This is what impact investing is – and how it’s different for nonprofits

One of the central tenets of impact investing is that even a third bottom line matters.

Impact investing

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Net income does not have to be the sole determinant of business success. One of the central tenets of impact investing is that social or environmental benefit can serve as a second and even a third bottom line that matters just as much as profits. 

Nonprofits have gotten into the action. Some sector leaders see impact investing as a potential tool to boost financially-strapped nonprofits or even the answer to their operating capital problems. But confusion still exists about exactly how impact investing is different and how it relates to traditional philanthropy.

Georgia Levenson Keohane, a social enterprise professor at Columbia Business School, and author of "Capital and the Common Good - How Innovative Finance Is Tackling the World's Most Urgent Problems" got hands on experience with impact investing  as former executive director of the Pershing Square Foundation. She is also a New America fellow.

The following is a transcript of Keohane's two-minute explanation of impact investing:

Impact investing is a very broad term that represents an array of investing.

But for the most part it’s private sector capital that’s invested into companies, funds, organizations with the intention of generating environmental or social impact alongside financial returns.

There’s a difference between nonprofits thinking about impact investing and really for-profits thinking about impact investing. For a long time, social entrepreneurship was really sort of a metaphor. And it was a metaphor for nonprofits that were keen to adopt the tools and the practices and sometimes the rigor and some of the other methodologies from business but it was really sort of in the metaphorical sense.

So for example, Robin Hood Foundation here in New York considers itself a venture philanthropy. They use lessons from venture capital. But they are really providing, you know, traditional philanthropic capital to nonprofit organizations. Increasingly, what we are seeing in some of the examples I described are really not a metaphor. They are really much more literal.

So they are companies that seek not only to earn revenues, but ideally profits. But I think nonprofits sort of chase what they think of as impact capital when really you know they’re nonprofits because they’re addressing market failure. They’re serving populations that it’s really hard to think about generating revenue much less profits in what they’re doing.

So if we think about really hard to serve populations. If we think about homeless populations.  If we think about people, you know, who have mental illness or other disabilities, it’s hard to think of sustainable business models sometimes that serve the most vulnerable.

But I think most nonprofits have to think very carefully about whether they are sort of committing to people providing them resources, whether they are committing returns, or whether they are really seeking a grant but a grant where they promise in return for the grant, let’s say it’s from the Robin Hood Foundation or the Tiger Foundation, that they are going to measure and evaluate and track progress on that grant which is different than impact investing even though we may borrow some of the language and the terminology.