Since the coining of the term ‘ESG’ in 2004 in a study entitled ‘Who Cares Wins', there has been a rapid rise in mainstream conversations on the ethics and impacts of investing. [1]
This phenomenon has impacted the philanthropy space, which historically focused on addressing the challenges in our society through grant making alone. In a bid to avoid accusations of ‘greenwashing’, there is now a growing focus in philanthropy on incorporating ESG factors and impact investing principles into investment decisions and strategy. The challenge is complex and there are many pitfalls to avoid.
If the last 50 years of philanthropy were defined by grant-making budgets, the next 50 must be about directing the other 95% of our assets toward justice. —Darren Walker, President of the Ford Foundation
How can philanthropists avoid the negative externalities of traditional investments negating the positive outcome of grantmaking? How should we engage with ethics in social impact investing? Is it possible to maximise both profit and purpose?
Profit with purpose - maximisation or optimisation
A key area of debate within the social impact investing space is the potential trade-off between financial return and positive impact. The Global Impact Investing Network defines impact investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. [2]
Philanthropists are therefore challenged to consider not only the financial implications of their investments but also the social and environmental impacts, both direct and indirect. Frameworks designed to help navigate the balance can be helpful. For example, The Impact Management Project’s investment classifications outline an ABC guide for investors to align their investments with their values: ‘Act to reduce harm’, ‘Benefit stakeholders’ and ‘Contribute to solutions’. However, there is often a trade-off between the two sides of the profit/purpose equation that can make the task more complex. [3]
Moreover, philanthropists face the additional task of weighing up if the impact of their investments negates or enhances the positive impact of grant making. The ideal of course is to marry the two together to have a holistic view of the impact of their philanthropic capital.
Each philanthropist will have a personal view on the prioritisation of social impact versus financial metrics. However, it may not be possible to maximise both. At Donor Advised Fund (DAF) Stewardship, we instead seek to maximise the positive social impact of our investments alongside an optimisation of financial return. Our investment strategy is underpinned by our adoption of the ‘Kingdom Impact Bull’s Eye Approach, which reflects our Christian values such as love, equality, and creation care. This prohibits investments in certain activities (for example: pornography and tar sands) and, at the centre, intentionally focuses on mission-aligned investments, such as affordable housing. [4]
We also offer our philanthropists the option of allocating some or all of their DAF account balance to three externally managed investment portfolios that incorporate an ESG integrated investment approach and apply ethical investment restrictions.
Impact investing internationally - economic empowerment
When making impact investments internationally, there should be a consideration of how we invest, given the abundance and competitiveness of investment capital in developed markets compared to emerging markets, especially given potential charitable tax relief for donors in developed markets which ‘synthetically’ reduces the cost of capital.
Therefore, it is important to think about the macro-impact of financing terms on the long-term economic prosperity of the region – for instance, affordable micro-financing may enable local entrepreneurs in emerging markets to grow their businesses while benefitting from equity value creation, which will contribute to the long-term economic prosperity of the region.
However, equity financing (or high interest financing) of the same project could unintentionally lead to an extraction of equity value from emerging markets to developed countries, further impoverishing these markets on a relative basis. A considered approach to impact investment structuring can ensure investments not only have a positive direct impact but also reduce inequality by boosting the long-term economic growth of the country through private consumption and local wealth creation.
Additionally, it can be a challenge to not project a Westernised model of society onto emerging markets. Philanthropists must make every effort to ensure impact initiatives are responsive to the local needs, as well as social impact initiatives being community or co-led. This ensures that social impact initiatives are effective in solving the unique problems using local expertise and empowering locals and communities to become economically independent long-term.
A good example of a considered ethics is the Christian Aid, Malonda Project. The project aims to support wealth creation for pigeon pea farmers in Malawi. In addition to affordable financing provision, the project focuses on developing local infrastructure to support inventory, providing training on alternative uses of the crop, and supporting the establishment of new international markets relationships. Focusing on these ‘ancillary initiatives’ not only supports the repayment profile of interest-free micro-loans but also leads to greater economic empowerment for local farmers. [5]
Outcomes vs purpose - finding the balance
There is value in both the outcome-focused approach, (for example: the number of people lifted from relative poverty) and the purpose-focused approach (for example: a project aiming to alleviate relative poverty) of social impact initiatives. The impact investing definition encapsulates both via references to measurable impact (that is, outcome) and intentionality (that is, purpose). When engaging in social impact initiatives, the ideal for philanthropists is to aim for both positive social impact and being able to quantitatively evidence the impact generated.
If we focus only on outcomes, there is a risk of supporting social impact initiatives masked as virtuous while existing solely for financial return. For example, a pharmaceutical company may only have positive societal impact as a byproduct of drug discovery rather than an intentional ambition. Alternatively, if we only focus on purpose, there is a risk of social impact initiatives not being effective in solving societal challenges.
It can be challenging, if not impossible, to truly discern the intention of an initiative, while outcomes are more black and white. Ideally, philanthropists would take a blended approach in their consideration of outcomes and purpose. The process demands careful due diligence, with a helpful starting point being to review organisations’ impact reports and mission statements. There are several ethical implications for philanthropists to consider when engaging in social impact initiatives, and many of these are more qualitative than quantitative in nature. There are no definitive solutions or answers, however, it is imperative that philanthropists aim for their ethics to inform their grantmaking and investing decisions.
References
- Who Cares Wins
- Global Impact Investing Network
- Impact Management Project’s investment classifications
- Kingdom Impact Bull’s Eye Approach
- Malonda Project - Christian Aid
This article was written by our Investments Manager, Finyin Inuayo, and was first published in the 2024 Summer edition of the Philanthropy Impact Magazine (page 18).
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