How philanthropy and impact investing complement each other in a wealth management strategy.
Coronavirus has sharpened the focus on social and environmental impact, consolidating a trend that has been growing for decades. The disruption has created an unprecedented opportunity to recalibrate our priorities, and individuals and families are looking anew to create positive change in keeping with their values.
Catalysing change encompasses a variety of different methods and vehicles, including philanthropy and impact investing, both of which have increased in 2020. Indeed, despite the precarious state of the global economy, the outlook for both is strong. A joint report by Giving Tuesday and the Association of Fundraising Professionals found that charitable giving in the US increased by 7.5 per cent in the first half of 2020.1
Meanwhile, in the first three months of the year, investors placed USD45.6 billion globally into funds focused on environmental, social and governance (ESG) issues, according to the HSBC Sustainable Financing and Investing Survey 2020.2 Only 1 per cent of investors say they are placing less importance on ESG and sustainability issues as a result of coronavirus.
Philanthropic endeavours and impact investing are not mutually exclusive and are both important tools that can be used to realise a family's vision for sustainable and inclusive societies. While philanthropy's primary purpose is to provide support and generate positive change without an expectation for a financial return, there are a range of approaches that an individual can employ to achieve both. Impact investing is one such example; it has the dual goals of creating positive social or environmental improvements while simultaneously achieving a financial return.
Using multiple approaches together has the potential to amplify impact, while the exact combination within an overall wealth management strategy will depend on individual objectives, needs and priorities.
The first step is to understand your motivations for taking action – and identifying the cause, area or issue most important to you and where you want to make a difference.
From there, you can define your goals, and plan a strategy and approach that is well positioned to achieve positive outcomes.
The Global Impact Investing Network (GIIN), for one, identifies sectors such as sustainable agriculture, renewable energy, conservation, microfinance and affordable basic services including housing and education as ripe for the market-based approach provided by impact investing.3
Some areas, such as homelessness and domestic violence, benefit less from a financial returns-focused approach. Supporting the arts is also still largely seen as a philanthropic activity.4 That said, market-based solutions can also be funded by philanthropy, as a way of stimulating and proving investable models.
The emergence of venture philanthropy, where the analytic rigour and day-to-day engagement of a venture capital investment is applied to a social problem and funded with charitable funds, has provided an additional avenue to make an impact. Bringing an imaginative approach to philanthropy, it is problem-focused and solutions-oriented, and often targets service gaps not otherwise addressed by other methods. This may take the form of early-stage medical or environmental research, for example, and a discovery made using venture philanthropy may have commercial viability in the future – another twist in this paradigm.
Aligning investments with values
A clearly outlined strategy around how impact investing and traditional philanthropy fit alongside other methods and vehicles to make an impact can amplify the change you make in the world, and bring your family's vision and values to fruition.
The availability of impact investing, in particular, enables individuals to align their investments with their values. These investments can then be leveraged to achieve positive change, as well as generate income to be used in investors' philanthropic efforts.
This approach has exploded in the past two decades. In 2018, impact investing assets under management were estimated at USD502 billion globally.5 Larry Fink, chief executive of Blackrock, the world's biggest investment manager, said in early 2020 that sustainability will become Blackrock's new standard for investing.6
With so many approaches and financial products available, it is essential to seek advice on charting a course that maximises your own social and environmental impact – and which aligns with your individual financial and philanthropic priorities.
HSBC Global Private Banking recognises that personal wealth has a crucial role to play in tackling the biggest social issues. We have solutions that will ensure your philanthropic and investment decisions have a positive impact on the world and are aligned with your family's values – now and into the future.
1Giving was up 7.5 per cent in the first half of 2020, new report says, The Chronicle of Philanthropy, October 2020 ↩
4How impact investing can complement but not displace philanthropy, Financial Times, June 2019 ↩