul Carttar, 3 May 2018:

In recent years, the social investing landscape globally has been increasingly dominated by discussions relating to “impact investing” – ie, the deployment of capital in pursuit of both financial and social returns. Often times, this is fuelled by the belief that individuals and organisations aiming to address significant social challenges can “have it all” by changing the world while also seeing a full market rate return on their money.

This leads to a provocative question: if true, why would anyone seeking social impact choose to engage in philanthropy – and actually give their money away?

In fact, this question is far more than just provocative, it is important, given that the magnitude of funds actually donated to social causes dwarfs that amount of impact investment. 

According to the latest survey by the Global Impact Investing Network (GIIN), the total impact investing market globally in 2016 totalled “at least” $114 billion in terms of assets under management, i.e. the total amount of money deployed over multiple years that is still invested in active deals. In contrast, total charitable contributions made during only the year 2016 totalled $390 billion – in the US alone.

So who are these people, and why do they persist in supporting social causes at such extraordinary scale with grants, when they might actually make money? 

Relying on the US data, the answer to the “who” question is quite clear – these “philanthropists” comprise a broad and highly diverse array of parties by form, areas of focus, demographics, and size.  Indeed, they run the gamut from the Gates Foundation, which donates more than $4 billion annually, to my 95-year-old mother and the $10 a week she gives to her church.

The “why” question is somewhat more perplexing and suggests several possibilities.

  • They may not have contemplated any alternative approach, possibly due to lack of awareness, the belief that the promises of impact investing are oversold or simply not relevant to their situation.

  • Or, they might have a pro-active belief that the causes they support and impact they are seeking simply do not lend themselves to the creation of significant, sustainable earned revenue streams so fundamental to impact investing. While my mother probably belongs to the first group, it is intriguing to think that as a lifelong Lutheran she recognises that Martin Luther’s campaign against the sale of indulgences 500 years ago probably eliminated any church’s best shot at building a robust profit model based on direct sales of “products” to their “customers!”

  • Alternatively, they might be proponents of impact investing and see significant ways in which philanthropy can actually enhance its growth or effectiveness.

This question merits exploring, as philanthropy remains not only the biggest source of funding for creating social change but the category most accountable for actually generating results. While impact investing purports to have a “double bottom line,” it is not at all clear what degree of commitment impact investors truly have to the social rather than the financial side of the ledger. That said, it is increasingly evident that hype notwithstanding, impact investing represents a fresh way of thinking that has many potential implications relevant to how philanthropies with very high aspirations for social impact might formulate their strategies.  On balance, I would submit that impact investing has:

  • Focused much attention on the “revenue models” of social purpose organizations, which has challenged their leaders and funders to be more purposeful about developing sustainable sources of non-grant income. This has the potential to dramatically improve the fiscal health of many nonprofits and better leverage grant funding in general to increase its social return on investment.

  • Caused philanthropies with large endowments to confront the fact that their ability to drive social change is not a function exclusively of the 5% of assets they deploy in grants but also may be advanced by the 95% they invest to generate the 5%.

  • Amplified interest in promising ideas for creating social impact through income-generating activities that may be far too high-risk for mainstream venture financing. These ideas might be attractive opportunities for philanthropic grants to support program pilots, business-model testing or market development, perhaps as part of a “blended finance” deal structure.

  • In general, increasing attention to and accountability for the social impact created by mainstream businesses can only be a positive thing.

Because philanthropists are ready to “risk it all” to improve our world, and therefore have vastly more degrees of freedom in terms of how to deploy their assets, they arguably constitute the class of social investors with the most compelling standing as drivers of social impact. Accordingly, how they actually choose to deploy their assets is critically important to our collective well-being.

There are, in fact, many options, and philanthropies can – and do – look at their potential pathways much differently.  This is evident in the choices made by many private foundations, each of which must determine the type of impact it is trying to achieve and how it can most effectively deliver desired results.


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