The term “impact investing” has only been around since 2008, but has been increasingly picking up traction in recent years. The Global Impact Investing Network (GIIN) reported in its annual survey that respondents from the world’s leading impact investing organizations and funds invested $22 billion in 2016.
What’s more, projections for 2017 show deals increasing by 20 percent and capital by 17 percent from 2016.
For those that care about a cause or community, impact investing is like having your cake (made with socially-conscious ingredients, of course) and eating it too. It generates a meaningful social or environmental impact, along with financial return. Impact investors seek repayment and hopefully return on their capital, but also strive to make a difference for a specific cause that the investment addresses.
Impact investments invest in either for-profit businesses called “social enterprises” — companies that strive to achieve a social outcome — or non-profits with a commercial arm that makes money.
Mark Crosswell, Community Foundation for Greater Atlanta’s Managing Director of Social Impact Strategy, says that social enterprise businesses, and their investors, may address certain problems in a more sustainable manner than non-profit solutions.
“By investing in initiatives that leverage a business objective, such as growing an earned revenue stream, investors are influencing sustainability and scale in ways that has previously evaded traditional philanthropic investments,” says Crosswell.
Just as traditional investing can be done on an individual (angel) or group (fund) scale, so can impact investing. Crosswell points to impact investing firms, many of which focus on specific socially-responsible industry verticals like health tech or clean tech.
Community-based impact investing, which focuses on local projects such as charter schools, affordable housing, or sustainable food sources for a neighborhood, is often conducted on an individual or less-formalized group level.
How do impact investors get started?
For Dan Graham, founder of Austin-based social impact fund Notley Ventures, it began with his own entrepreneurial endeavor. His e-commerce and custom printing business saw high-demand from the non-profit community — they needed t-shirts for fundraisers, banners for marches. This exposure got him thinking about his company’s impact.
“What we really struggled with was, what exactly was our passion and purpose? What was the thing that we could get the company to rally behind?” says Graham. “What we ended up doing was creating a giving program that was kind of different.”
Graham’s team created a tiered sponsorship model that employed money spent by large non-profits to subsidize the cost of products for smaller non-profits.
”It sort of became a little self-contained non-profit business as part of our larger company. It actually became this really robust piece of the business, and it really changed our culture — that idea of taking a business model and using it to scale social impact and philanthropy,” says Graham.
“I got pretty excited and passionate about helping these non-profit entities by making them more like businesses. That’s the social innovation portion,” says Graham.
After stepping into the social entrepreneurship world, Graham started Notley Ventures to scale his efforts. The fund focuses on both non-profit and for-profit enterprises.
For example, Graham points to a for-profit pharmaceutical research company that does drug discovery for genetic diseases. the company’s stated goal is to treat “100 diseases in just 10 years”.
“They’re attacking this challenge in rare diseases, in that there’s not a lot of money poured into them because the market is not very big — but in aggregate they cause a lot of suffering and death,” says Graham. “Their mission is to eradicate suffering in treatment, but they are for-profit.”
Another option for impact investors is a hybrid non-profit venture. Graham points to Easter Seals, a national non-profit that provides job training and services for the disabled. The non-profit launched a commercial component in the form of a landscaping business run by the residents. The revenue is used by the non-profit.
A similar example is Good Measure Meals, the for-profit arm of Open Hand Atlanta. The net proceeds earned by Good Measure Meals go towards supporting the non-profit, which addresses nutrition shortages in the community and improve outcomes of nutrition-related chronic disease.
What about the returns?
Crosswell says that community-based impact investing is still developing, and as such, there aren’t yet benchmarks or norms to compare it to traditional investing.
Graham says that returns may be lower and deal flow slower.
“For these types of social ventures, there’s not as many deals to look at. And an investor also has something other than profit to look at — they want to look at the social impact,” says Graham. “I think anyone operating in this space just knows that this type of investment is not competing with the same investment dollars that the venture capitalists or a high-worth angel is looking at.”
But, as opposed to a general charitable donation, there is some opportunity for financial return.
“If you compare returns to capital that is allocated or set aside from wealthy individuals to just give away, in philanthropic funds or family foundations, the return on that is zero. So when you compare that to investment returns, the outlook is really good — there’s actually the potential of a return,” says Graham.
In fact, GIIN reported that new impact investors say their portfolio performance overwhelmingly meets or exceeds their expectations for both social/environmental impact and financial return.
There’s also a tax incentive — these investments may be invested directly out of a donor fund, so can be made with pre-tax dollars. Graham says the IRS has been increasingly flexible in allowing people to invest out of their philanthropic funds, which is driving the growth of the sector.
Another factor driving growth, says both Graham and Crosswell, is awareness, particularly by high net-worth individuals.
“High wealth individuals are wanting to do this as part of their diversification strategy,” says Graham. “They’re trying to make social change happen as part of their business model. The demand is growing in the large financial institutions and the government and it’s making it easier and providing more resources. Everything is trending this way.”