Myth three
Impact investing is more effective than traditional philanthropy
In some cases, impact-driven investments may be more effective but in others, charitable donations could be a better fit.
There are many different types of impact investing: anything from screening out ‘sin stocks’ to social investment like CAF Venturesome. It might be helpful to start with the idea that impact investing can have three types of impact: enterprise impact, financial impact, and non-monetary impact.
Enterprise impact is the social impact that a company has. In other words, how effective is that company at solving the social issue it seeks to address? And is that always more effective than directly donating to a charity? Not necessarily.
One example we can look at is anti-malaria nets.
Evidence suggests that distributing nets for free is much more effective than asking people to pay, since charging significantly reduces demand. Therefore, if you were investing in a social enterprise that sold beneficiaries anti-malaria nets you might actually have less impact than if you were donating that money to a charity that gave them out for free.
Financial impact is the impact that your investment has. If an impact investment opportunity gives market-rate returns, it could attract a socially neutral investor who is just looking for a good investment opportunity. The company would not have an issue raising capital, and so your donation could have more impact by going to an effective charity.
This leads us on to non-monetary impact, which is the skills, knowledge, and expertise that you can bring to a company that another investor could not. This type of impact means that you are likely to have more impact in private markets, where these types of resources are more needed. It might also mean that you can identify financially rewarding and impactful investment opportunities that other investors may not have come across.
Again, we would recommend an approach of exploring your options. Impact investments can be an impactful choice in some areas, but not in all. To learn more about key definitions, concepts and how to determine when which method is more effective, tune into our
impact investing webinar.