As with many new trends in the charity funding space, we’re often asked -what is impact investment? This is a hot topic, both for charities trying to increase their budgets, and donors who want to improve their public image.
Impact investing has exploded in popularity over the past decade, as a way to create societal benefit, while also generating profits. However, there are a number of misconceptions about this type of investment.
In particular, the charity sectors in the UK and Ireland are heavily regulated. Regulations strictly determine how charitable organisations can secure, use and distribute funds. Of course, this also applies to impact investing.
Today, we’ll outline everything that charities need to know about impact investments. But first, let’s start with the basics.
What is Impact Investing?
Essentially, impact investing is any kind of investment which tries to create a societal or environmental impact, alongside generating a financial return. In other words, the investor still wants to make money, but they want to do some good in the process.
This idea first emerged in 2008, pioneered by the Rockefeller Foundation. Since then, its popularity quickly grew in the United States, and today it’s a popular source of financing for charities closer to home.
In any impact investment, there are essentially three parties involved:
The investors - The people or organisations providing the investment,
The delivery organisation - The charity or other organisation which receives investments, and carries out work to benefit society,
The beneficiaries - The people or groups in society who benefit from the charitable work.
Of course, the impact measurement plays an important role here. Investors want to know that their money is creating the maximum benefit. In order to prove this, charities must know how to quantify the impact of their work.
With that in mind, there are four stages to impact investing:
Establishing a social or environmental goal,
Setting up performance metrics for meeting this goal,
Monitoring the performance of the delivery organisation,
Reporting on the financial and social performance of the investment.
Who Carries Out Impact Investing?
A number of different people make impact investments. Today, impact investments are made by major financial institutions, individual investors, certain charitable organisations and a range of other bodies.
For example, a number of investment banks and other financial bodies offer impact investment products, where customers can buy into socially responsible funds. Similarly, many philanthropists and charitable trusts heavily leverage impact investments.
Many charities also conduct impact investment as the most effective way to utilise their profits. For example, charitable companies have to follow strict rules, ensuring that their profits are only used for certain aims.
Charitable companies who don’t have the resources to use their profits internally may use impact investing to distribute funds to partner organisations with similar aims, in order to get around this problem.
Who Benefits from Impact Investing?
Impact investment is booming in popularity because it offers distinct benefits for funders and charities alike. The ability to combine financial returns with societal benefit is an attractive impact for many investors.
For charities, there are essentially two ways benefit from impact investing:
Securing funding for projects,
Distributing funds to meet your charitable goals.
Of course, only charities which can earn profits are able to take advantage of impact investments. Naturally, charities which do not generate profits are unable to receive funding from impact investors, as they cannot provide a financial return.
Let’s take a look at some of the kinds of charitable organisations which are most likely to benefit from impact investing.
Impact Investing for Trusts and Foundations
Charitable trusts and foundations are keen providers of impact investments. The goal of these organisations is to fund deserving charities, individuals and projects, in order to create a societal benefit.
However, this depends on the trust or foundation having access to sustainable funds.
Because of this, some trusts and foundations may choose impact investing as a way to distribute funding, while also growing their own coffers. This means that over time, the overall fund grows, and the organisation can fund more and more projects.
Impact Investing for Charitable Companies
Charitable companies may be either sources or beneficiaries of impact investments, depending on their own goals and resources. Charitable companies can earn profits, but must follow strict regulations for how these are used.
As noted earlier, charitable companies may choose to make impact investments in order to utilise their assets, while continuing to work towards their overarching societal goals.
Impact Investing for Social Enterprise
Social enterprises are some of the most common targets of impact investments. Social enterprises are simply businesses which seek to create some kind of societal benefits, often in a hyper-local setting or within one community.
This societal benefit is usually the top priority, even more so than profits and revenue. Of course, social enterprises must still earn a profit, in order to keep the lights on and pursue their social goals.
Social enterprises might have goals as simple as creating employment in their local community, or improving wellbeing in their local area. Others may work towards more specific aims.
What makes social enterprises such a popular focus for impact investors is that they are profit seeking businesses, with a firm commitment to social impact. These organisations are also typically not as heavily regulated as other charitable organisations.
In fact, many social enterprises secure the majority of their initial funding from impact investors. When seeking to start a social enterprise, however, it is always worth speaking to a fundraising consultant to find the right solution for you.
How to Take Advantage of Impact Investing as a Charity
As we’ve seen, impact investing can be an excellent way for different charities to either secure or distribute funds.
However, this differs greatly from other streams of funding. Unlike grants or other awards, impact investment funding must ultimately be paid back, in the form of a proportion of the organisation’s profits.
This means that only profit-earning organisations, such as social enterprises or certain charitable companies, are normally eligible to receive funding from impact investors. Other kinds of charitable organisations may choose to make their own impact investments.
As with any funding strategy in the third sector, your best option is always to speak to an experienced expert. At S3 Solutions, we have extensive experience of working with charities of all sizes to create sustainable financing.
Speak to our team today to find out more.