What Social Impact Investing Means for Your Nonprofit

Social impact investing has taken both the financial and philanthropic worlds by storm in recent years. According to a 2015 study by financial asset manager U.S. Trust, approximately one-third of high-net-worth individuals either already participate in social impact investing or want to. Yet the study found that many potential social impact investors are confused about what these philanthropic investments involve, the returns they produce and how their social impact is measured.

If your charity wants to attract social impact investors, it’s important to understand this emerging hybrid model and be able to explain how your programs match investors’ dual objectives.  

Donors redefined

Social impact investments are made to generate a measurable social and financial return. Investors may put money in projects sponsored by for-profit companies, nonprofit organizations and investment funds. Instead of making outright gifts and grants, social investors generally participate via equity, debt and other market instruments.

The recipients of such investments usually are expected to repay investors, often with interest. Depending on how the investments are structured, investors may receive modest returns (in exchange for community and other social benefits) or returns that are competitive with non-social-impact investments.

One popular instrument is the social impact bond. Investors pay upfront costs for providing social services and are repaid by government agencies — but only after a third-party evaluator determines that the services achieve agreed-upon outcomes.

Investing in action

Rather than profiting directly, many social investors “recycle” their returns for greater charitable effect. For example, the Greater Cincinnati Foundation’s impact investing donor advised fund uses a variety of methods to leverage participants’ donations — including reinvesting financial returns in the fund — to support a portfolio of community nonprofits.

One of the best known social impact investments is the Rockefeller Foundation’s 100 Resilient Cities initiative, which provides urban centers around the world with leadership, technology and specialized expertise to build “resilience” to current and future social, economic and environmental challenges. A city suffering from “energy poverty” might receive foundation assistance to build an electrical grid, and then repay the foundation once it’s up and running. The foundation expects that its involvement in such a project will attract other participants — such as energy service companies, private capital and nonprofits — and generate new economic activity that benefits everyone in the region.

Tapping a desirable demographic

Social impact investors are a desirable demographic. High-net-worth individuals, women and younger donors — those who prioritize “doing well by doing good” — have expressed disproportionate interest in social impact opportunities. And because minimum investments are typically high, family offices and private foundations frequently participate in social impact initiatives.

Unfortunately, not all nonprofits will be able to attract social impact dollars. If, for example, your nonprofit provides basic human services such as food assistance or shelter for the homeless, you’ll probably have a hard time making the case to investors. Your programs’ social returns may be high, but the financial ones are probably nil.

If, on the other hand, your organization builds low-income housing or community health clinics, provides seed money for minority business startups, or funds the development of environmentally friendly products, you may offer what social impact investors are looking for. Keep in mind that you’ll need to provide social impact and financial return projections that are both attractive and realistic. (See the sidebar “IRIS makes the double-bottom line easier to read” for help preparing financial statements.) And be prepared to prove that your nonprofit has the management and financial experience and expertise to achieve your objectives. 

Reaching these investors isn’t always easy, though. Most charities gain access to social impact dollars through community foundations or professional investment advisors, so it’s important to foster good relationships with these intermediaries.

Steep learning curve

For nonprofits accustomed to dealing only with traditional donors, the learning curve for social impact investing can be steep. So you should work with financial advisors who are knowledgeable about this brave new world of philanthropy. They can help you craft a compelling social impact offering and find potential investors.

 IRIS makes the double-bottom line easier to read

Transparency is critical to attracting social impact investors to your organization. These types of donors — and intermediaries such as community foundations and financial advisors — won’t make any commitments until they know how you measure, monitor and report social and financial outcomes.

The nonprofit Global Impact Investing Network has initiated the Impact Reporting and Investment Standards (IRIS) project to help ensure that investors, nonprofits and other stakeholders will all be on the same page. Like Generally Accepted Accounting Principles (GAAP), IRIS is a common accounting language that enables comparison of different organizations or investments. Unlike GAAP, it features a double-bottom line to record both financial and social results. IRIS’s metrics catalog suggests specific ways to measure social returns, such as “number of volunteer hours,” “energy conserved as a result of energy-efficient construction” and “percentage of students advancing from one level to the next.” You can view the entire catalog online at https://iris.thegiin.org/metrics.

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