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The Impact of Impact Investing: A Case for Renewed Giving

Are you curious about how much America gives?  About how Non-Profit funding works? Or how the economic pressures that have given rise to Donald Trump affect both?  Check out our newest blog post where our Operations Coordinator Joe Ward goes in-depth on a variety of topics related to philanthropic giving, while pushing America to give more.

The Impact of Impact Investing: A Case for Renewed Giving

It’s no secret that charities need money.  We see the Santas ringing their bells at Christmas and smile through the requests at the checkout lines.  And we don’t mind because we know charities survive off donations and believe that they benefit society.  The problem is that this is not a full circle.

The scope of non-profit operations simply isn’t big enough to provide high-yield returns to society, at least not to the same people who donate.

Thus the circle is really a line from the donor, to the organization, to the recipients, with indirect beneficiaries - like donors to a youth basketball team.  We also know many charities do not charge for their services.  A lot of them can’t - think about how invalid a soup kitchen becomes when it charges for food.

Because philanthropy (by definition) does not provide a financial return, non-profits still rely on the health of the general economy to keep things moving.   This reliance will never cease because there is no point at which a non-profit becomes self-sustaining: There are no profits involved with which to re-invest or save.

Because of this never-ending need, some charities have decided to partner with financial investors in what is being called “Impact Investing.” This is where a financial firm or affluent investor decides to invest in a non-profit or socially beneficial company with the stated goal of achieving both financial and social returns.

In practice, the charity organization shifts some of its focus from their service to developing business plans for investors and generating revenue that will make them self-sustaining (or at least stable, at most profitable) in exchange for a larger upfront donation (read: investment) that can help carry the organization to this point of self-sufficiency.

Then, the investor collects their returns.

I see two main problems with this. For one, investors are investors. They want their return and that means diverting your focus, which dilutes and devalues your service, and diminishes your social returns (1).  For two, you can’t create a market opportunity where one doesn’t exist.  If people aren’t willing to (or in this casecan’t) pay for a service, then there’s no opportunity for revenue there.

You can’t introduce pricing at a soup kitchen – that’s a restaurant.  You’d have to re-invent the entire operation in order to turn the problem into a market opportunity.  Like replacing a soup kitchen with a Tom’s for food or a farming co-op. But even if that made sense to do, investors wouldn’t have the patience.

And if you’re not lucky enough (as a non-profit) to find an investor with a serious personal tie to your mission, then your non-profit will be caught in the trap.  You now have an obligation to semi-neutral investors to create a return where there was never any intention of one before.

To be fair, the expected return is generally smaller than would be expected in a normal VC investment, and can in some cases be supplemented by philanthropy.  But you don’t have to ask for much to be asking for multiple times more than a non-profit’s model was originally built for, or than its market can sustain - and that matters.

So let’s talk more about funding for non-profits.  Donations from individuals totaled about $258 billion in 2014 (2), essentially even with pre-recession giving.  But even charitable gifts don’t always come without strings: Many major donors wish to see the organization make shifts that better suit their ideas for society, or restrict grants for very specific purposes.

Donors also seem to injudiciously and unilaterally hate that their donation might support staff at a non-profit (and at America’s scientific research labs…) (1).  Plus, that $258B is only 1.5% of GDP - the total dollar value of all goods and services produced.

And so it is not that there is just a lack of funding ($258B divided by the 1.5M charities in the US is only about $172k per charity per year), but also a lack offlexible funding.

The lack of funding seems like the bigger problem, since even $172k totally unrestricted dollars can’t get you very far - especially as non-profits attempt to compete for qualified talent.  It also seems to me that the lack of funding is a macro-economic problem, perhaps of the sort that's given rise to "Trumpism," but more likely driven by the increasing purity of capitalism in the US.

Pure capitalism is when all production is attributed to the private sector, and development occurs by reinvesting profits.  Republicans fight for this when they denounce welfare programs, which are an alternative to charities.  The direction we’re going, as a nation and a world, is on this path of increased privatization.

(Granted, we’re not exactly purifying our capitalism because instead of investing in development, companies invest in marketing (lack of competition in markets = lack of need to innovate services and goods), but that’s a different conversation.)

The increased privatization has affected our very culture and what we expect both from our companies and from each other.

We ignore everybody when we allow industries to become oligarchic, like with the regulatory costs that create barriers to entry for new banks, and other fields like cable, cereal and cigarettes (3).  This eliminates extra HR, legal, compliance, janitorial and other staffs that would come with competing companies. This, along with globalization (4), is the commonly attributed cause of Trumpism and certainly affects the large-scale, small-dollar donations that charities rely on from individuals.

We ignore the middle and lower classes when real estate developers bulldoze parks for apartment buildings, which never willfully include low-income housing. We ignore them when our democratic mayors let their budgets get so out of hand that we budget for 30%+ of our revenue to come from police citations, which always come mostly from the less-fortunate. We ignore them as we continue to segregate ourselves (5), from the municipal level to the state level.

In short, the need is growing but the means are shrinking.

On the individual level, the re-segregation clearly has the biggest impact. If you can't see it, you don't imagine it, and if you don't imagine it, you can't sympathize. This, along with the entire world’s focus on profitability (and the too-easy ability to excuse bad behavior in pursuit of said profits), and perhaps classic media portrayals have led to a decline in sympathy not just across class-levels, but in general it seems.

I believe these economic and social factors, along with constant solicitation from ads, has led to the perennial dearth of individual donations and unrestricted gifts.

I certainly haven't discussed every factor, but the point is that we would completely abandon the less fortunate if we reduced philanthropic giving any further. I get that the point of investing is the financial return, but let's not casually decide that that extrapolates to good-will and philanthropic endeavors too.

Impact investing may make sense for some non-profits who already generate revenue, but we still need to recognize that charitable gift giving is vital to social welfare and resist the push to privatize.

Average additional giving of less than $350 per person would bring individual donations up to 2% of GDP and $358B overall.  That's nearly a 40% (!) increase in giving and still less than $1200 a person per year (6).

I write this because while it may be right that all investors will want a return, that is a deeply saddening thought when we apply it to social welfare. Robert Putnam aside, I rue the thought that soup kitchens, youth camps, and other great services should be creating margins. We can’t trap our nation’s non-profits between operating on a budget so lean it has scurvy, or re-imagining their operational model to provide financial returns.

We need a boundary to our capitalism, and the well-being of our nation’s neediest individuals is a line that shouldn’t be crossed in this regard.

 

1: http://www.forbes.com/sites/theyec/2016/01/04/why-impact-investing-is-hurting-nonprofits/

2: http://nccs.urban.org/nccs/statistics/Charitable-Giving-in-America-Some-Facts-and-Figures.cfm

3: http://www.econlib.org/library/Enc1/IndustrialConcentration.html

4: https://www.washingtonpost.com/news/wonk/wp/2015/12/24/a-big-hint-about-why-so-many-people-support-donald-trump-might-come-from-germany/

5: http://www.thebigsort.com/home.php

5b: http://www.thisamericanlife.org/radio-archives/episode/550/three-miles

6: GDP = $17,914B; US Population = 318.9M; Individual Donations: $258.51B.  Thus individual donations are currently 1.44% of GDP and $810 per person.  Another 0.56% brings individual donations to $358.83B, or $1,125.20 per person.

Photo Credit: http://blogs.reuters.com/faithworld/files/2011/06/santa-charity.jpg