In traditional charitable financial giving we think of both donors and nonprofits. From the donors’ perspective, we financially give - donate - to an organization (such as our church), serve a cause, or improve a social or environmental condition that is important to us. Nonprofits typically receive their funding from individual donations, business sponsorships, grants and hosted events. Innovations in society are happening everyday. In the philanthropic sector, these innovations include new tools and techniques to improve our hometown.
In detail below, we will introduce the leading-edge tool; ‘impact investing’ and discuss how it can provide financial funding to organizations serving our community.
We will answer the following questions:
- What is Impact Investing?
- How can Impact Investing better my community?
- What are the opportunities for Impact investing for donors and nonprofits
What is Impact Investing?
In its most basic form, impact investing is the financial investment in companies, organizations and funds with the intention of making a measurable, beneficial social or environmental impact as well as generating a financial return. Depending on the organization type, the impact investment could be in the form of debt (loan) or equity (purchase of stock). The investment is used to address social or environmental challenges within the community.
In traditional philanthropy, nonprofits would write grants and receive funding from the government, foundations or similar sources. These grants are outright gifts. In many cases, the nonprofit does not measure the social impact, and there is no financial return.
In contrast, impact investing is an investment that expects both a measured social return on investment (“SROI”) and a calculated financial return on investment (“ROI”). Typically, the available funding for impact investments comes from local foundations (either private, health care, or community) or other funding intermediaries. The nonprofit justifies the investment as a program-related investment (“PRI”) or a mission-related investment (“MRI”).
How can impact investing better your community?
Impact investing can better our hometown in a variety of ways. It unlocks additional capital from local foundation endowments and community development financial institutions (CDFIs). The infusion of this additional funding for both profits and nonprofits is critical for these organizations to serve their community.
In advanced applications of impact investing, community economic development can be leveraged and accelerated through the collective engagement of community stakeholders such as individual donors, businesses, nonprofits and the faith community. Impact investing serves as an added funding resource for local government community economic development departments. Firms specializing in impact investing, such as locus impact investing, facilitate the collaboration, deal-making and due diligence needed for local community economic development.
To further understand how impact investing helps communities, Virginia Community Capital are a great example. They are a 501c(3) nonprofit organization that owns a for-profit bank. Click this link to read one of their most recent success stories.
What are the opportunities associated with local impact investing for donors and nonprofits?
Opportunities for Donors
For individual donors wanting to make a direct social impact there is opportunity to pool funds for specific impact investing projects in local communities.
Opportunities for Nonprofits
For those nonprofits seeking additional funding beyond donations, grants and special events, impact investing creates a whole new source of funding. Local private foundations, health care or community foundations may want to explore employing a slice of their endowment as an impact investment. This will help learn how to leverage financial resources and more importantly, better the community.
Many new philanthropic tools and techniques can be used and applied to better your hometown. Impact investing is just one of these tools. It is especially useful when also supported by the economic development departments in your community.