Nonprofits Are Seeking Profits
AUGUST 16, 2016
The International Non-Governmental Impact Investing Network has released a report showing how not-for-profit organizations are actually chasing profits by embracing the concept and process of impact investing.
More than $545 million has been invested by NGOs into businesses run by social entrepreneurs, according to the report. Almost 60 percent of international NGOs participate in impact investing, the report says, with the remainder exploring ways to incorporate programs and strategies into their missions.
Impact investing is a fast-growing sector of financial services that aims to produce financial returns for investors while at the same time producing socially positive results akin to charitable giving.
The big hope for NGOs, the report says, is that the social businesses to which they have invested will turn tidy profits, propping up their balance sheets, while facilitating their social missions.
“Over the last several years, the INGO sector has seen a number of developments in impact investing and social enterprise creation that are exciting in their range and potential to scale and sustain long-term mission results,” the report says.
These developments are promulgating NGO impact investments even though these organizations tend to be impact-first investors, meaning that they are ready to withstand below-market rates of return. Indeed, the report says less than 20 percent of NGOs expect market-rate returns, and nearly 45 percent expect no additional returns beyond capital preservation.
The reason for this is NGOs are not seeking to replace fundraising efforts with impact investing returns. Rather, impact investing initiatives are being designed to augment development goals. There is a $2.5 trillion gap in funding sustainable development goals across the globe, according to the United Nations. Impact investments can help to narrow that gap.
To be sure, no NGO is going to turn away a profitable investment return mechanism, especially one that manifests value for donors. Altruism aside, NGOs have to face the fact that their business model is changing—and that they must change along with it.
“Enabled by new technologies and a generation of socially conscious millennials, individual donors are now connecting directly with recipients through peer-to-peer platforms, [circumventing] charitable organizations and traditional donor governments entirely. At the same time, new models of giving, including crowdfunding and payment for impact, are complementing traditional grant funding, unveiling tremendous new opportunities. These shifts have the potential to transform the INGO sector,” the report says.
The hype around impact investing has been most pronounced within the traditional financial services industry via financial advisors, banks and foundations. However, new actors to the impact stage, such as INGOs, are less talked about. Herein lies opportunity through collective alliances to design newfangled investment products that serve myriad asset owners and goals.
For example, one NGO, ACDI/VOCA, has partnered with a U.S.-based private investment firm RENEW Strategies to bring more private equity investments to Ethiopia. The conceit is that the NGO has a strong understanding of the geographic, business and political landscapes and cannot only mitigate risk, reduce investment friction and uncover opportunities, but also better measure results.
“Even though measuring impact resulting from investments or investment support is different than measuring impact from traditional donor-funded programs, this is an area where many INGOs can add value based on their long experience of measuring the social and environmental impact of programs and interventions,” the report notes.
Still, as with most venture capital or private equity investments, the time horizon for returns can be years, lengths of time NGOs are comfortable withstanding for long-term sustainable development. Such “patient capital” is seemingly ripe for partners of all profit stripes.
Clickhereto read the full report.
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