SDGs blurring the boundary between philanthropy and impact investing
The distinction between philanthropy and impact investing is slowly becoming less defined, and the pursuits will need to draw even closer to meet burgeoning demand
Philanthropy by common consent means making donations to promote the welfare of others without expecting any profits in return.
Impact investing, on the other hand, means providing capital to address social or environmental issues.This kind of “social” investment will sometimes yield returns that may take some time to realize. Some of these ventures may require, at the outset, a dose of philanthropic financing so they can evolve and become mature enough to be good impact investments.
In the past, philanthropy and impact investing were separate silos in the financial world. This means that the world’s biggest philanthropists tend to donate to their own causes. The impact investors seek out worthy investments. Both work independently of each. But the promulgation of the Sustainable Development Goals (SDGs) by the United Nations, beginning 2015, has been pushing philanthropy and impact investing together towards a common goal and possibly blurring the boundaries between them.
The SDGs are a collection of 17 global goals set by the UN with the objective of “Transforming our World: the 2030 Agenda for Sustainable Development”. The SDGs cover social and economic development issues including poverty, hunger, health, education, global warming, gender equality, water, sanitation, energy, urbanization, environment, and social justice.
For the philanthropists, the SDGs identify the areas they want to donate to, while for the impact investors the SDGs provide the projects and opportunities they would want to invest in.
The United Nations International Children's Emergency Fund (UNICEF), for example, is one of the biggest philanthropic organizations, investing US$4 billion annually in emergency food and healthcare services for needy children around the world. Because of the urgency of achieving the SDGs as well as the magnitude of its philanthropic activities, UNICEF has recently recognized that the traditional philanthropic approach is no longer sufficient for its requirements.
“When you’re looking to reach the 1.8 billion children by 2030, the largest ever cohort of young people that we have now around the world, then the traditional philanthropic approach needs to be supplemented by impact investing. This is where we are deploying and looking for business solutions,” says David Evans, chief of global philanthropy at UNICEF.
The good news for the philanthropists is that impact investing has become more mature and sophisticated in recent years. As recently as 10 years ago impact investing consisted largely of investing in small-scale start-up businesses engaged in social or environmental projects.
As of 2019, the impact investment market has grown exponentially in terms of size, product sophistication, investor profile, and demand.
According to the Organisation for Economic Co-operation and Development’s (OECD) Social Impact Report for 2019, the number of impact investors rose from fewer than 50 pre-1997 to well over 200 by 2017. Social impact investment (SII) assets under management currently represent US$228.1 billion, 56% of which is allocated to emerging markets.
In Southeast Asia alone, a total of US$904 million in impact capital was deployed by private impact investors, while US$11.2 billion of impact capital was deployed by development finance institutions from 2007-2017, according to the Global Impact Investment Network (GIIN).
In terms of impact investment products, now there are impact funds, impact bonds, impact debt structures, blended finance structures which mix government money or non-profit money with profit-seeking capital, as well as long-term investments with sub-market rates.
“Now there’s a whole range of impact investment activities and opportunities that families, businesses and individuals can engage in. The exciting thing now is that people can look across their portfolio and see opportunities to have social benefits across the entire range of their investments while still continuing to work on and support philanthropy,” Evans says.
With the advent of the SDGs, however, stronger linkages between philanthropy and impact investing need to be developed to complement each other’s needs and requirements.Such a linkage will move the current limited supply of viable impact projects closer to meeting the huge demand.
At present, this gap is being filled in part by organizations like Ashoka, a global network of social entrepreneurs, which provides funding through grants for social and/environmental projects.
“We work with about 3,600 social entrepreneurs in 92 countries. We provide them with grants and support to help them scale up their ideas. We’ve been going for about 35 years now and we’re very much an entrepreneurs’ organization, so we work with the founders of social sector organizations. We look for entrepreneurs with disruptive and innovative business models,” says Mark Cheng, managing director of Ashoka.
He adds, "We also mobilize a significant amount of impact investment capital as well. And that’s really been a trend over the last 10 years. So historically we’ve been very strong at helping them raise donations and philanthropy.”
Ashoka raises about US$50 million annually purely through grants, which are used to support social entrepreneurs and social enterprises around the world. However, its capital raising program on impact investment is five to 10 times more.
“The promise here is that if you can offer investors a return on their investment as well as just simply leveraging in philanthropy, potentially there could be a much larger pool of capital that you could unlock to solve these issues. Particularly with the SDGs, the capital need is far, far greater than is available in the traditional philanthropy markets. So it’s clear that we have to move in this direction,” Cheng says.
However, one issue that is holding these aspirations back is to what extent these social enterprises can offer similar financial returns to those available in the commercial sector. Many of these social projects that Ashoka finances, for example, are in poorer countries where the average income is only US$4 a day per capita or less. At the same time, many of the projects are in sectors that are very challenging such as education and healthcare in remote rural areas.
Cheng, however, believes that there is a spectrum of financial returns that is possible, saying: “Many of the entrepreneurs that we work within areas like clean tech, renewable energy, and medicine genuinely have very strong financial returns as well. Those kinds of projects we’ve seen raised US$50-100 million dollars in capital.”
Cheng argues that there is potential for philanthropists to play the role of a traditional venture capitalist in developing impact investing opportunities.
“Traditional venture capital takes very early stage risks. The difference is venture capital requires very high returns in exchange for that risk. One of the opportunities that we see is where we can engage foundations to take that risk but for a lower return in exchange for very high social return. And that’s a conversation that we’re trying to broker with high net worths, with philanthropists, with foundations. Because what could be a key to unlocking this market is who can take that early stage risk,” Cheng says.
Demand for philanthropy and impact investing is also growing amidst the booming private banking, wealth management, and high net worth investor (HNWI) market.
“Philanthropy has gained a lot of traction in the wealth management industry over the past decade. What we do with our clients who have interest in philanthropy is to discuss with them how they could structure it, what their involvement would be, do they want the second generation involved with it as well. We actually have a philanthropy department in the bank,” says Arjan de Boer, head of markets & investment solutions, Asia at Indosuez Wealth Management.
The interest in philanthropy among private bank clients and HNWIs has been driven partly by the increasing awareness surrounding ESG investing, as well as the recognition that philanthropy is no longer just a hobby.
“It’s really becoming mainstream. The question in the past was whether investing in a company with a high ESG score meant foregoing some returns. Now that thinking is actually starting to turn around. They’re becoming aware that investing in something with very low ESG scores may actually lose money,” de Boer says.
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