The synchronisation of asset portfolios and donations within a joint mission is the way forward if philanthropic foundations and funds are to maximise their impact and value. That’s the view of impact-investment organisation GIIN. But what is needed to achieve this brave new world?
When foundations develop new strategies, they are often designed with sharp divisions between the plans for philanthropic donations on the one hand and the foundation’s investment work on the other. It has been this way for many years, based on the motto that the more money foundations can make on the asset side, the more money there will be to spend on the donation side, for example in the form of donations for research, culture or social challenges. In my view we need a paradigm shift which demands new knowledge, training, and significant organisational change.
But how can a foundation start breaking down the silos between traditional donations and asset portfolios? The following is a brief and hopefully practical guide to the issues a foundation’s investment manager should consider:
Here are my five steps to get an impact investment journey started:
1. Ask yourself what does impact investment mean for you?
Impact investment is an umbrella term for investments made in companies, NGOs and funds to generate social or environmental effects along with financial returns. Impact investments can be made in both existing and new markets, at market or below-market rates, depending on the investor’s strategic aims. This, however, is only a general definition; it is crucial that each fund or foundation defines what impact investment specifically means for them. For example, is it impact investment if a pharmaceutical company invests in research to solve a widespread disease?
Furthermore, legislative differences between countries mean that the concept must be defined in relation to the national context it is used in.
2. What should my impact-investment profile look like?
It is essential that foundations ask themselves which impact-investment profile they want, analyse previous donations and, not least, examine which of the urgent social needs are most appropriate for them to address.
3. What are our roots as a foundation, and what routes does society need us to take?
Some choose the UN Sustainable Development Goals (SDGs) as guideposts to coordinate donations and investments towards shared aims.
4. What do we expect from the financial return?
Although it is appealing that social and green investments can yield almost as high returns as other investments, it might also be worthwhile for foundations to shift their focus from financial return to social impact and value creation in relation to their asset portfolios. According to GIIN’s members, 15 per cent indicate that the return surpasses their expectations for the financial performance, 76 per cent that it matches their expectations, while only 9 per cent indicate that the investments underperform compared to the financial expectations.
So here too it is very important to have realistic expectations and keep the foundation’s overall goals in mind.
5. What demands does this place on my foundation?
The trend towards impact investment amounts to a paradigm shift requiring significant competence development, external advice or organisational changes to break down the silos between investment and donation. Whereas investment departments previously operated from a desire for the greatest possible financial returns, from an impact-investment perspective, portfolios must be restructured step by step to focus on double or triple bottom lines that also account for social and/or environmental returns.
Susanne Dahl is a philanthropic consultant and founder of Copenhagen Philanthropy. This is an abridged version of a piece first published in Danish on Altinnet. The original version can be found here.
For more by Susanne Dahl see Philanthropy in China – a land of contrasts