IN the past, philanthropy and impact investing were separate silos in the financial world. The world’s philanthropists donate to their own causes. Impact investors seek out worthy social investments; both work independently of each.

With the adoption of the 17 Sustainable Development Goals (SDGs) by member states of the United Nations in 2015, however, the boundary between philanthropy and impact investing has become less defined.

 

The SDGs are a collection of global goals set by the UN with the objective of transforming the world. The SDGs cover social and economic development issues including poverty, hunger, health, education, global warming, gender equality, water, sanitation, energy, urbanization, environment, and social justice.

 

To achieve this visionary framework, research suggests global spending of up to US$7 trillion is needed over the next 12 years. Given the urgency of meeting these goals, the world could be facing a huge funding gap that neither governments nor philanthropy can fill.

 

The United Nations International Children’s Emergency Fund (UNICEF), one of the world’s biggest philanthropic organizations, invests US$4 billion annually in emergency food and healthcare services for needy children around the world. Because of the magnitude of its philanthropic activities, UNICEF recognizes that the traditional philanthropic approach is no longer sufficient for its requirements.

 

“When you’re looking to reach the 1.8 billion children by 2030, the largest ever cohort of young people that we have now around the world, then traditional philanthropic approach needs to be supplemented by impact investing. This is where we are deploying and looking for business solutions,” says David Evans, chief of global philanthropy at UNICEF.

 

UNICEF is not alone in this mission. There is an increasing number of individuals, foundations and organizations that invest in projects that are achieving both financial returns and social good.  This has helped the impact investment market grow exponentially in terms of size, product sophistication, investor profile and demand.

 

According to the Organisation for Economic Co-operation and Development’s (OECD) Social Impact Report for 2019, the number of impact investors rose from fewer than 50 pre-1997 to well over 200 by 2017.  Social impact investment (SII) assets under management currently represent US$228.1 billion, 56% of which is allocated to emerging markets.

 

In Southeast Asia alone, a total of US$904 million in impact capital were deployed by private impact investors, while US$11.2 billion of impact capital were deployed by development finance institutions from 2007-2017, according to the Global Impact Investment Network (GIIN).

 

There is also a variety of impact investment products currently.  The market now has impact funds, impact bonds, impact debt structures, blended finance structures that mix government money or non-profit money with profit-seeking capital, as well as, long term investments with sub-market rates.

 

“There’s a whole range of impact investment activities and opportunities that families, businesses and individuals can engage in. The exciting thing now is that people can look across their portfolio and see opportunities to have social benefits across the entire range of their investments while still continuing to work on and support philanthropy,” Evans says.

 

As impact investing gains traction, more investment models can be developed and deployed. 

 

 Ashoka, a global network of social entrepreneurs, aims to do its share in promoting impact investing. The network provides funding, through grants, for social and environmental projects.

 

“We work with about 3,600 social entrepreneurs in 92 countries. We provide them with grants and support to help them scale up their ideas. We’ve been going for about 35 years now and we’re very much an entrepreneurs’ organization so we work with the founders of social sector organizations. We look for entrepreneurs with innovative and disruptive business models,” says Mark Cheng, managing director of Ashoka.

 

Ashoka raises about US$50 million annually purely through grants, which it uses to support social entrepreneurs and social enterprises around the world. However, its capital raising programme on impact investment is five to ten times more.

 

“The promise here is that if you can offer investors a return on their investment as well as just simply leveraging in philanthropy, potentially there could be a much larger pool of capital that you could unlock to solve these issues. Particularly with the SDGs, the capital need is far, far greater than is available in the traditional philanthropy markets. So it’s clear that we have to move in this direction,” Cheng says.

 

However, one issue that is holding these back is the concern that social enterprises may not offer the financial returns that are available in the commercial sector. Many of the social projects that Ashoka finances, for example, are in poorer countries where the average income is only US$4 a day per capita or less.

 

At the same time, many of the projects are in sectors that are very challenging such as education and healthcare in remote rural areas.

 

Cheng understands these concerns, however, dismisses the myth that all impact investments yield weak returns and that they take too long to realize.

 

“Many of the entrepreneurs that we work within areas like clean tech, renewable energy, and medicine genuinely have very strong financial returns. Those kinds of projects have raised US$50-100 million dollars in capital,” he notes.

 

But there are early stage social ventures too that do require much attention and it’s an area where philanthropists and charity foundations can help.

 

“Traditional venture capital takes very early stage risks. The difference is venture capital requires very high returns in exchange for that risk,” he explains.

 

“One of the opportunities that we see is to engage foundations to take that risk for a lower financial return in exchange for very high social return. Because the key to unlocking this market is really getting investors to take that early stage risk,” Cheng says.

 

Meeting investment goals
Philanthropy and impact investing are also emerging trends in the booming private banking, wealth management, and high-net-worth individual (HNWI) market.

 

SDGs are becoming a rallying theme for asset managers and institutions, aligning their businesses so capital can be allocated towards positive impact investments.

 

“What we do with our clients who have interest in philanthropy is to discuss with them how they structure investment, what their involvement would be, do they want the second generation involved with it as well,” says Arjan de Boer, head of markets and investment solutions, Asia at Indosuez Wealth Management.

 

The interest in philanthropy among private banking clients and HNWIs has been driven in part by their awareness of the environmental, social and governance (ESG) considerations. For them, philanthropy is no longer just a hobby. They are recognizing potential risk in portfolios that ignore ESG considerations.

 

“The question in the past was whether investing in a company with a high ESG score means foregoing some returns. They’re becoming aware that if they invest in something with very low ESG scores they might actually lose money,” de Boer says.