Over time, as donors learn more about their areas of interest, they may want to address the root causes of these issues and support a range of strategies to make a difference within a particular community or region.
This is sometimes called “high-impact” philanthropy, in which donors take a proactive, strategic approach to philanthropy, leveraging their resources creatively to maximize results.
High-impact philanthropy does not consist of a rigid set of rules or financial formulas. Rather, it is a process of understanding the array of roles and strategies that can enhance the impact of philanthropic resources.
Moving towards high-impact strategies
Increasing the impact of philanthropy involves research, testing new ideas and theories, and continuous reflection and revision of the philanthropic strategy. While not necessarily linear, the process usually includes the following components:
- Development of vision, mission and goals – The most effective philanthropy is focused on goals and outcomes. Informed by the donor’s values, goals flow from a clearly defined vision and mission that may target specific social or cultural issues, populations or geographic areas. Whenever possible, the donor looks for tangible indicators and measures of success, while taking the long view. For example, a funder who supports economic opportunity programs for inner-city populations might assess the impact of grants by evaluating new job creation, wage increases or career training in the target community.
- Issue-focused research and analysis – Strategic philanthropy builds on best practices, identifies existing needs and gaps, and targets emerging opportunities. Through research and analysis of issues, funders can develop a critical context for determining how best to allocate philanthropic resources.
- Design of the philanthropic strategy – The main elements – values, mission, vision, goals, research and analysis – comprise the working materials for designing a philanthropic strategy. The next step is to decide on the roles and approaches that are most likely to achieve the donor’s goals. For example, some donors pursue a strategy that fosters innovation, while other donors focus on leadership development or institutional capacity building.
- Implementation – Once a donor has designed strategies and determined what role to play, it is time to implement the programs. Implementation starts with development of an action plan, timeline and budget. The specifics of the plan will be linked to the strategies and roles the donor has chosen.
- Evaluation, reflection, revision – High-impact funders continually evaluate their efforts, synthesize new research, build on effective strategies, and develop new strategies when appropriate. They engage their grantees as learning partners and seek to capture knowledge and leverage insights from their grants. These donors also seek opportunities to meet with experts, practitioners and other funders in their field of interest, to enhance their understanding and build a network around common goals and purposes.
Donors can enhance their impact by thinking carefully about what roles they can and should play. In addition to grantmaking, the donor’s role may involve convening, training, media outreach, and many other tools and tactics that can enhance impact. Roles may include:
- Innovator/incubator of new ideas, programs or organizations. Philanthropy often acts as the “research and development” sector of society, generating and testing new ideas free of public sector constraints and fueled by the creativity of the donor and grantee.
- Disseminator/replicator of innovative models and best practices. When programs and approaches are proven effective, funders can play a critical role in replicating or expanding these models and disseminating important findings and ideas.
- Capacity-building of nonprofit organizations, schools, neighborhoods and fields of interest. These donors work in close partnership with their grantees, offering technical assistance, supporting leadership development and creating networking opportunities. “Venture philanthropy” is one term used to describe highly engaged activity that aims to build capacity and enhance nonprofit performance.
- Convener/connector. Donors can play an important role in connecting groups with common goals and interests, building coalitions and convening people around an agenda. Some donors bring together community leaders, experts, grantees, funders and creative thinkers to generate new ideas, build consensus around a shared vision, and share experiences and best practices.
- Change agent/catalyst to promote social change. Some donors address underlying causes and work to improve systems within their area of interest. They may support research, promote strategic alliances, or raise public awareness. Some donors play the role of public advocate and spokesperson to galvanize action around the issues they seek to influence.
Magnifying impact through investment
Many philanthropists and foundations are intrigued by the possibility of magnifying their impact on the issues that they care deeply about through deploying more of their financial resources in market-based approaches. And in this regard, they are considering the promise of impact investing.
Impact investing is any type of investment that generate both measurable impact as well as a financial return. Impact investing is not a uniform, singular approach to capital allocation, rather, a lens through which investors view the world and a perspective that allows them to draw upon a proper set of tools required to build capacity, sustainability, and ultimately impact over the long term.
In other words, impact investing is an investment philosophy, not a particular type of asset class. Investments may be made directly to individual enterprises (for profit or non-profit) or via funds (or funds-of-funds) that aggregate investments, which are often in a particular sector and/or asset class. These investments can come in many forms that provide market or below-market rates of return; examples of which are:
- Loan guarantees for projects or funds – An organic farming business needs capital to expand its greenhouses. A foundation or individual co-signs a note with the local bank, thus providing both access to capital and better terms for the borrower.
- Cash deposits – A local credit union provides favorable rate mortgages and small business loans in a local depressed economy, financed by investors who deposit cash at below-market rates. A “green bank” can provide favorable terms for energy retrofits, due to impact investors’ willingness to make cash deposits.
- Loans to non-profit institutions – A foundation makes working capital loans to small community arts organizations that meet specified criteria, agree to work with a technical assistance consultant and have the capacity to repay.
- Loans to for-profit companies – An impact investing fund manager builds a portfolio of loans to support the expansion of companies engaged in a range of disruptive medical innovations.
- Equity investments – A private company with proprietary technology that reduces the cost of solar panel installation needs expansion capital and finances it through selling a share of the business.
- Revenue royalties – The same company finances its expansion through a technique that provides investors “royalties” as a percentage of revenues, subject to a cap.
- Real asset investments – A sustainable timber financing company purchases threatened or damaged land areas around the buffer zone of a national park, establishes sustainable forestry practices and generates carbon offsets while providing a financial return to investors.
