“With great wealth comes great responsibility,” said Bill Gates, not just one of the world’s greatest entrepreneurs, but also one of the world’s foremost philanthropists.
According to Gates, this is giving back to society and taking responsibility for ensuring that those resources are put to the best use possible to assist those in most need.
This insight is supported by the world’s current crisis. The philanthropic environment is also changing. Nowadays, there are many more individuals in their 40s or 50s who have had successful professional lives and wish to give the riches and know-how they have amassed over time.
In the case of family foundations, it is generally the younger family members between the ages of 20 and 40 that inspire their elders to give back to society.
Impact investing vs. venture philanthropy
Philanthropy is distinct from typical investments or even purpose and impact-based investments, which seek a financial return. However, unlike charitable giving, which is an emotional response, the operations of philanthropic foundations are “well-thought-out”. They are rather in connection with a set of follow-ups and aims to achieve.
Impact investment and venture philanthropy may appear to be the same thing, but they are not.
For one thing, venture philanthropy has a far longer history. John D. Rockefeller III created the term in 1969. His venture philanthropy concept was described as a “adventurous strategy to finance controversial social projects.” The popularity of venture philanthropy peaked in the mid-to-late 1990s.
When the Rockefeller Foundation invented the term “impact investing” in 2007, it became known as a “ethical” investment approach.
Impact investing was characterized at the time as “mobilizing enormous pools of private wealth from new sources to address the world’s most pressing challenges.”
Venture philanthropy is primarily concerned with social reasons, whereas impact investment is concerned with both social and environmental issues. Both often seek a financial return while also having a beneficial influence on the world. But, not all investments produce a financial return.
Impact investing supports sustainable development
Impact investment can take place in developed or emerging economies, with the dual objective of profit and beneficial social or environmental gains. Microfinance programs are popular in emerging nations, but impact investing also sponsors projects that improve job and education prospects, promote sustainable agriculture, make healthcare and housing more affordable, and create clean technologies. Investors frequently achieve this through the use of private equity, debt, or fixed-income instruments.
Many prominent firms, such as Apple and Tesla, have stepped up to decrease the carbon impact in their supply chain. When you find a private or public firm embracing this strategy, putting money behind it is an example of impact investment. You may also begin impact investing by purchasing exchange-traded funds (ETFs) or mutual funds.
Venture philanthropy is more focused on capital building
Venture philanthropy focuses on capital formation rather than general operational expenditures, and heavily involves grantees in driving innovation. There is also a strong emphasis on performance measurement, with the primary purpose of improving systems and sectors. This, as opposed to promoting individual organizations and funding individual projects.
The involvement length for venture philanthropy is three years minimum and five to seven years on average. The majority of venture philanthropy investments the wealthy can make are through foundations or private equity firms. There is no time limit for impact investment. It’s more of a “whatever long it takes” attitude.
Barriers to philanthropic investing
Even though wealthy families do have a motive to donate now and share their money, many individuals don’t know how to accomplish it or how to approach it effectively.
According to a recent analysis on impact investing hurdles, the issues that high-net-worth people (HNWI) and family investors experience are not dissimilar to those that other investors encounter. They can, however, be felt more deeply. This is due to the fact that HNWI individuals and certain family offices typically do not have the same access to resources as institutional investors or fund managers. External concerns such as misinformed counsel, the expense and lack of due diligence, the absence of impact management data, and so on can all put a halt to them.
This is a frustrating condition that might result in fewer possibilities, a halt in development, or even more labor than is necessary. Individual Impact Investing Commission, author of the report on the challenges that prevent rich people and families in the UK from investing in impact, agreed on 12 main recommendations in response to the concerns discovered.
Philanthropic investing is a market with a big potential
Philanthropic or impact investment is a large market that is still developing and has not reached its full potential. It comprises all asset categories and draws investors from all asset types.
It cannot be overstated how crucial it is. Accelerating the expansion of impact investment, according to the Global Impact Investing Network (GIIN), is the only way to achieve the Sustainable Development Goals (SDGs). The SDGs are a set of goals that will help humanity “achieve a better and more sustainable future for all”. We can achieve this by ending poverty, ending world hunger and realizing human rights for all. Gender equality, reducing environmental degradation, and delivering a transformative blueprint for the planet’s prosperity, are the key SDGs, as well.
Individuals with High Net Worth (HNWI) and their families play an essential role in the ecosystem. They are a force to be reckoned with in terms of their entrepreneurial attitudes and ideas. And they also play a significant role in assisting impact-led enterprises in creating chances for social and environmental change. They can choose to prioritize effect if they so want.
Because most HNWI deal with many financial advisors, advice that doesn’t discuss effect or seek for methods to overcome hurdles might turn off prospective impact investors or prevent them from making a decision.
Social innovation will occur more rapidly, on a wider scale, and with greater attention if policy makers remove certain difficulties. For example, If the constraints to HNWI impact investing were removed, private investment just for the UK might increase by £2 billion to £11 billion.
