The Great Debate - By Audette Exel AO, Peter Winneke and Rachel Etherington

Impact investing has emerged in recent years as a powerful tool for social change. But where does it fit in to the philanthropic eco-system? In this expanded Great Debate, we ask three wise voices to reflect on the question: does impact investing negate the need for philanthropy? The responses draw on varied examples and experiences that capture the enduring scope of philanthropy and how impact investing is part of the larger suite of tools available to those seeking to make a difference. It's a provocative question that triggers a stimulating debate.

Does impact investing negate the need for philanthropy?

By Audette Exel AO, Founder and Chair, Adara Group

Whether I am sitting under a tree chatting to midwives in Uganda or perched at the top of a mountain pass in remote Nepal chatting to teachers, I am always struck by one thing. Our world is full of need – yes – but wonderfully, our world is also full of extraordinary people and organisations working to address those needs. There is so much greatness in people, including in those who work for traditionally funded not-for-profits.

Impact investing is an exciting and important addition to the toolkit we have as a world to make social change and reach the Sustainable Development Goals. We can add it to the need for more and deeper multi-lateral, bi-lateral, direct Government funding, private sector support, philanthropy and traditional giving. All are needed – and one does not trump another.

As I think about the question as to whether impact investing negates the need for philanthropy, I am grateful for the privilege of meeting those who do such complex work.

This has given me an understanding of the scale of need in our world and the knowledge, commitment and skills required. If we suggest that community groups and NGOs transform to serve the needs of impact investors, we are asking for even more – such as the skills to create business models to make a return to pay for such critical work. Creating economic sustainability for not-for-profits is a fantastic achievement. Yet as we sit at the intersection of profit and purpose, we must take care to recognise the benefits and risks of difference approaches.

When working in the social impact space, we must ask ourselves – do we risk distorting an organisation’s mission or service delivery by creating an obligation to provide financial returns rather than social impact? By casting aside philanthropy in favour of impact investing, will we, for example, find organisations delivering support to ‘easier’ client groups? Will staff end up taking time away from their areas of expertise to find return-seeking opportunities?

Measurement of outcome is such a complex area – far greater than numbers on a page or cash returned. Impactful non-profit work takes time – sometimes it can take generations – and long-term change isn’t always easily packaged into a return on investment. Does that make it any less worthy of support? Shouldn’t the lives transformed – rather than the dollars, rupees or shillings made – be a truer measure of an initiative’s success? Isn’t giving without expectation of return one of the highest orders of self?

Traditional models of giving are not something we should abandon for the sake of innovation, for the new ways of thinking. I worry that there has been a tendency to describe these traditional philanthropists as the ‘old way’ as ‘dinosaurs’, but this could not be further than the truth. This is not a zero-sum game.

Philanthropists through history have been the great risk takers and innovators. They have been the givers who don't wait to hear about the government’s latest stance before they give money to a disaster. They are the givers who make a life from trying to fill gaps, meet unmet needs, from the environmental, the arts, to human rights.

The result? Lives changed and saved. Potential unleashed. Countless stories of impact.

That’s the power of philanthropy – standing in its rightful place, alongside (not behind or ahead of) the myriad of important ways we can make our world a fairer, greener and kinder place.

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By Peter Winneke, Executive Director, Australia's Giving Pledge

Australia and the world face many issues. We have the wealth and intelligence to solve most of these issues. We just need to find the inspiration to do so. As many readers will be very aware, philanthropy can play a unique role here. Accordingly, the aim of Australia’s Giving Pledge is to scale up philanthropy’s involvement via a giving pledge. Peer-to-peer inspiration will be critical as we seek to normalise material giving. Simultaneously we need to work harder at better collaboration, developing bigger ideas, working on systems change and better monitoring and measuring of progress, in order that capital can be effectively deployed.

Pledge signatories with net investable wealth (‘NIW’, excluding their primary residence) over $20m are publicly pledging to donate at least 20% of their NIW to eligible charities, or to their foundation, in their lifetime or upon death. We already have close to 40 signatories Australia-wide.

Some families have said that the language around a giving pledge does not resonate with them. They say that they are 100% impact investing, and that is how issues around the world will be addressed.

