Dispelling Impact Investing ‘Myths’ for Charitable Trusts & Foundations

Despite the natural appeal of impact investment to charitable trusts and foundations, few have embraced the practice, challenged by the misperceptions that investing for impact necessitates an appetite for high risk or a financial trade-off, new research suggests.

The report Impact Investments: Perspectives for Australian Charitable Trusts and Foundations by Kylie Charlton, Scott Donald, Jarrod Ormiston and Richard Seymour from the University of Sydney found that the initial reaction of many trustees of Australian charitable trusts and foundations to impact investment”, is one of “cautious enthusiasm.”

While enthusiastic about the chance to expand the tools available to drive social change, trusts also worried that impact investment, with its ‘soft’ and ‘non-financial’ benefits, would compromise the investment duties with which they had to comply under statute and general law.

Impact Investments are made with the intention to generate social and environmental impact alongside a financial return, yet specific requirements regarding use of funds by trusts for grantmaking and investment purposes complicate its integration.

Common concerns about impact investing among charitable trusts and foundations included:

• Concern by trustees as to whether impact investment is permissible under the applicable legal framework in which they operate;
• Uncertainty as to where impact investment is included within modern investment portfolios;
• A narrow set of bespoke investment opportunities;
• Limited human capital to design, implement and manage an impact investment strategy; and
• A lack of enabling industry infrastructure such as standardized frameworks for measurement of social return.

“Early adopters of impact investment have demonstrated that none of these issues are insurmountable,” the report said.

“While such caution is appropriate, with care, the requirements imposed on trustees can be navigated in a way that permits the trustees of charitable foundations to provide capital to enterprises and funds pursuing a social impact agenda.”

The report said impact investment presented an opportunity for charitable trusts and foundations to complement traditional grant strategies with impact investment to enable deployment of a greater proportion of capital resources in support of their mission.

“It makes intuitive sense for, part or all, the corpus of charitable trusts and foundations to be invested in impact investments that generate both social and financial returns.

“Enabling flows of capital beyond traditional grants allows charitable trusts and foundations to engage with the expanding solution set for social and environmental challenges.

“Anecdotal evidence would indicate that a well-executed impact investment strategy provides trustees the opportunity to build income generating investment portfolios aligned with the mission and values of their charitable foundation or trust, which can offer unique exposure and uncorrelated diversification to a wide range of geographies and sectors,” the report said.

In Australia, the market potential for impact investment is estimated to be $32 billion over the next decade, with that figure globally in the range of US$400 billion to US$1 trillion.

However, the number of active investors and level of capital committed is small relative to the pool from which engagement is necessary if such market potential is to be realised, the report said.