This is a guest blog post by John Thornborrow, a Mission Capital Board Member and Chair of the Alternative Financing Taskforce which helped spearhead the recent Easter Seals Central Texas social impact loan.
Social impact investors seek to invest in social ventures or socially responsible businesses that have the ability to provide both a social benefit and a financial return (even if it’s a small financial return). In order to provide such a financial return, an organization needs to have a Fee for Service model or an Earned Revenue Stream – in other words, it needs to charge for a product or service.
For nonprofits with an Earned Revenue Model, we’ve seen an emergence of social impact investing options such as loans, impact investments, and Program-Related Investments (PRIs) that provide new funding alternatives for organizations willing to seek them out.
Let’s face it; this type of funding source doesn’t make sense for all non-profits; some may never have the ability to repay an investment or loan. And many organizations will (and should) continue to leverage traditional philanthropy as they have for many years.
What is social impact investing and where does it fit with non-profit fundraising?
In contrast to a donation in a traditional non-profit scenario where the investor donates 100% of their “investment” and receives a tax deduction in return, a social impact investor seeks social benefit achieved by the organization in addition to a return of capital plus a modest financial return.
Consider the following Return on Investment Continuum. On the far left, we have traditional non-profit funding, which have a high social impact in program delivery and provide no financial return. This is classic philanthropy or “investing with the heart”. On the far right, we have traditional financial investments which seek only financial return and are agnostic to social impact. This is classic financial investing or “investing with the head”. Social impact investing seeks to achieve both a social benefit and a financial return and sits in between traditional philanthropy and financial investing.
What are potential alternative funding sources? Here are a few examples and terms that are good to know*:
- Foundation Program-Related Investments (PRI): PRIs are defined by the IRS tax code. Investments for which the primary purpose is to accomplish one or more of the foundation’s exempt purposes, and for which production of income or appreciation of property is not a significant purpose.
- Impact Investing: Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.
- Nonprofit Loans: Nonprofit loans are made with an organization commitment to repay the investor principal with a modest or below market interest rate.
So, why not just make a donation? Why ask for a return?
By returning capital to the investor, that capital becomes available to facilitate change again and again. Investors will open their wallets to social impact investments in addition to what they have already ear-marked for donations.
In other words, there are new sources of capital available to non-profits willing to think outside of the box of normal philanthropic fundraising.
For nonprofit and social ventures willing to explore new funding alternatives, social impact investments can provide additional access to much needed capital resources. Greenlights’ On the Verge research has a section on the need for innovative investment solutions (page 15-16), and for more information on impact investing I’d recommend resources on the Forum for Sustainable and Responsible Investment. If you’re interested in learning more about investing with your heart and your head, a good place to start would be the upcoming Mission Driven conference on September 10-11 or by looking into Greenlights’ SVP network.
* from Unleashing the Potential of US Foundation Endowments: Using Responsible Investment to Strengthen Endowment Oversight and Enhance Impact