Why Impact Investing Is Better for Social Good

Many in the nonprofit industry think things will always remain the same or evolve slowly. However, that couldn't be further from the truth. I predict that by the end of the decade, philanthropy will be upended by the economy, technology and donors who don't trust or want to support nonprofits. As a result, there’s a growing opportunity for innovation in social good — and one approach is impact investing, also known as mission- or values-based investing.

The fact is that this is quickly becoming a big deal in the philanthropic sector. The Saint Paul & Minnesota Foundation is giving donors what they want. In other words, deeper transparency and nonprofit influence much deeper into the financials. As I often say, donors dictate the terms. So, let’s start by exploring impact investing, its benefits and how it affects your nonprofit.

What Is Impact Investing?

Impact investing is an approach to investing that focuses on using money to make a positive social impact based on the values of the investors and donors. Those who pursue values-based investing want to align their investment portfolios with their personal beliefs and values. 

That can take the form of investing in companies or impact investment funds working to create solutions to global problems, such as climate change, poverty and disease, or in companies committed to ethical practices, such as sustainability and fair labor practices. For example, an investor concerned about climate change may want to invest in organizations working to reduce their carbon footprint or developing renewable energy technologies. 

Similarly, someone passionate about Christian causes may want to invest for social good in pro-family and pro-Christian organizations (profit and nonprofit). And people who care about social services may wish to invest in organizations that support people’s basic human needs, like addressing homelessness.

By now you’re wondering, well, how does it affect my nonprofit? I love the idea of donors being aligned with the mission. Sure, that’s great. My question to you is, what will you say when your donors want to review your financials, operating reserves, and any endowment and take you to task about where the money managers have invested those funds. If you happen to be a faith-based nonprofit, is there any money whatsoever in anything that goes against your religious cause and values?

Benefits of an Alternative to Traditional Philanthropy

Impact investing is becoming increasingly popular as more investors look for ways to impact the world positively. Moreover, as donors shift away from nonprofits, new methods for social good are becoming more commonplace. In other words, people will always want to support a good cause. However, they don't have to do it with traditional philanthropy, and younger generations, in particular, aren't buying the nonprofit model.

As a result, people who want to make a positive difference are exploring other options, such as impact investing for a variety of benefits.

• It aligns investments with values. By investing in organizations that make a positive social impact, investors and donors ensure their money is used to reflect their values.
• It makes a positive impact in the world. Impact investing allows people to make a global impact toward systemic change. One of the most prominent examples of this is impact investing focused on stopping climate change.
• It generates a financial return. Although impact investing focuses on creating a positive social impact, it’s often profitable. By investing in companies and funds, people can benefit financially from the potential growth of these companies.

Donor Intent and Dictating the Terms

As I mentioned, donors dictate the terms. It used to be that donors wanted to know who was on your team and their alignment with your nonprofit mission. If you had people who didn’t align, they would take leaders to task. For example, suppose people worked at an environmental organization. In that case, donors wanted to ensure that everyone on the team genuinely supported the mission at work and during their personal time. 

Now, the focus of donors has become much sharper. As we know, knowledge and technology are allowing donors to know much more and nothing remains hidden any longer. That means that sophisticated values-based donors want to see how and where your funds are invested. Think of your retirement and pension funds. Think of your operating reserves. Think of any endowments. And think of even your vendors!

Anything that isn’t 100% aligned to the values your nonprofit espouses has a high potential of dissuading a donor, especially a major donor, from giving to your nonprofit. With intense competition now for donor dollars, every nonprofit should stay up at night and worry about this strategic issue and not rest until their nonprofit gets it right. 

Impact investing is an increasingly popular approach to making a positive social impact, but it’s also a greater opportunity for donors to push their ideas and, candidly, personal agendas. Therefore, as values-based investing takes root in the philanthropic sector, expect your nonprofit fundraisers to have discussions with your donors about where your funds are invested and also every vendor in your organization and their alignment to the values you say you have as a nonprofit organization. Don’t be late to the party. Look at where your money is making money today and, if necessary, make changes.