Philanthropy or attractive financial returns? Por qué no los dos?

Many of us will do both by setting aside a discrete amount to support our philanthropical pursuits and allocate the remainder to our investment portfolio. The distinct allocations arise because most of us perceive philanthropy and investing for financial returns as being mutually exclusive: the return from philanthropy is the feel-good factor associated with helping others without the expectation of a financial return, while the return from investing is potential financial returns and the feel-good factor is generally self-centric.

Por qué no los dos?

What would you think about a logistics company that offers:

• Faster delivery: Deliveries are 7x the speed of traditional automobile deliveries
• Ultimate convenience: Deliveries arrive in the exact right place with down-to-the-second ETA
• Lower cost: Scale your operations at low, predictable prices with autonomous delivery
• Easy integration: Get set up in just days with our simple software integration and infrastructure
• More customers: Extended range multiplies your service area by up to 150x
• Fewer emissions: Fully electric aircraft fly with 97 per cent fewer emissions than traditional delivery.

Sounds like a company that has the potential to be highly profitable, right?

Compare that company to an organisation that launched in 2016 by delivering medical supplies in Rwanda, thereby saving lives and expanding access to healthcare around the globe. Which would you think is more profitable?

You’ve probably guessed that it is a trick question and that the companies are one and the same and it exemplifies an impact investment as it sits in the intersection between philanthropy and an investment with attractive financial returns i.e. it has a higher purpose with a positive impact on society while being able to generate positive financial gains (I have deliberately not named the company as it is not the point of this article but for those who are curious find me and message me via LinkedIn). In fact, an investment in that company grew 3.5x over the roughly four-year period to May 2023.

You may be tempted to think that this company is a unicorn, but according to a study published in the Harvard Business Review, companies with a strong purpose (defined as a concrete goal or objective that reaches beyond profit maximisation) outperform the market by 5–7 per cent per annum. This indicates that purpose and profit are not mutually exclusive and this is what impact investments aim to achieve.

So, coming back to the decision regarding philanthropy or financial returns I respond with the words of the wise child in the Old El Paso ads from the early 2000s “Por qué no los dos?” (meaning, “why not both?”).

So how do you invest?

Up until recently, impact investing has been exclusive to the ultrawealthy. This is partly because of the perception that financial returns are compromised and because impact investments are largely found in the unlisted private markets (the general lack of liquidity can be problematic for investors with shorter investment horizons). Those barriers are starting to be broken down by new companies (such as Reach Alternative Investments) whose purpose is to improve and streamline investment accessibility and level the playing field so that it is no longer exclusive to the ultrawealthy.

There are also other issues that need to be worked through to improve the impact investing ecosystem such as developing standardised impact measurements and metrics that are accepted across the industry to reduce the likelihood of “impact washing”.

Ultimately, the decision to engage in impact investing depends on individual preferences, goals, and the specific social and/or environmental issues an investor seeks to address. But if we all waited until the ecosystem is perfect then we will have no chance of bridging the US$3.9 trillion gap between what is required to achieve the UN’s Sustainable Development Goals and what is currently being spent. Philanthropy alone will be unable to bridge that gap.

Jonathan Ng is head of Investments at Reach Alternative Investments