- Micro-enterprise funds – A micro-finance organization makes loans to cooperatives of women micro-entrepreneurs, financed by investors who may make a market or below market return.
- Pay for success structures and social impact bonds - This is a particular new type of impact investment. It refers to an experimental financing structure that brings together government, service providers and investors/funders to implement promising programs designed to accomplish clearly defined outcomes. Investors provide the initial capital support, and the government agrees to make payments to the program (who repays the investors) only when outcomes (“success”) are achieved.
If you are interested in high impact, innovation driven philanthropy, grantmaking and social investment, the next questions would probably be:
- What are your social goals? What social/environmental issues do you want to impact? Are you agnostic with regard to the areas of impact, or more likely, do you care deeply about one or more social problems and/or specific communities? Some issue areas – such as energy efficiency, affordable housing, childcare, health care, and family-supporting job creation – are more conducive to impact investing strategies than others because they offer a revenue stream and measurable indicators of social impact. However, we are seeing many creative approaches to addressing other areas of interest, from providing access to water and utilities to strengthening the arts and education. If you thoughtfully define your social goals first, the rest of the planning will follow more easily.
- Are you a “finance first” or “social first” investor? Are you looking for a market rate return or are you willing to take below-market returns (including simple return of capital) to achieve social goals? Most donors and foundations are social-first investors who ascribe substantial value to the social return of the equation and are willing to sacrifice some financial return by filling a niche where traditional investors dare not tread. Others are concerned about sacrificing return and potential growth of financial assets for future use. You may want to do some of each – make social first investments with your philanthropic capital and finance first investments with your personal investment capital.
- What money (capital sources) will you use? Do you want to use money already dedicated to philanthropy and/or do you want to use other private investment resources? If you are drawing on philanthropic capital, do you want to use principal – such as a donor advised fund or foundation endowment – or take it out of your grants budget? Using the private investment resources can multiply your resources for social good. You may want to use a variety of capital sources and deploy them with different goals.
- What percentage of your financial resources will you dedicate to impact investing now? Potentially in the future? Do you want to go all in or experiment with a few limited investments and see how they perform? Most investors are carving out a percentage of their assets for this purpose while the market continues to develop. They may invest the remainder in socially responsible or mainstream funds.
- What geography(ies) do you want to impact? Do you want to work locally, regionally, nationally or internationally? Today, it is much easier to invest in impact investing funds that are national or global in scale than regional and local funds due to market size limitations and the small number of local intermediaries. While there is variation by geography, many of these local funds do not have the ability to market themselves as investment ready opportunities to investors; however, locally-based private investors and foundations often have on-the-ground knowledge of local individual enterprise opportunities – including grantee organizations – and can prove to be an excellent resource.
- What asset classes are you most interested in? Different asset classes offer different levels of liquidity, risk and return. Generally, loans, deposits and guarantees will provide lower financial returns, but offer more liquidity and lower risk (although of course, this varies greatly deal by deal). Equity shares, available only in for-profit enterprises, may offer significant return but also higher risk and lower liquidity, especially if you are considering early-stage companies. New breeds of “hybrid” enterprises have emerged in recent years including B Corporations.
- How engaged do you want to be? Do you want to spend a lot of your time looking for opportunities, analyzing them and even working directly with investees to help them succeed? Or do you want to be hands-off, and have experts do all the work? If the former, how do you get smarter and immerse yourself in the emerging deal flow? Or create new opportunities?
You have a sense of your overarching goals, so what is next? Ultimately, you will want to develop an investment policy, strategy and execution plan. But first, you may want to dive into a deeper understanding of the marketplace and the range of investment opportunities that might meet your goals.
When it comes to deploying capital, you have two basic choices:
- Invest in funds (or funds-of-funds)
- Directly invest in specific enterprises or one-off deals
Whether you decide to move forward slowly with one or two deals or go “all in” on impact investing, you will want to articulate your goals, define your strategy, and make sure you have got the skills and capacity to execute and assess progress. Start with the following:
- Develop an investment policy – The policy will typically include: a goals statement, percentage of your portfolio dedicated to impact investing, asset allocation targets/ranges and performance benchmarks. The goals statement will address such areas as: desired income generation, principal growth, liquidity needs, volatility and risk parameters, investing time horizon and social impact goals, including “impact themes” or areas where you would like to make a difference. This will help make impact investing work for your needs. Your impact investment policy can be separate from or integrated into an overarching investment policy.
- Define your strategy – Building off your investment policy, develop some indicators of success for your financial and social/environmental goals. Determine the primary strategies and approaches you will use, including which tools/investment products as well as how you will source and assess investments and how you will align investments with your philanthropic strategies. Develop a budget, timeline and action plan. Be sure to build in plenty of time and resources for learning, building your capacity to execute and assessment.
- Build your capacity to execute – The expression “execution trumps strategy” rings true for impact investing. Most traditional philanthropists and foundations will not have the capacity in-house to jump into impact investing. Impact investing requires not only program expertise, but ability to do credit analysis, financial and organizational due diligence, legal skills and new systems for monitoring and tracking payments. You may elect to train existing staff, hire new staff, use consultants or work with intermediaries such as banks or CDFIs who can execute. Co-investing with experienced impact investors is another way to execute.
- Assess your progress – Finally, you will want to build in systems and milestones for assessing your progress. This begins with making sure your own goals are clear and developing good systems for investee reporting.
Next Generation Consultants is a specialist impact management and measurement consultancy that assist social investors, grantmakers and philanthropists develop impact strategies, impact management plans, impact measurement frameworks and impact reports. Contact us at firstname.lastname@example.org for more information.