Impact Investing is steadily becoming a mainstream option for investors large and small. Philanthropy, which has been around for centuries, is looking a little jaded by comparison. It smacks a little of amateurish do-gooding, a bit self-indulgent perhaps, even a bit hit and miss, dependent on how well a foundation or family office has done this year. It is an inescapable facet of philanthropy that long-term funding is contingent on individual or family fortunes.
Yet in truth both philanthropy and impact investment are needed, and the dividing lines between the two are starting to become very blurred. While philanthropy by definition exists within a fairly loose regulatory framework, impact investment is and will be ringed by very tight – and necessary – regulation, to protect the investor, who often will not be very rich at all. According to the recently published 2015 BNP Paribas Individual Philanthropy Index, impact investing is “seen as the most promising trend by most philanthropists worldwide” as “it offers the potential of unleashing a huge base of capital to fund sustainable market conditions.” The critical phrase there is ‘huge base of capital’; impact investing can potentially unleash vastly more capital than any amount of philanthropic initiatives.
Impact Investing is also starting to get noticed by policymakers, who everywhere are anxious that the fiscal purse will not stretch to accommodate all demands and needs. In Britain for example, the implementation of Social Investment Tax Relief in July 2014, which enables individual investors to take a 30% income tax relief per tax year on investments of up to £1 million in charities or social enterprises, is a very welcome policy innovation.
Nevertheless, philanthropy has been and continues to be very important, almost for its leadership signals as much as any investments. It shows investors that changes can be made, bringing social and community benefits.
No longer just setting an example
Philanthropy sets an example for impact investment. Not so much a moral example (though that is important) but an example of how social progress can be effected through the directed attention of powerful wealth. Eminent philanthropists such as Bill Gates help to demonstrate that catalytic philanthropy, where personal and family wealth can fill a gap between public and private sectors, works.
And it has worked, for centuries. But it is no longer enough. The structural problems faced by governments everywhere are so massive – nothing less than the unsustainability of the welfare state in its current form, or the overwhelming difficulties of tackling climate change, to take just two examples – that a more widely-based social investment is needed from the private sector.
Moreover, the financial crash has irrevocably altered perceptions of individual financial and social futures. The middle classes of the developed nations have seen their pension prospects devastated. The return they can expect on their investments has been crushed, while the world they and their children can look forward to seems darker than perhaps at any time since the 1930s.
This explains, in part, the rapid growth of interest in impact investing. The number of funds involved in impact investing has grown fast since 2007, and the amount of assets under management in impact investment is set to explode over the next decade, with capital in a range of forms, including equity, debt, working capital lines of credit, and loan guarantees, with investments in microfinance, community development, clean technology, and many others all making themselves felt. Rising demand for impact investing is being matched by rising supply of impact investing opportunities.
The development of social stock exchanges will, over the next few years, transform the possibilities for impact investment, by offering ordinary retail investors genuine alternatives for their savings – alternatives that offer a highly diverse portfolio of ways to make a profit that is more ethical, more socially beneficial, more moral.
While the world of philanthropy will continue to enable massively wealthy individuals and families to work in their own ways, towards achieving particular, specific goals, the world of impact investment will become increasingly responsible for taking on much longer-term and larger projects: it will, in other words, do much more of the heavy lifting, while philanthropic efforts will become much more the artisan, bespoke side of the market.