Recently, a Forbes article shared that in the past philanthropic giving and financial investments have been two separate fiscal activities. But today there is a growing trend of devoting philanthropic dollars to achieve both a return on investment and a social return.
In the past, the wealthiest of individuals, families, and most profitable companies have supported causes by donating to nonprofit organizations and charities. This was in hopes of seeing a social impact that bolstered society’s ability to operate such as feeding the hungry and giving shelter to the homeless.
However, investment strategies such as socially responsible investing (SRI) and impact investing have been created to allow donors to simultaneously yield market-based returns while achieving a social impact. Socially responsible investing refers to investment decision-making that takes into account a company’s environmental, social and governance (ESG) policies and records. These strategies show precisely how those assets are utilized and give the donor or investor the ability to trace them to their final destination and see how the return is generated.
The most common SRI strategy practiced by the investment professionals is screening. When using “negative screening,” managers create a list of unacceptable products, services or corporate governance practices and uses it to omit companies or industries such as tobacco, alcohol, mining, forestry, and weapons from their portfolios.
On the other hand, “positive screening” seeks out stocks that have sustainably beneficial business impacts such as high-technology, education, renewable energy and biotech. “Best in class” screens look for companies that take positive environmental and human initiatives in their particular industry.
SRI is quickly becoming a substantial contributor to the greater universe of investment assets under professional management. BrownFlynn is a member of a U.S. association for professionals, firms, institutions and organizations engaged in socially responsible and sustainable investing called the Social Investment Forum (SIF). SIF produced a report in 2010 showing that SRI strategies are contributing $3.07 trillion in assets to the greater investment universe, growing 380% since 1995.
Another area considered to be contained within the SRI space by SIF is impact investing, which refers to the intentional use of investment capital to create positive social and environmental outcomes along with financial returns by investing in for-profit social enterprises. Impact investors look for market-based solutions that address real world problems, including sustainable agriculture and financial services for the poor. Impact investing can be an exciting and rewarding choice for donors seeking alternative approaches to funding social innovation in their specific areas of interest.
Impact investing is predicted to grow rapidly as an increasing number of new ventures continue to come about in developing markets focusing on providing low-cost solutions in areas such as banking, education and health care. In a November 2010 J.P. Morgan report, which estimates profit opportunity of between $183 billion and $667 billion over the next decade in five sectors — housing, water, health, education and financial services — serving global populations earning less than $3,000 annually.
Incorporating SRI and impact investing strategies into your charitable plans involves a willingness to challenge the long-established boundaries between the philanthropic and financial sectors. But those who embrace this new investment framework stand to achieve double-bottom line results in the form of strong financial, as well as socially meaningful, returns that yield positive impacts on the environment and on communities around the world.
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