For decades, philanthropy has been understood as a fairly simple transaction. Actually, it hasn’t exactly been understood as a transaction at all. Philanthropy until now has always been seen as a one-way conduit, allowing individuals and businesses to solve problems large and small by throwing money, time or resources at them–with no expectation of return.
However, philanthropy of that sort is often ineffective, as much of it flows through hands that may not have the business or financial talent to maximize the philanthropic gifts provided by donors. Many purely philanthropic organizations are top-heavy, bureaucratic, and plagued by inefficiencies that simply wouldn’t survive on the open market.
An emerging trend, though, shows significant promise to alter the way we understand and practice philanthropy – for the better. As opposed to basic philanthropy (and as its name suggests), impact investing seeks to invest, rather than merely give. Like any other investment, impact investing expects a return. However, impact investors are willing to intentionally give up some potential financial gains to invest in companies, services, and products that promise to deliver on a social good or societal improvement. In fact, fully 41% of impact investors are willing to intentionally accept returns significantly below expected market rates.
According to the Miller Center for Social Entrepreneurship, impact investors “provide financial support for social entrepreneurs, who are building lasting, market-based solutions for the poor.” Believing that governments and charities alone are not sufficient to effectively execute programs that meet the needs of the world’s poor, impact investors give social entrepreneurs with innovative and workable solutions access to the funding that allows them to implement those ideas.
For example, The Acumen Fund invested $1.79 million in Sproxil, a simple service that uses a camera phone to verify the authenticity of medicine, solving a problem faced in places like India, where markets are flooded with counterfeit drugs of dubious provenance. And, of course, the most famous example of impact investing is electric car manufacturer Tesla. At the moment, the name Tesla has near-luxury cache. But in 2003, Tesla was a relatively young company when investment firm Double Bottom Line began offering funding and guidance.
The result of that investment will likely be felt by our grandchildren, as Tesla’s subsequent success has provided legitimacy both to the mass appeal of electric vehicles and the social (and financial) wisdom of impact investing.