By Elyse Crowston
Five years’ ago the United Nations publicized the 17 Sustainable Development Goals to synchronize and focus global efforts to solve critical problems like climate change, gender inequality, and poverty. Ten years from now, 2030, is the target to achieve them. And, frustratingly, the estimated $5-7 trillion per year needed to achieve the goals is far from secured.
Philanthropy alone cannot mobilize the necessary capital quickly enough to fund the goals by 2030. Further, the SDGs do not represent a number of disasters that require relief — they represent symptoms of systemic problems that humanity must address in order to mitigate disaster.
Enter: impact investing — investing capital for social or environmental benefit alongside financial return. In essence, impact investing is a shift of incentives. Whereas the overarching goal of conventional finance is to generate profit, impact investing places (generally) equal importance on the human or ecological return of a venture, while also delivering profit to investors. Impact investment is the center of the venn diagram between economic growth through private enterprise and altruistic good of philanthropic funding.
It is therefore fair to ask, ‘if solutions to the wicked problems facing humanity, distilled as the 17 SDGs, are not being wholly addressed by the third sector, should funds that are earmarked for philanthropy be diverted to the private sector?’
The business of doing good
Global Impact Investing Network (GIIN), a non-profit organization to measure the scale and increase the effectiveness of the impact investing sector, reported in 2019 that the global impact assets under management reached US$502 billion, up from $114 billion reported in 2017.
The five-fold increase is significant, and signals that a shift is underway in financing for-profit ventures where the business model is predicated on solving a social and/or environmental problem. Impact investing, like Socially Responsible Investing (SRI), mission/social venture capital, clean money are all terms that vary subjectively, but ultimately describe the intention of using capital to generate financial returns while also generating a collective good.
The B Corp movement, for example, is a growing global community of businesses that have elected to be meticulously audited for their environmental, governance, community, operations, and worker impact performance. To be certified as a B Corp is to be verified as a business as a force for good.
In 2019, the B Corp community grew to 3,100 companies in 70 countries across 150 industries. Collectively, they offset 6.4 million tons of carbon, diverted 108,000 metric tons of waste, protected 8,800 hectares of land, and performed 60,000 hours of volunteer work.
The GIIN report affirms the perception by impact investors is positive, with 98 percent of investors stating their investments met or exceeded their impact expectations and 91 percent stating their financial return expectations were also met or exceeded.
Despite the impressive growth and performance of the impact sector, there is still a significant hill to climb to amass the trillions necessary to mitigate disaster, and time is running out.
The partnership we need
It is a false dilemma whether funds should flow to philanthropy or impact investment. The reality is the world needs both, working together, diverting funds from conventional business that doesn’t take into account the effects on people and planet — placing sole importance on profit.
What’s needed is a paradigm shift to correct the disconnect between how capital is accumulated and how it is directed to do good.
Using my own life as an example, I began my career working for an environmental law charity working on campaigns for a clean energy transition. Meanwhile, I discovered, my personal assets were invested heavily in the fossil fuel industry through my mortgage, long term savings, and (meager) investments at a big five bank. Whereas I shifted my personal banking to a credit union to align with my work and personal values, a reciprocal shift needs to take place en masse at both the individual and institutional levels.
The philanthropic sector is ideally positioned to catalyze the change, with several foundations already leading the way. McConnell Foundation has more than doubled their impact investment holdings from 2014 to over C$50 million in 2017, and the McArthur Foundation recently announced that they will increase their impact investments by up to US$150 million. Notably, both foundations have launched initiatives parallel to their investments that deploy ‘catalytic capital’ to support impact intermediaries.
Catalytic capital — investment capital that is patient, risk-tolerant, concessionary, and flexible — is an essential tool to bridge the two sectors, attract matching investment, and get the impact investment sector to scale.
Reciprocally, impact investors are broadening product offerings to accommodate a diverse array of risk/return profiles. At Rhiza, we offer credit union guaranteed investment accounts for retail banking and endowment holders, market-rate venture capital funds, and develop place-based impact fund consortiums. The intent is to democratize impact to a level where just as many Canadians identify as impact investors as give to charity, and every philanthropic organization has their capital aligned with their mission.
Is impact investing the end of philanthropy? Unequivocally no. Philanthropy and impact investing must continue to, and increasingly, support one another to divert capital from destructive to regenerative practices, that support human and ecological resilience. Foundations are the vanguards whose capital can get impact intermediaries to scale, helping attract equal or greater private investment. In turn, intermediaries investing in businesses proliferating solutions to societies’ urgent problems amplify the impact of charitable efforts.
The feedback loop or successful impact, return, and reinvestment — impact investors and philanthropists together — has the potential to generate the capital needed to achieve the worlds’ sustainability goals. Hopefully we can do it in time.
Elyse Crowston is Director of (Impact) Investor Relations, Rhiza Capital. The firm invests in direct response to the challenge of financing the UN Sustainable Development Goals (SDGs). We build Positive Impact financial portfolios, programs, and partnerships that localize the SDGs and connect community to opportunity. Coast Venture Root 3 (CVR3) is a balanced fund targeting a market rate or better return alongside meaningful environmental and social impact. The fund will make seed, early, and follow on investments in private companies in diverse sectors, all with alignment to the SDGs.