As the investment culture expands from simply the bottom line of profit to an increased focus on the triple bottom line (social, environment and profit), philanthropy will continue to be an essential catalyst in unlocking the potential of impact investing. This is because these game-changing funding models may not achieve the necessary scale to produce a profit without some initial subsidies.
In this new climate, it is difficult at times to keep up with the jargon and modern nomenclature. Many articles interchangeably refer to fledgling terms, such as venture-philanthropy, mission related investing, blended value finance, impact investing and social finance, etc. Also, because of the proximity of these terms, they are often treated as instruments of philanthropy, when they are much better represented in the investment domain.
With the rise of GIIRS, B Corp certifications, social and/or environmental impact metrics etc., and events like the G8 Social Investment Forum, it is clear that investors are collectively caring more about society and the environment, and not just profit. However, due to various reasons of scalability, growth rates, financial traction and the relative novelty of impact investing, donations are often required to top off successful investments. This is why bridged terms such as venture-philanthropy are being introduced, as they reflect the heterogeneity of impact investing.
What is of concern is that these terms are often also used to describe "new ways of being philanthropic," which is where the discourse goes off track. For example, if philanthropists are introducing new dollars to make impact investments, they are being more philanthropic; but if philanthropists are taking previously allocated dollars for donations and redirecting them to impact investments, they are being less philanthropic. This distinction is not being made clear in the evolution of the social investment culture.
It is important to distinguish between philanthropy and impact investing, (as well as any hybrid nature of the two) because many charitable activities cannot rely on the free market system to dictate whether or not they are necessary, or should be funded. We need a strong philanthropic sector to ensure the sustainability of charitable services and programs; a sector that is not influenced by any potential monetary biases (which are inextricably linked to impact investing).
This is because impact investing can actually hurt the charitable sector if confused with philanthropy. Returning to the previous example, if philanthropists begin to convert donations into impact investments, they are not only removing those much-needed dollars from the sector (because many social enterprises are structured as private entities), but they are also diminishing the charitable act of philanthropy itself.
However, just as it can take away from the charitable sector, impact investing can also complement it. This can be achieved by investing in "self-sustaining social enterprises" that can viably replace former "donation-dependent nonprofits." This then liberates those funds, decreasing internal competition among charities and consequently provides a larger pool of funds for the nonprofit/charitable sector to function within.
Thus, impact investors have two choices when it comes to influencing the philanthropic/charitable sector. They can either convert their donations into investments, where philanthropy and charity become second-rate to impact investing and social enterprise, or they can free philanthropists from inefficient burdens, helping them to focus on where their donations are needed most. At this point in time, I certainly hope for the latter, as the consequences of the former could erode the foundation of the charitable sector.
(An earlier version of this article was posted on MitchellKutney.com)