FEATURE: Impact Investing, The "Invisible Heart" Of The Markets?

Amisha Mehta Assistant Editor London 3 February 2016

FEATURE: Impact Investing, The

There are many roadblocks for would-be philanthropists: bad governments, corruption, lack of commitment, time, patience, focus. The biggest of all – money – is of course no barrier for the high net worth. The rise of socially-conscious investment, however, is sometimes portrayed as a threat to traditional giving.

Impact investing refers to investments in companies or organisations, with the aim of generating a social or environmental impact while also making a profit. It demands attention across all stages of a business’s growth and is fast gaining momentum. The 2015 GIIN and JP Morgan impact investor survey revealed a 7 per cent growth in capital committed between 2013 and 2014 and a 13 per cent growth in the number of deals. 

The trend speaks to a growing group of wealthy individuals looking to become "impact entrepreneurs" through the same risk-taking, results-driven approach that made them successful. Such entrepreneurial types are equally drawn to venture philanthropy not only because of its transparency and hands-on nature but also for the intellectual contribution they can offer.

The term venture philanthropy was coined by John Rockefeller III in 1969. He described it as “an adventurous approach to funding unpopular social causes”. Note this is different to – though it comes under the same social investment umbrella as – impact investing. Not all venture philanthropy targets a financial return. The practice is understood to use the tools of venture capital funding to promote start-up, growth and risk-taking social ventures. 

After a handsome fortune is earned, you might think giving away money would be the painless part. On the contrary, philanthropy done well is a job in itself and one the time-pressed may be tempted to do in a scattergun way. Social investors, however, come with values of patience and vigour.

“Venture philanthropy means radically overhauling an organisation, with all the upheaval this brings, when someone could choose instead to support work which is already established,” Angela Kail, head of the funder team at New Philanthropy Capital, told WealthBriefing. “It can mean committing large sums of money to long-term investments. NPC would like to see more of this sort of strategic thinking from funders.”

It’s the really early stage impact enterprises that need the most capital and expertise – and this is where venture philanthropists and impact investors are equally present, according to John Ayliffe, founder of 1to4 Foundation. If and when these businesses reach later stages of growth, impact investors will make up the majority of the funding.

The skillset of impact investors is much like that of private equity or angel investors. This is venture capital in its purest sense funding areas where access to both money and advice is generally not that accessible. This requires having to think outside the box, being open to new ideas and ways of doing things,” said Charles Mesquita, senior director at Stanhope Consulting, the charities arm of Stanhope Capital. You can do all the due diligence you want but, ultimately, you have to believe in the people and in the concept as the risk of losing all the money will always be there.

These people need to know where their money will end up and so transparency is a must, an area where many large charities are arguably falling short. Such a lack of transparency is exactly what fires up talk of the use and abuse of non-governmental organisations. 

In November last year, the UK's Charity Commission suggested many charities were making basic errors in their financial reporting. The governmental body identified 76 charities with an annual income of over £500,000 that appeared to have high governance costs. It found an 87 per cent majority of these had incorrectly allocated costs to governance costs when they should have been included in other categories, including charitable expenditure. The most common mistake was to equate governance costs with general management and administration costs.

“The dilemma here is that people cannot see how much their money is having an impact. The days of wealthy people writing a cheque and saying 'I've done my bit' doesn't make them feel warm and cuddly anymore,” Jon Needham, global head of fiduciary services at Societe Generale Private Banking Hambros, told WealthBriefing.

“With impact investing, they know very quickly if their money is working or not. It is transparent and easy to measure. Plus, if investors want to exit they can do so and deploy their capital more effectively elsewhere.”

As for patience and time, these can be bought to a certain extent; they are issues that can be pacified with the scale of wealth. Today, many high and ultra-high net worth individuals have a family office with a dedicated team of specialist advisors looking after their philanthropic endeavours. This is an area that is only set to grow, according to Needham. Indeed, of the HNWIs who currently receive advice on social impact, demand for more advice from wealth managers reached 54 per cent, according to last year’s Capgemini and RBC Wealth Management Global HNW Insights Survey.

So, is this impact investing boom hurting "pure" philanthropy, which pays no attention to business plans and focuses only on non-profits with a mission to do good? In fact, the UK’s Sunday Times Giving List 2015 showed that more people are giving more money. The Sunday Times tracked philanthropy from over 300 of those featured in its Rich List and found that this group gave a record £2.577 billion over the year. 

Over the financial year of 2014-2015, the UK’s Charities Aid Foundation committed £2.19 million to social investments, compared to £478 million in donations paid to charities. Both figures were up significantly from the previous year and are expected to continue on their upward trend. So social investment is not creeping into charities’ share of the pie, rather the total pie is growing.

“Even if we’re talking about some patient capital that has been diverted to impact investing, it’s a drop in the ocean compared to the influx of new investment money that is feeding the impact investing sector,” said Ayliffe.

What is clear is that there is a seismic shift going on: a growing appetite to support the next generation of entrepreneurs, specifically those looking to make a measurable, tangible impact and to use investments for good.

“There is a whole generation of people who want to do things differently. Their motivation is to have the biggest impact; the money-making is just a by-product. It's a case of recycling grants, meaning that people are giving out money and advice to help deliver social impact and then using any returns for future impact-related and philanthropic projects,” said Mesquita.

Also, people who are philanthropically-minded are likely to be more open-minded to impact investing, but they will not divert capital whimsically, Catherine Tillotson, managing partner at the Scorpio Partnership, told WealthBriefing

“Philanthropic capital is often providing support to the most vulnerable in society. So, in practice, a serious philanthropist is more likely to dip into their investment portfolio to test out social investment rather than diverting their already-committed philanthropic capital,” she said.

This new wave of private wealth is no doubt taking some of the load off governments, who are neither led by innovation nor best placed to run the risks needed when it comes to tackling social issues. The UK government, for example, has frozen funding for the Charity Commission until 2020. Traditional philanthropy alone cannot cope, according to Sir Ronald Cohen, chairman of the Global Social Impact Investment Steering Group, also known as the father of social investment. In a 2014 letter to leaders of taskforce governments, Cohen called attention to the emergence of impact investing as a unifying force among government, the social sector and foundations, institutional and private investors, and entrepreneurs. He summed it up eloquently when he said that impact investing brings the “invisible heart” of markets to guide their “invisible hand”.

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