What is the Spectrum of Impact Investing Approaches?
Given the field’s growth and increased number of actors, the last ten years have also seen a proliferation of definitions and terminology related to impact investing. In fact, strong opinions prevail regarding whether or not the term “impact investing” is the best to capture this field. While some prefer mission-related investing or sustainable/responsible investing, still impact investing is most commonly used.
Rather than arguing about the terms, let's discuss three approaches and one overarching strategy to describe impact investor practices. Depending on who you are—and your goals and capacity—you may have the resources and willingness for some but not all of these approaches. See the image of the home as a good metaphor for describing these approaches to managing and being accountable for your assets.
Clean Up: This approach reflects the belief that your assets should align with your values, and by holding or divesting specific assets you can increase that alignment and express your values. For example: Clean and remove toxins.
Renovate: In this approach, you select assets based on specific investment criteria that define eligible and ineligible investments with the goal of incorporating the positive and negative externalities into your investment decision. For example: Paint your house.
Add a Room: By picking a specific theme, you are using your capital to drive the generation of a specific environmental or social impact. For example: Add a new addition to your house.
Manage and Measure: This overarching strategy is to continuously measure and manage the positive and negative impact of your assets and respond to new data and events. You will track the emergence of new environmental and social movements, as they become impact investment products. For example: Maintain and repair your roof.
Rockefeller Philanthropy Advisors yesterday published its handbook for impact investors, a refresh of a guide they first published ten years ago, a lifetime ago in impact investing. It is a comprehensive (182 pages) guide to the nuts and bolts of impact investing, with some help from a 45-year old avatar investor named Sophia.
With so many people now trying to get themselves oriented in investing their money for social and environmental impact, it is excellent to have a fully updated primer for beginners, and a reference book for the more experienced.
The Handbook is available (for free) at: https://lnkd.in/dH8qK7U
Philanthropy vs Corporate Social Respondibility
While both philanthropy and corporate social responsibility (CSR) have the potential to be very effective and are indeed relied upon by those in the charity and not-for-profit sectors, they are very different.
The differences between the two can be measured in the return that flows back to the giver. Businesses who engage with the charity sector like to believe that they are doing more than just donating a portion of their net profit to their chosen charity, and in effect have a corporate social responsibility program in place. Truth be known, many businesses who believe they are engaged in CSR, are really only engaged in corporate philanthropy.
What is the difference between the two?
Philanthropy is often defined as using wealth to bring about social change. A ‘philanthropist’ is a bit like a venture capitalist in the not-for-profit sector; they make a decision to invest a portion of their wealth to bring about social change in something they believe in. There may be an investment of their time and knowledge, but more often than not, the support is financial.
The philanthropists desire to participate beyond that can vary, but often they are happy to support from an at arms length. While they will likely seek to find out the impact their funds have achieved for the charity, they will usually not get involved beyond that.
For businesses of all sizes that engage in CSR (this domain is not limited to corporate enterprises as the name might suggest), it is in their interest to be involved beyond simply giving money. If a business can turn their CSR into a profit centre, then they are more likely to deepen their engagement, stay strong during hard economic times, and—as they see their CSR have a positive impact upon their own business—give more.
A CSR program that is built on the back of a shared experience—wherein there has been the opportunity to engage with a charity beyond a monetary transaction—is likely to return business benefits such as improved morale, increased staff retention, status as an employer of choice, attracting new business, and differentiation from competitors. These benefits are seldom achieved through the donation of money and money alone.
If corporate CSR program is limited to the CEO greenlighting donation request received, then in fact it’s not a CSR program, but rather corporate philanthropy.
Neither are wrong and one is not better than the other, but if a business engages in a more engaged form of giving with clear objectives in terms of KPIs and ROI from the program, all of those involved will benefit, and therein lies the magic.