Impact Investing VS Investing With Impact

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Investor interest in impact investing is experiencing explosive growth across the globe. In fact, The Global Impact Investing Network (GIIN) values the global impact investing market at around $502 billion.

While many are fully invested in making an impact, there’s still a great deal of confusion among investors and startups concerning impact investment as a financial instrument and how it forms part of a greater portfolio alongside philanthropy.

There are multiple reasons for the confusion. Some believe it stems from the notion that there is a binary decision between investing for-profit and donating funds to social causes. According to Sapna Shah of the Global Impact Investing Network (GIIN), “The binary between investing and philanthropy is a false one.” Philanthropists who embrace impact investing believe that while traditional grant-making may assist in overcoming market-based failures, impact investing has the potential to leverage the power of the markets to bring about lasting change. Still, impact investing requires far more from the companies that an investor is involved in than philanthropy does.

Other proponents believe that a lack of clarity in practice is to blame for the confusion. In the experience of Gareth Ackerman, chairman of South African, family-owned retail giant Pick n Pay, many ventures that investors or organizations label “impact investing” are purely philanthropic with different expectations tacked onto them. This disconnect means that often impact startups that have no real chance of yielding the expected returns receive funding only to have it pulled later.

“We take the view that if you’re going to give money away, just give it away rather than disappointing people long-term. If you want to help people but only fund them through “impact startups”, that might never make money, they’ll end up disappointed when you eventually have to pull the plug.” Gareth Ackerman, Pick n Pay Chairman

Lack of investor clarity and its influence on impact startups

How investors regard philanthropy and impact investment can affect how organizations are structured and secure funding for various impact ventures. This is something Jimmy Scavenius, founder of Kwerafund, an organization that makes education accessible in Malawi using income sharing agreements, experienced first-hand when his local market wasn’t entirely ready for his venture in impact investment.

The benefit of experience allows Scavenius to see both sides, “Often pure philanthropy and free money isn’t sustainable as this can create dependency and complacency, but at the same time many investors are still not ready to direct their funding toward impact areas.”

While impact ventures are unable to accept tax-deductible donations while running “for-profit,” they are still able to qualify for various “philanthropic grants” alongside raising more traditional debt and equity finance. Despite the seemingly numerous potential financial vehicles available to fund impact startups, raising capital is not always easy.

For Kwerafund, raising funding through donations has proven to be more effective than securing impact investment. This led to its conversion from a company to a non-profit organization to get it off the ground.

Still, Scavenius believes his organization can move beyond being just a philanthropic cause. He explains that “It’s up to social entrepreneurs to ensure that they are self-sustainable in the long-run and can create a pull market.”

What’s an investor to do when considering impact investing?

Philanthropy and impact investing aren’t always mutually exclusive in many respects. As such, it’s vital for investors to define their own objectives in order to determine how their giving can help them to achieve their goals without inadvertently having a negative impact.

Head of family office services at KPMG in the UK, According to Catherine Grum believes it helps to have a view of where on the impact-to-return spectrum, families or organizations want to be positioned. She recommends that investors ask themselves, “Are they undertaking this exercise because they want to create a particular impact first and foremost while hopefully generating some financial return, or are they focused on generating good financial returns by investing in more impactful businesses? Both options are available, but it helps both the family and, ultimately, the company or fund they are investing in if their expectation is clear at the outset.”

Shah echoes this sentiment, “Start with your objectives – addressing a specific issue, generating a certain amount of financial return, and then work backward into what type of financial tool is best able to get you there.”

The ability to set clear expectations when it comes to giving relies on having a clearly mapped out family purpose and objectives. This will help you to determine whether or not you’re ready to take the step beyond the philanthropic realm.

This post originally appeared on Forbes.com

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