Charitable giving has hit a record high in the United States; household, charitable, and foundation giving are all on the rise. In 2014, Americans gave over $350 billion to charities, accounting for over 2% of the country’s GDP. Between 70% to 90% of U.S. households donate to charity every year, and the average household’s donation totals somewhere near $3,000. Studies show that individuals and families are more likely to give during the holidays than any other time of the year.
These are all noteworthy achievements. Good on America for being generous and altruistic.
But the conversation must turn to the sustainability and overall impact of the gift, not simply how much was spent. If you think about it, traditional “checkbook” philanthropy is a rather limited form of giving – $350 billion in donations sounds like a lot of money, but relative to the magnitude of the challenges we face, it’s a drop in the bucket.
Philanthropy also doesn’t do a very good job of measuring the actual impact of all those hard-earned dollars. Trillions have been spent to move the needle on major social problems, yet by many indicators, we’re still stuck treading water. Since the 1970’s, for example, K-12 reading and math achievement have remained stagnant; the U.S. poverty rate has hovered at around 15%; and the average yearly income of the bottom 40% of U.S. households has barely changed.
Moving forward, how could we possibly expect anything different if we keep doing the same old same old? Due diligence is just as necessary to charitable giving as it is to the other aspects of your personal finances. It is time we apply market-like logic to our philanthropic donations.
Cue impact investing.
Impact investing is one of the more exciting developments to emerge from the “social impact” movement of more definitively measuring the results of the social sector and more comprehensively understanding the relationship between inputs (your money) and outcomes achieved. Impact investing, or leveraging private capital for social good, is playing a key role.
First and foremost, impact investors are motivated by an organization’s mission and degree of social impact. Importantly, though, impact investors are motivated by double or even triple bottom-line opportunities to earn a financial return while also doing something good for society. Securing a financial return helps ensure that the organization generates measurable impact that is scalable and self-sustaining over time.
The potential scale of impact investing is impressive – consider this: some 41 trillion (with a “t”) dollars are expected to be transferred from baby boomers to millennials over the next several decades. And studies and surveys indicate that social impact is the number one priority for these millennial investors, even outweighing a financial return. Impact opportunities are emerging as a promising new asset class for these socially conscious investors.
The significance of impact investing first dawned on me a number of years ago when running a tech business aimed at helping deaf people more effectively communicate with each other and with hearing people through video relay service. Because the business was sustainably profitable, we were able to scale much faster to positively impact the lives of millions of people across America. If we had relied on charitable giving alone, we would have been constrained by the amount of donor funds that could be raised resulting in a much more limited impact.
In 2013, recognizing the need for more impact capacity and education, I endowed a center at the University of Utah’s David Eccles School of Business to be a center of excellence in this emerging social impact field and help facilitate impact investing. The Center’s mission is to provide an experiential education to a new generation of investors, policymakers, service providers, and entrepreneurs who are committed to developing thoughtful and innovative solutions to social and public health problems around the globe. The students provide valuable services for early stage impact investors, foundations, family offices and high net worth individuals by sourcing, performing due diligence, conducting market research, and investment underwriting of impact investments.
Entrepreneurs and free-markets are the backbone of this country. Let us harness the productive capability of the for-profit sector and channel this towards social and environmental good.
In the commercial market, venture capital investors acknowledge that not every investment may pan out financially. These risks are calculated and inform the full spectrum of investments made, creating an efficient market place that has built great economies and raised the standard of living we enjoy. In order for us to take a venture capital approach to philanthropy or “philanthrocapitalism” as it has been called, we must be more strategic and enterprising in our charitable giving or investing. We have to be prepared to find and facilitate potentially self-sustaining, scalable social enterprises from grants or early stage impact investments and then measure their true success—or failure—by the social impact they produce as they generate a financial return. Every investment may not be successful. But the potential is there that a special few will generate out-sized financial returns, fundamentally changing society at large for the better.
As we reflect upon the New Year, let’s be as thoughtful about our spending on others as we are for ourselves. Impact investing provides a mechanism to do just that.
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