“If you’re looking for a respite from the daily parade of rancorous headlines and doomsday predictions, might I suggest dipping a toe in the world of social impact investing.” — John Carpenter for Forbes Magazine
Modern society rests on a foundation of people willing to invest their resources into sound, innovative, and sustainable causes. Now more than ever we look into a future that will be determined by where we decide to focus our collective energy today. Technology allows us to shape the evolution of society more than ever before. Why funnel money into traditionally acceptable investments like oil companies, mineries, and financial institutions when we could shift our funding to causes that will endure and improve the future for all of us? Each of us is an investor, and each of the investments we make now towards a responsible cause will steer society towards a bright future.
If we want to make a difference, then why not donate? While donating has been the foundation of nonprofits and will always be important, there are several key reasons why donating is not enough to change the world.
Effective Business Models are the Solution–More Money Isn’t
James Lee Sorenson, guest writer for Forbes Magazine, wrote that donations to charitable causes is at a record high. Historically charitable causes have run on donations. Donations allow nonprofits the freedom to utilize funds freely, without needing to focus on future monetary payoffs. As Forbes points out, the problem with this model is that donators can’t see where their dollars go, and for all the trillions that have been spent it doesn’t seem that much social change is actually accomplished.
“But the problem is not money, per se,” write Sir Ronald Cohen and William A. Sahlman in the Harvard Business Review.3 “Take a look at the social sector in the U.S. There are $700 billion of foundation assets, and 10 million people working for non-profits. These are huge numbers. Yet there are massive inefficiencies in capital allocation. Too often donors starve organizations and entrepreneurs by refusing to cover overhead. This makes it impossible for social organizations to scale.”
It isn’t that nonprofits aren’t using donation dollars wisely. The purpose of nonprofits has always been to utilize donations to make immediate and future impacts on important social and environmental issues. Making more money has never been a focus, and so nonprofits tend to grow slowly. In the
face of overwhelming need nonprofits spend donated dollars on immediate rather than future need. The impact nonprofits can have is reduced by their inability to compete with powerful money-making business ventures.
This is the essential problem with using donations to fund the bulk of social impact causes. We are not lacking in capital, nor in able, well-staffed non-profits. What we lack is a system of investing, rather than giving, dollars so that organizations can operate on effective business models to accelerate real change in the world.
While donations will always be extremely useful by enabling nonprofits with capital to use freely to meet emerging needs, large-scale change takes place through social impact investing. Nonprofits can accept and use donations as they always have, while also using social investment dollars to expand their reach and compete with profit minded business ventures.
Can We Expect Real Returns from Social Impact Investments?
In an Atlantic Magazine article Al Gore says that when he left the White House in 2001, he didn’t know what to do. At 52, he was without a government job and a determined sense of purpose for the first time in his professional life. He hadn’t been wealthy compared to other senators, but after leaving government office Gore devoted his attentions to good investments, and rapidly accumulated hundreds of millions of dollars.
While he still devotes about half of his time to climate change, Gore devotes the other half of his time to the Generation Investment Management Company. This project attempts to reduce the damage caused by businesses who operate without regard to environmental or social negative impact. In the ten years or so that Gore has been working on this project it has made more money by investing in socially responsible businesses than has the average investment made with only profit in mind.
According to the Atlantic, Generation has invested more than $12 billion for its investors. Investments made by the Generation Company gained 12.1 percent a year during the difficult years in which most stocks dropped to a growth rate of 7 percent. Generation has one of the highest-returning funds, and one of the least volatile. This level of stable success could make even the most profit-minded investor pay attention. Just because investments are responsible and sustainable doesn’t mean they won’t be profitable. In fact, they may be more profitable than profit-only minded investments.
“Sustainable Capitalism,” as Gore and Generation’s senior partner David Blood call it, can produce returns as good or better than traditional capitalism, and may be more stable. The realization that social impact investing can actually make more money than traditional investing takes it out of the realm of charity and into the consideration of serious investors.
“Everyone agrees that impact investing is on the rise,” writes Brian Trelstad in the Harvard Business Review.2 “According to the Global Impact Investing Network, the market for impact capital, currently sized at $60 billion, could grow over the next decade to $2 trillion, or 1% of global invested assets.”