Many families wrestle with how to think about philanthropy versus impact investing — what are the goals of each capital pool, and how do they relate? More practically, what does best-practice implementation look like, and what can be learned from each of these tools for social change?
Defining family values and employing them through philanthropic giving and impact investments can be what differentiates families who build multigenerational legacies from those who do not. A deeper understanding of both — and the connectivity between them — allows families to pursue their value alignment more effectively.
Philanthropy is the use of private capital for individual or public benefit. Its aim is not only to do good but also to influence societal constructs. It’s therefore a powerful force.
However, many families’ philanthropic activities, as well as being linked to a deep sense of purpose and a desire to help humanity, often have several secondary intrinsic purposes, including:
- To inform the next generation of family values, including why their wealth exists and their responsibility to manage it wisely.
- To involve a wider group of family members. Here we often see the younger generation driving the conversation and educating matriarchs and patriarchs.
- To inspire all generations to do more, and so the endeavors become embedded within the family value set and handed down over time.
These three I’s can amplify a desire to give back to society by collectively providing families with a strong clarity and purpose to engage. However, a fourth element can also be particularly relevant to families: tax incentives. While taxes are unlikely to be the driving force, they can be an incremental consideration, as they incentivize donors who are high taxpayers to “do good” while reducing their tax burden.
Motivations aside, philanthropy typically exists as a distinct cause outside of the scope of the family investment portfolio. However, the proceeds from a traditional investment portfolio may be used to fund philanthropic causes, thereby connecting philanthropy to the investment strategy-setting objectives.
As defined by the Global Impact Investing Network in 2022, impact investments are investments made with the intention to generate positive, measurable social and/or environmental impact alongside a financial return. This last point — requiring a financial return — is important, as it clearly differentiates impact investing from philanthropic giving, where no financial return is required.
The concept of investing without doing harm via environmental, social and governance (ESG) best practices is now widely familiar, but it is not synonymous with impact investing. Impact investing is distinguished from ESG by three practices:
- Intentionality: It is insufficient to be “less bad.” Instead, investments must be intentionally good, such as to advance public welfare.
- Measurement: While ESG and impact investing share the intention to deliver positive impacts, the results in the case of impact investing must be quantified. This can be difficult, as measuring long-term outcomes as opposed to shorter-term “outputs” is complicated by other influencing factors. Doing it well is key in attracting additional capital, which can then help scale positive outcomes.
- Contribution to solutions: In providing a financial return, impact investments aim to attract a distinct additional capital pool that might not otherwise exist, creating a "market-based" solution.
Philanthropy and Impact Alignment
Philanthropy and impact investments are holistically aligned. However, some have expressed criticism that the growth of impact investing cannibalizes philanthropic capital. The ideas that follow dispel this myth:
The world isn’t short of problems. The world’s financial requirements for achieving the 17 United Nations Sustainable Development Goals are estimated to be between $5 trillion and $7 trillion per year between now and 2030, according to a United Nations Association report. Combining all forms of philanthropy, development capital and impact investments still leaves us short by some $2 trillion per year. In other words, there is room for both.
There is plenty of global wealth. The world’s net worth, as measured by the value of real assets, has risen by some $350 trillion in the past two decades, according to a Barron’s report from November 2021. As wealth accumulation has accelerated, so, too, has the potential for philanthropists to really make a difference.
They have differing intentions. Philanthropic capital is unconstrained; no financial return is required. The opposite is true of impact investments, which must focus on those sectors where the capital can be impactful and profitable.
The roles of philanthropy and impact investing in family wealth management toolkits are distinct. This distinction presents an opportunity by allowing families to engage in a powerful combination of both, giving clarity of meaning and purpose to family members across generations.