3 reasons why Impact investing is hurting non-profits

There has been a lot of talk surrounding Impact Investing in the past 5 years, it combines the best of both worlds – doing social good and earning a return at the same time. The introduction of private market economics to companies serving the society give social enterprises and non-profits access to funds, allowing them to deliver more impact than they can relying solely on donations. Reality however, deviates slightly from the ideal.

1) Impact investing is seen as an alternative to donations.

There is a difference between donations and impact investments. Charging 2 dollar for a meal is not the same as providing free meals. Problems occur when people fail to distinguish between the two, see impact investments as an alternative to donations (possibly to satisfy their CSR targets while reducing the impact on their bottom line) and channel funds originally intended for donations into impact funds, hurting non-profits with donation dependent business models

2) There aren’t free lunches in this world

Literally. The dominance of impact funds and lucrative access to capital causes non-profits to adopt fee-based business models to generate returns which, although not as big in the grand scheme of things, does alienate the marginalized few (bottom of the pyramid) that need aid the most. Arguably, there seem to be an inverse relationship between profitability and impact, though governments and socially conscious consumers try to ameliorate the situation.

3) Divergence in goals

Measuring the impact of an investment proves to be difficult with unclear definitions and questionable assumptions. In a Forbes article, a CEO of a non-profit revealed that it seems like many investors are satisfied as long as their investment makes some sort of impact. This attitude suggests that the key bottom line in impact investing is for financial gain, which sends a disturbing message to non-profits: it does not matter how many people you are helping, just make sure you are……AND you are making money.

Having said that, I do believe impact investing ultimately do more good than harm to the overall ecosystem of non-profits and their beneficiaries due to the sheer amount of capital and efficiency of the private markets being able to unlock opportunities non-profits can only dream of previously. However, it should not replace altruistic donations that many non-profits still rely on. Realistically, impact investing is better represented as a ‘social derivative’ rather than 'venture-philanthropy'.