Should we call impact investing what it really is? Philanthropy

Today in a complex regulatory market, Donor Advised Funds provide enormous flexibility around donations, possible tax reliefs and the onward distribution of investment of that gift.

| 7 min read

All the terminology

Social enterprise, social impact, impact investing, CSR - corporate social responsibility, ESG – environmental, social and corporate governance. There seem to a swathe of terms meaning similar things but there is some confusion as to the difference and as a philanthropist what is the best method to adopt?

A social enterprise is proactive in its approach to social change, while CSR is reactive. Doing good is a permanent fixture of a social enterprise’s business model. It is the reason the enterprise was created. On the contrary, a CSR programme is how corporations create positive social impact through their existing organisation.

A great explanation was written by the Workforce Opportunity Services. TOMS, the shoe company, is a social enterprise which was founded on an idea to create positive social change. For every pair of shoes it sells, it gives a new pair to a child in need. It also reinvests profits into positive social change and provides work for people in developing countries.

An example of CSR, on the other hand, can be found at clothing manufacturer, Levi Strauss. Levi’s looks to reduce its environmental footprint by incorporating sustainable practices in its manufacturing.

The difference between TOMs and Levi’s is in their origins. When Levi’s opened for business, its goal was to sell jeans. Its social programs were reactive. TOMs was created to put shoes on the feet of children in need― it is proactive in pushing for social change.

And so, what is impact investing? As defined by Wikipedia, impact investing refers to investments "made into companies, organisations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return”.

Finally, how do we measure the impact of doing good? There are various matrices that look at impact measurement and how to assess the impact of a donation in a charity, but a standardised scale doesn’t exist. It’s also hard to measure the emotional impact or personal journey that the donor takes and their motivations for making a particular donation that may outweigh their concerns over impact. And is one better than the other?

Keeping up with the USA

The social investing space in the UK has not developed (even with a social investment tax relief) at the same pace as the US. This may be interconnected with the whole concept of philanthropy which is much more direct in the US (with easier tax incentives) and many citizens feeling a greater responsibility to give than they do in the UK. This is in addition to our timidity in celebrating success.

If we unpick what philanthropy (promoting the welfare of others) entails, in addition to time spent on causes we care about, grants are awarded with the intention of alleviating societal problems and advancing humanity, collectively achieving social impact. With philanthropy celebrated more openly in the US, it may more positively affect their view of social investment too – perhaps explaining the UK’s lag.

Donor philanthropy

With the demise of government support, innovative ideas such as impact investing have developed where an individual really wants a financial and social return and this return can often be re-invested into the company. Essentially, impact investing is a complementary and alternative form of traditional philanthropy. If the mindset of a donor is such that they expect a return and will compare this investment alongside a traditional financial investment, they may be disappointed. If, however, they look at a matrix that may contain, a return, whilst doing good, and if this investment could be translated into a grant (if returns are disappointing) then ultimately, they are a generous donor as opposed to a disappointed investor.

Prism the Gift Fund, is a Donor Advised Fund, is UK registered charity that offers time poor donors the administrative and governance support around making a gift. They also may not have the knowledge around different forms of giving. Today in a complex regulatory market, Donor Advised Funds provide enormous flexibility around donations, possible tax reliefs and the onward distribution of investment of that gift. A donor may make a gift towards one of the great art galleries in London supporting lunchtime educational events, or conversely support a social enterprise that is looking to provide a taxi service in an estate where few taxis venture and so support the local community. A donor’s journey may start with a pure grant and then move to a loan or other forms of impact investing. The world of Donor advised Funds is growing in the UK and with their growth the ease of giving effectively and correctly is growing and thereby providing simple solutions to those that genuinely want to engage in philanthropy.

Many UK charities at the moment are jumping on a social investment “bandwagon”. Cynically they are no longer raising money effectively and at the same level for their traditional grants, so they need to innovate and diversify. But few really have the skills, and the money to robustly create the structure and funds to make a real difference. There are a handful in the UK that are making a difference and exploring this field. Perhaps with their growth, there will be greater regulation and more education around the social investment field. There is also always the hope that the government will consider adding to the existing tax break to encourage more donors and corporates to genuinely enter the field of impact investing and ESG. This could lead to more truly philanthropic motives and not just organisations hoping to increase their bottom line by adding the notion of philanthropy to their offering.

This article was written pre the outbreak of Covid-19, but we feel it’s important to add some reflection on the response from philanthropy to this virus.

In the wake of Coronavirus, society has been left wanting with an increased beneficiary demand and a reduction in funding and services. Government funding has been a lynch pin to surviving but will soon be reduced. What remains to be seen is the long-term societal effects and how this change will be managed. Philanthropic gifts, large and small, have created hundreds of millions of pounds of funding going to causes in need. These types of donations, true to their nature, have been flexible, responsive and bridge the gap that may well eventually be filled by the result of impact investing. Some large foundations are considering taking out loans to be able to continue their annual funding and deal with the emergency response. The landscape is clearly going to need to adapt quickly over the next year(s).

For more information on Prism The Gift Fund please contact: Kitty Harris, Head of Business Development on 02074867760

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Should we call impact investing what it really is? Philanthropy

Read this next

Fighting the FANGs

See more Insights

More insights

The perspective of an award-winning endurance cyclist
By Lindsay McCrae
19 Mar 2021 | 8 min read
How many times must the bell toll?
By Dana Hanby
04 Mar 2021 | 10 min read
Building Brighter Futures
By Marc Leckie
04 Feb 2021 | 7 min read