An increasing number of Australian trusts and foundations are now starting to allocate portions of their endowments to investments that seek to achieve social and environmental impact alongside financial returns.
This growing appetite for impact investment is evident within the Foundations Group for Impact Investing hosted by sector peak Philanthropy Australia, where membership has expanded to more than 50 foundations representing over $10 billion in funds in its first year.
With purpose-driven mandates and over $50 billion in investible assets, the philanthropic sector has been welcomed by the impact investment sector with open arms. The expansion of impact investing within philanthropy certainly has the capacity to grow the impact investment market, but can philanthropy bring more to the table?
A long history of funding impact
Modern philanthropy has been around since the mid-19th century, allocating capital to support social and environmental impact. The Australian sector began to coordinate on grant making in the early 1970s and, while it is far from perfect, there have been lessons learned over the decades.
In contrast, impact investing is comparatively new and while impact investors are not a homogeneous bunch, it’s fair to say that the sector is dominated by people and organisations with financial sector backgrounds and expertise. This financial sector dominance is reflected in the ways in which many impact investments are identified, framed, assessed and reported.
I believe philanthropy can contribute more than capital to the field of impact investing, drawing on its history of funding impact to enhance the effectiveness of impact investing. Here are three ways:
- Taking a systems change approach
In the 1980s, the Reichstein Foundation adopted the tagline “Change not Charity” and pioneered a new approach to Australian philanthropy dedicated to addressing the root causes of inequality and injustice, rather than the symptoms.
For example, instead of funding food vouchers and emergency accommodation, which remain important responsibilities of government, a systems change approach might seek to tackle economic inequality and its manifestations through social security reform, affordable housing policy or progressive taxation.
Systems change projects – whether philanthropic, commercial or a mix of the two – must be planned and delivered in their full economic, political and social context. They must be alive to underlying structures, attitudes and power dynamics. A systems approach is more complex, unpredictable and difficult to measure, but it’s also capable of driving meaningful, sustainable change at scale.
Over the years, systems change philanthropy has become mainstream and some of Australia’s largest funders now adopt this approach to their giving. In contrast, impact investment, with its single asset paradigm and tendency to operate independently from civil society networks and social movements, is not currently organised to engage deeply with systems.
Of course, investment capital is not always well suited to delivering systemic change. In those cases, blended finance approaches which include a philanthropic component could greatly enhance the scope and impact of investments. This systemic view, however, acknowledges the underlying role that capital in all its forms, and its control and application, plays in shaping the fairness and sustainability of our economy and society.
- Funding advocacy and movement building
Systems change philanthropy recognises that meaningful impact requires more than shifting resources; it must also shift power. Over time this has led to the steady growth of philanthropic funding for advocacy and movement building.
Whereas these areas of activity were once considered too political for philanthropists, Australian trusts and foundations now provide tens of millions of dollars in support of advocacy projects and organisations.
Advocacy does not usually generate income, at least not directly (legions of corporate lobbyists will attest to the financial value of their work, just ask those campaigning against the mineral resource rents tax, or the proposed ban on gambling ads). Nevertheless, systems change usually has an advocacy component.
Most impact investing does not account for the fundamental role of advocacy in achieving impact at scale. For example, a solar farm might contribute to efforts to tackle the climate crisis. However, its impact will be limited without advocacy to secure the legal and policy settings needed to support the energy transition. In some instances, investors could be well placed to not only fund but contribute to such advocacy.
One of Australia’s largest and most influential foundations, Boundless, demonstrates the power at the intersection of philanthropy, investing and advocacy by deploying a strategic mix of all three tools across its priority issues. This approach can ensure that a desired change not only has the capital it needs to succeed, but also the political backing, policy frameworks, institutional support and public buy in.
- Shifting decision-making power
One of the dominant and ongoing criticisms of philanthropy is that it assumes that access to resources confers special insight into the solutions to social and environmental problems. This mistake is often evidenced in overly prescriptive funding guidelines, burdensome reporting requirements and timelines and measurement frameworks ill-suited to the nature and cadence of the work.
Progressive social change philanthropy recognises that the communities and organisations experiencing and working on an issue are best placed to identify, prioritise, deliver and analyse solutions. Accordingly, the people and communities impacted by injustice must have the agency, flexibility and resources to determine and drive impact.
Practices such as trust-based philanthropy (which seeks to change the structures and power dynamics that get in the way of NGOs and communities achieving their intended impact) and participatory grant making (which shifts decision-making power to grant seekers and communities) are growing trends within philanthropy intended to situate power and resources in the places where they will drive the most impact.
For example, in Australia there are a growing number of Aboriginal controlled funds and funding processes, where First Nations leaders are responsible for making decisions about grants intended to benefit their communities.
First Australians Capital, an Aboriginal controlled impact fund, is an example of such an approach in the investment world, but funds like this are comparatively rare. As in philanthropy, impact investing has the potential to achieve more if the people impacted by issues have more of a say in the design and delivery of solutions.
A shared aspiration for impact
The causes of the problems that both philanthropy and impact investment seek to address have not come about by accident. They are a product of systems of oppression and extraction that are woven into the fabric of our societies and institutions, including the philanthropic and financial sectors. As such, work to effectively tackle these problems is complex and likely to benefit from a range of perspectives and expertise.
The entrance of more trusts and foundations into the impact investment space has the potential to do more than grow the market. The shared aspiration for impact opens up an additional field of learning and collaboration where together we can expand our understanding of impact investments and the type of impact we can aspire to.
Rachel Ball is CEO of the Reichstein Foundation, which backs the people and organisations that drive social, economic and environmental justice in Australia.
Reichstein Foundation is one of six leading philanthropic trusts and foundations behind the Endowments for Impact Challenge – a groundbreaking initiative seeking investment advisors to manage a combined investment pool exceeding $170 million.
Investment advisors (Australian Financial Services licensees) can register their interest in the Challenge at www.endowmentsforimpactchallenge.com/get-involved
Proposals from registered investment advisors are due by 5pm 18 December 2024.