Impact investing is critical for many issues, to help develop sustainable models. If there was a profitable model to delivering better sanitation systems in developing countries, health and national development could be significantly improved in many areas. But there are many issues where investing is not the answer, as it won’t produce profitable or sustainable models. In such cases grant funding is required.

So, to address the multitude of significant issues that we face we need impact investing AND philanthropy.

A terrific example of this is climate change. We know that we need continued investment in renewable energy (‘RE’) to expedite the move from reliance on fossil fuels and continue to drive down the price of RE. However, a yet to be fully told story is philanthropy’s role with this move from fossil fuel to RE. Significant funding has been provided from philanthropic foundations worldwide, including within Australia, to delay the building of coal power plants around the world, via a number of strategically targeted interventions, including supporting local grassroots opposition, legal action, withholding finance, withholding insurance and better communications on climate generally but particularly within the finance community with the emphasis that fossil fuel assets would become stranded assets.

The simple thesis was that the longer the building of these coal power plants around the world was delayed, the less likelihood that they would be built, as the price of RE dropped sharply.

So, the critical move from fossil fuels to RE has required BOTH impact investing and philanthropy. Working together, such forms of capital have had a profound role in reducing carbon emissions. This is a terrific model for other issues that we face in the community. The trick is using the right tool for the job.

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By Rachel Etherington, Investment Advisor, Crestone Wealth Management

In a word, no, but it’s certainly a worrying idea that it might. Philanthropy and impact investment are entirely different concepts, and both are vital in the creation of a flourishing society and environment.

So, let’s start with some definitions. At its simplest impact investment is characterised by the generation of a financial return, in addition to a measurable social/environmental outcome. By contrast, philanthropy - at its root – is “the love of humankind” or the desire to promote the welfare of others or society as a whole. There is no implicit or explicit requirement for a financial return (or any monetary exchange).

This distinction is vital. There are innumerable social and environmental issues, which are central to the planet and its inhabitants living long, healthy, happy lives, which simply cannot be monetised or made investible. Advocacy, which aims to alter existing structural systems, change behaviour on a large scale, or promote a new status quo, is one such example. Social housing is another: impact investment can create solutions to the problem, but it doesn’t resolve the problem itself.

In some quarters, impact investment is considered to have a greater discipline and thus be more impactful. In some ways this is a meta reflection of the core of the problem: as a society we don’t value social and environmental enhancement in the same way we value economic generation. It is this very issue that has created and compounded so many of the problems we are now working hard to resolve. Indeed, it is our obsession with unrelenting growth and consumption that has created the environmental tipping points at which we find ourselves.

So, while I applaud and welcome impact investment – and think it has a vital role to play - we need to understand its limitations. The fact that we are now integrating social and environmental benefits into certain investments, is indicative of a bigger and important movement. That said, I do believe that we should shift the focus from impact investment to the broader concept of sustainable investment. This is a simple and inarguable concept: sustainable financial returns are predicated on a sustainable economy, which itself is predicated on a sustainable environment, so to ensure the former, we need to safeguard the latter. Afterall, “The economy is a wholly owned subsidiary of the environment, not the other way around.”

Too much focus on, or arguments about what constitutes ‘impact’ within investment, can derail or delay what is so desperately needed: the mobilisation of huge amounts of capital towards Net-Zero and a more circular economy, for example. What we urgently need is structural change. We need policy and regulatory frameworks to internalise social and environmental externalities.

For example, a price on carbon would be one of the most effective ways of achieving rapid and widescale decarbonisation. It would ensure that the external costs of carbon emissions – costs that the public pays for such as damage to crops, health care costs from heat waves, droughts or to property from flooding and sea level rise – are tied to those responsible for them and who can reduce them.

Such a move would also open up a whole raft of new, investible environmentally progressive opportunities, but it is a policy issue, which perhaps can only be achieved through successful advocacy. So here we are again, back to philanthropy.

So, in conclusion, it is not an ‘either/or’ – it is an ‘everything’.

The scale of the problems that we are facing from biodiversity destruction to climate change, from poverty, to health, to racism, to misogyny - are so vast that we must be big, bold and varied in our solutions. Rather than asking oneself “Should I pursue impact investment or philanthropy?”, the better question on which to reflect “how can I use all the tools I have available to me to drive rapid and widescale change?”.

May. 06, 2022

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