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What criteria should nonprofits consider before accepting a social impact investment?
Recent trends in philanthropic giving indicate that the new generation of donors has a high interest in ensuring that their donations generate outcomes (Flandez, 2012). Donors are becoming increasingly vigilant and have rising expectations of nonprofit agencies. As a result, an emerging method of investment, called social impact investment, has investors monitor the outcomes produced by their donations while simultaneously producing profit from their investment. Nonprofit executives must be cognizant of these trends, as they may provide insight into the motivations for giving. They may be some useful considerations for nonprofits to consider in order to boost their finances and maintain their donor base. At the same time, nonprofits should be aware of the challenges and limitations to this emergent form of funding.
The Nonprofit Finance Fund defines social impact investments as “investments that intend to generate positive social or environmental impact along with financial return.” Though the practice is decades old, the term was only coined in 2008, making it a relatively new field of study. Despite its recent emergence, it has gained rapid popularity, with an estimated $300 billion in impact investments in 2014, and an estimated $500 billion expected by 2019 (Sirull, 2015; Monitor Institute, 2009, p. 5).
Proponents of nonprofit impact investing cite that seven out of ten high-net-worth Americans have more faith in the private sector than the nonprofit or government sectors due to its utilization of social impact investing. This type of investment is increasing among women, Gen-Xers, and Millennials. Among high-net-worth individuals with over $10 million, social impact giving has tripled in the last year. While this method of investing has been most prominent in the business sector, nonprofits have been involved in this sweeping trend (Segedin, 2016). Opponents of nonprofit impact investing claim that investors are more concerned about generating market returns than they are about the nonprofit’s mission, and that they may have unrealistic expectations of what their funds can be used for and how impact can be measured. Additionally, pursuing impact investments may short a nonprofit’s focus to creating a more business-like model that might not necessarily work for the benefit of its target population (Ategeka, 2016).
I conducted research on four nonprofits that accepted social impact investments and were successfully able to utilize them. These organizations were VisionSpring, Code.org, the Colorado Coalition for the Homeless, and the Mental Health Center of Denver. The study of their combined narratives revealed several common themes. These observations provide insight on the criteria nonprofits must meet before considering impact investments. First, successful impact investments were made to organizations that were large and already well-established. Except for Code.org, all the nonprofit organizations were established over ten years ago. Additionally, these nonprofits were large organizations with wide-reaching impact, serving tens of thousands, if not millions of people.
Understanding the expectations and concerns of the investors is another way to determine the barriers to social impact investing. A survey of impact investors conducted by the Global Impact Investing Network (GIIN) revealed that the lack of “innovative deal/fund structures to accommodate investors’ or investees’ needs” was a primary setback against social impact investing, and this indicates the need for a nonprofit to have proper infrastructure before accepting an impact investment. The lack of “research and data on products and performance” and the lack of “sophistication of impact measurement practice” were also high on the list of challenges, especially among developed markets like the United States (GIIN, 2016, p. 9). Therefore, nonprofit organizations should have the capacity to collect data and accurately measure the impact of the investments. They should be able to quantify their impact, and focus on identifying the outcomes and impact as opposed to simply the outputs. For this reason, social impact investing in developed countries is most popular in the areas of housing and energy, as there is already an ample amount of baseline research on homelessness and energy efficiency.
Charlene Flaherty, the Associate Director of the Southwest Corporation for Supportive Housing, further adds that it is critical for nonprofit organizations accepting impact investments to have a refined organizational structure, including good governance, risk management procedures, and financial systems. Finally, effective leadership is necessary to overcome the challenges of social impact investing. The leaders must have the knowledge to be able to “integrate social and environmental factors into economic and finance theory” (Monitor Institute, 2009, p. 51). They must be flexible, as impact investments will likely require compromises from both the investor and the investee. Coordination and effective communication with involved parties are necessary to mitigating the risks and overcoming the challenges inherent to social impact investments. The organizational leaders should be prepared to invest time and effort to accommodate impact investments and collaborate with the investors.
Nonprofit managers must take the following factors into consideration before accepting an impact investment:
In view of these observations, managers and executives of nonprofit organizations should assess their organization’s readiness to accept social impact investments. If the nonprofit meets all of the aforementioned criteria, it could very well have the capacity to utilize the investments to their full potential, and generate a social and financial return for the benefactors. As such, nonprofit managers looking into impact investments must be aware of their organizations and mindful of the possible setbacks and barriers before seriously considering the authorization of this form of funding.
Ategeka, C. (2016, January 4). Why Social Impact Investing Is Hurting Nonprofits. Retrieved September 12, 2016, from http://www.forbes.com/sites/theyec/2016/01/04/why-impact-investing-is-hu...
Flandez, R. (2012, June 21). Many Donors Would Give More if They Saw More Results. Retrieved October 22, 2016, from https://www.philanthropy.com/article/Many-Donors-Would-Give-More-if/156463
GIIN. (2016, May). Annual Impact Investor Survey. Retrieved October 22, 2016, from https://thegiin.org/assets/2016%20GIIN%20Annual%20Impact%20Investor%20Su...
Monitor Institute. (2009). Investing for Social & Environmental Impact. Retrieved October 16, 2016, from http://monitorinstitute.com/downloads/what-we-think/impact-investing/Imp...
Segedin, A. (2016, June 6). Big Donors Losing Faith In Charity To Solve Problems. Retrieved September 05, 2016, from http://www.thenonprofittimes.com/news-articles/big-donors-losing-faith-c...
Sirull, B. (2015, January 23). 2014 Was the Year of Impact Investing: What's Next For 2015? Retrieved October 22, 2016, from http://www.triplepundit.com/2015/01/2014-year-impact-investing-whats-nex...
Bayan Dwaik is a graduate of Arizona State University. She received a Masters in Nonprofit Leadership and Management in the Fall of 2017. As a graduate who completed a Masters degree, Bachelors degree, and certificate program on the nonprofit sector, Bayan has extensive knowledge on all the facets of nonprofit management. She volunteered with a variety of organizations, including United Way, Central Arizona Shelter Services, and the Saudi Food Bank, and she completed a full-time internship with the Arthritis Foundation, wherein she gained hands-on experience in grant writing, event planning, and volunteer management. She is currently applying for jobs that will put her in the position to make the world a better place.