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Impact Investing and What Donors Need to Know

Impact investing has become a point of discussion (and sometimes confusion) among donors and financial advisors. But what is impact investing and what do donors need to know before considering it as a philanthropic option?

The Global Impact Investing Network (GIIN) defines impact investing as investment into companies, organizations, and funds with the intention of generating social or environmental impact alongside a financial return. The exact impact will depend on the investor's goals, while the financial returns can range from below-market to market rate.

The concept of investing capital to generate social impact in a way that also provides monetary returns almost seems too good to be true. But donors may want to keep in mind that returns, like any investment, may vary from the initial principal amount upward, and potentially downward, depending on the nature of the investment. Donors that are intrigued by this alternative means of philanthropy would be wise begin the conversation with their financial advisor.

Types of impact investing

Impact investing is a broad term that encompasses a wide range of options for investors. For example, a microfinance investor, a green-tech venture capitalist, and a low-income housing lender are all potential impact investors. The Monitor Institute notes that impact investors can be broadly categorized into two groups:

  • Financial first investors – This category of investor is primarily focused on optimizing their financial returns, while also aspiring to achieve social or environmental impact as a secondary objective.
  • Impact first investors – This group is motivated by social or environmental returns on their investments over monetary returns, while still expecting some financial return. Typically, these investors are willing to shoulder more risk to reach their social or environmental goals.

Impact investing in today’s global climate

The excitement surrounding impact investing is palpable and has been on a continual rise over the past decade. Just five years ago, a survey from JP Morgan Chase and the Global Impact Investing Network characterized the impact investing field as “in its infancy and growing.” The recent findings of the 10th Annual Impact Investor Survey from GIIN would prove these earlier predictions correct.

The 2020 GINN survey found that impact investors have not abandoned their previous investing plans when faced with tumultuous times, instead, they are staying the course. As for growth, a separate study of 1,700 impact investors found that aggregate assets under management increased from $502 billion in 2019 to $715 billion in 2020.

In a recent Forbes article, CEO and co-founder of the GIIN, Amit Bouri commented that our current social, economic, and environmental issues have presented a moment when impact investors can play a critical role.

The future of impact investing

A few enduring questions surround impact investing regarding performance and measurement. According to the GIIN survey, which questioned 294 investors managing a total of $404 billion in impact investing assets, 88 percent of respondents reported meeting or exceeding their financial expectations. In terms of impact performance, nearly all respondents noted that they have met or exceeded their expectations since inception.

Evidently, progress has been made in terms of the methods for measuring impact, which have grown in sophistication, according to survey respondents. However, there is still plenty of room to grow.

Impact investing and Donor Advised Funds

A Donor Advised Fund (DAF) is often regarded as a favourable way for donors to make a charitable contribution to causes that are important to them. Donors who have an established DAF or are considering creating one for the purpose of impact investing, should first consult their financial advisor and may benefit from the expertise of a charitable organization such as Gift Funds Canada.

Although impact investing and donor advised funds may share similar intentions when it comes to making a positive social impact, the charitable organization that sets up the DAF must comply with all federal and provincial regulations that apply to public foundations.

A charitable foundation, such as Gift Funds Canada, will tend to apply any such requirements to each fund that it manages. The investment strategy for a specific DAF must also take into consideration the short, mid, and long-term grant-making objectives for the fund.

Due to risk tolerance requirements, an impact investment strategy would require the careful consideration and planning of an experienced professional.

What’s next for interested donors?

In the wake of the coronavirus and the economic downturn that followed, plus the ongoing social and environmental concerns, the argument for investors to play a role in our collective recovery and rebuilding is apparent.

According to Bouri, he expects to see a much broader social mandate for businesses and investors to demonstrate how they are contributing to the health of their communities and the planet. This may ultimately impact how decisions are made and shift the focus of investing in a way that isn’t just about generating financial returns for the owners of capital but prioritizing positive measurable social impact.

Regardless of how the impact investing field emerges, philanthropic contributions will continue to be necessary and will play a key role in meeting the emerging needs of our communities and beyond. For donors who are new to impact investing, gaining a complete picture by contacting a trusted financial advisor and understanding all the options available to them is a prudent first step.