Impact Investing's Place on the Continuum of Private Sector Funding
With everyone from AARP to Fidelity to my local pastor talking about impact investing, it can be difficult to determine what it all means. We created this little chart to help clear up the confusion and make it easier to determine where Impact Foundation should invest financially. The chart describes the variety of ways one can deploy capital in the private sector: from investing in traditional businesses (whether publicly-traded or closely held) to donating to charity/church.
Not too long ago people had just two lenses through which to view the private economy--something was either a business or a nonprofit (charity/church/ministry). Today, those two traditional classifications constitute the ends of an increasingly-crowded continuum. On the left, the focus of the enterprise is mainly (or solely) financial profit without intentional affects on employees, vendors, the community, the environment, or other stakeholders. Similarly, on the right, the focus is mainly (or solely) on the mission or the cause that the organization seeks to address, e.g., providing clean water or ending sex trafficking.
Somewhere in the middle is the sweet spot for impact investing, which we define as the practice of deploying capital for social (including environmental) and spiritual gain along with financial return. It's overly simplistic to suggest that impact and financial return exist on the same continuum and that you can't have high degrees of both, but we've illustrated it this way for ease of understanding the broader concepts.
From left to right the potential for financial return begins to decrease starting with Charity Enterprise, a nonprofit that has a revenue model to fund and further its missions. As with nonprofit hospitals, revenue stays within the charitable realm to pay expenses or finance expansion of the mission. There are no shareholders and private individuals cannot benefit from the activities of the nonprofit except to the extent of being compensated for their work. We've written elsewhere on the blog about Charity Enterprise and the reasons many are convinced that solving complex social issues requires the addition of business models to traditional charity.
With Impact Companies and tithing businesses, gross financial return prior to any charitable contribution should be comparable to similarly situated "traditional businesses". A growing number of companies, private equity funds, and foundations are out to prove that investors can experience comparable financial return through impact investing. At least one study supports this hypothesis (read it here).
Social and Spiritual Transformation
From left (traditional business) to right (traditional charity), we see the potential for measurable social and spiritual transformation begin to grow with "tithing businesses". A tithing business is one that gives a portion (perhaps even a large portion) of their profits to charity. The Newman's Own brand is a classic example--a portion of the profits from the sales of salad dressing and other consumer products goes to charity via the Newman's Own Foundation. While it's great that Newman's Own's success has allowed them to give over $450mm to charity, there's nothing inherently good for consumers or the environment from the sale of K-cups coffee pods or salad dressings.
The potential for positive social and spiritual transformation reaches its peak with Impact Companies. Rather than isolating the pursuit of the common good to a department or program, Impact Companies make it an integral part of their business model, as in Co.Tribute, Grace Family Home Care, or the others that we spotlight on our blog. These companies stay true to their commitments through carefully defining and measuring the positive impact they seek.
You'll find impact investing at its best where there is both risk-adjusted financial return and measurable social/spiritual impact.
Why does this matter? Because if we are not clear or are unrealistic about our expectations of impact investing, the movement will not catch on. We cannot confuse tithing businesses for Impact Companies and expect both to have the same measurable social impact. Likewise, we cannot expect Charity Enterprises, which properly have no investors and no private benefit, to have the same financial gain as tithing businesses.
We welcome your thoughts and questions to help us further refine our thinking as we seek continually improving ways to change the world for good.