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Until recently the only option for financing a charitable program was through the use of philanthropy.  Donations and perhaps a bake sale would be held to raise funding for a charitable cause. Although philanthropy has and will continue to have an important role in society, there are other social options being explored to finance social programs.  For these innovative approaches to get traction and to become successful requires changes within society on how we view the role of charity.  One of these financing innovations has been impact investing and although it is beginning to gain interest it has had a decade struggle in convincing everyday people that a charity could take on a significant charitable cause, and to do so with the use of capital markets.  Too often the response has been that this is not the role of a charity.  I think this response precisely identifies the problem we have in successfully tackling major social problems.  We have preconceived notions of what charities should do and don’t realize that we’re undermining any possibility of them being successful.  

Charities must also begin to challenge their role in society.  Too many have become content with having an important, small role in the community.  Very few would ever dare to take on systemic social issues as they realize they could never raise the necessary resources.  There is a wind of change occurring and charities must demonstrate a willingness to at least explore new possibilities to improve their organizational social impact.  During the past several years there have been an increasing number of diverse impact investors that have united themselves around the desire to intentionally become part of a movement to tackle difficult social challenges, and to do so at scale.  Impact investing creates the environment where these investors can provide working capital to progressive charities and expect to receive both a financial and social return.  

Impact investing should never be seen as a substitute for philanthropic grants and donations, but as a complement that can strategically leverage larger amounts of funding for scaling successful social development programs.  The simple fact is that there will never be sufficient government or aid budgets to address social issues in Canada and elsewhere.  The budgets of governments are in the billions of dollars, whereas, the cost of solving social problems around the world are in the trillions of dollars.

When we talk about the need for trillions of dollars to tackle social problems it should become evident that the historical mindset of raising funds through donations and bake sales needs to change.  If we dare to think differently, there is an opportunity to transform these daunting social problems into opportunities and to create incentives that can engage all parties to become involved in finding sustainable solutions.  The key is our mindset and how we look at these problems, as well as how we look at the potential of charity and non-profit sector.

There is well over $200 trillion in the world’s stock markets and money supply (money market accounts, savings, time deposits and narrow money – banknotes, chequing deposits) and this will only increase in the next few years as Generation X and Millennials inherit an expected $40 - $45 trillion from Baby Boomers.  If even a small percentage of this capital were to be redirected towards investments that have an intentional social impact there would be considerably more resources available to seriously tackle some of the world’s biggest social problems.

In order to take on Canada’s and the world’s biggest social problems it will require that charities begin to think differently and similarly, and for the general public to think differently about charities.  There are many types and sizes of charities.  There are those with annual budgets of thousands of dollars and others with hundreds of millions.  When considering impact investing, the size of the charitable organization has less of a role than does the organization’s commitment to continual learning and further improving its impact on the community where it is working.

At Impact Bridges Group, when we are looking for potential social programs that could be made into an impact investment, we begin by finding out what data the charity collects.  The key is to collect the right data, that is, data that drives the organization’s understanding of whether and how the program is achieving the strongest impact possible.

The organizations that make the best candidates for impact investing will have strong verifiable data of the impact of their program.  A normal distribution of organizations doing social development work will show that there are some that are making a significant impact, while others are achieving very little social impact, and the vast majority are in the middle of the bell-shaped curve.  As a whole, there will only be a small number of these organizations that have programs where there is verifiable evidence of their impact.  Still, the vast majority of these organizations will make claims of transforming communities.  

In their book “Measuring and Improving Social Impacts” by Marc Epstein and Kristi Yuthas, they make the comment on charities being “guilty of fooling themselves about the impacts they are making.  They do this by assuming that good intentions lead to meaningful actions, by confusing the amount of action with the quality of results, and by basing important decisions on instincts instead of evidence.”  

A major problem in the social sector is that charities often only measure outputs, such as stating that they provided reading tutorials to 500 students.  Taking the time to provide tutorial lesson for 500 students certainly demonstrates good intentions, and to reach this number of students will take a significant amount of energy and action to complete, but as Epstein and Yuthas mention, neither of these necessarily translates into meaningful actions and quality results.  If the organization was measuring the improvement in literacy, using a verifiable means such as a standardized test, then we would be able to better measure the impact.  

The simple fact is that most of these organizations don’t have the financial support to measure their impact.  These organizations need to justify every dollar they request from donors.  Meanwhile, these same donors might be purchasing services from a private sector company and would never consider asking for a breakdown of their daily fee.  Similarly, there is a public perception that charities should pay salaries that are well below market rates, and that the cost of services rendered to society be kept to a minimum.  We are forcing charities to be small and inefficient.  Efficiency is about maximizing the net social benefits.  It means giving sufficient resources so that the cost of inputs per social benefit is minimized.  Given such an environment, is there any wonder why many charities are not measuring impact or setting up performance management systems within their organizations?  The societal attitude is that this money should be used for programming.  If it were the private sector, there would be no one questioning the need for research and development and evaluation of a program’s success.

In recent years, many government aid donors have encouraged and incentivized the private sector to become involved in development work.  There is little doubt that the recent success the world has seen in reducing the number of people living in extreme poverty has come about by private sector investment and subsequent economic development.  That’s not in question.  The simple fact is that the private sector will not be able to address all social challenges.   We still have serious social issues, and COVID-19 has highlighted some of these, including long-term care homes where the private sector has done less than a stellar job.  To borrow the phrase from Canadian-born economist, John Kenneth Galbraith, there is a need for a social balance.  Almost seventy years ago, Galbraith stated that “the line which divides our area of wealth from our area of poverty is roughly that which divides privately produced and marketed goods and services from publicly rendered services often delivered through charities.” (Italics my own comment)

This line that Galbraith talks about is in danger largely because of the perceptions that society has on charities and the work they do.  Society does not want charities to dream about making major breakthroughs on key social issues.  Why?  Because dreaming means taking a risk and a charity only needs to fail once to be sidelined and marginalized from donors.   In his TED Talk, Dan Pallotta talks about five areas where the general public undermines the work of charities and, ironically, as a result of this discrimination society does not receive the level of social services it deserves .  

COVID-19 has made it clear to most of us that times are changing, and for society to keep up with new social challenges there will need to be a change of attitudes and understanding on how charities can work in this new environment.  Similarly, charities can not continue to provide anecdotes on how they are transforming communities without having any verifiable evidence.  The programs delivered by charities need to be moving towards having progressive leadership who can dream about the potential of their organizational potential in taking on social challenges.  The challenge for charities, and perhaps more so for larger organizations, is adaptive leadership.  Adaptive change is all about changing people’s priorities and beliefs and letting go of a culture that has permeated an organization for years.  For many, it will mean building new systems, such as a performance management system, that can provide near real-time insights for decision-making.  When we begin to make some of these critical adaptive changes, we will begin to be able to embrace new and potentially ‘game-changing’ social innovations such as the use of impact investing.

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