Impact Investing vs. Charity? Q&A with Chris Walker
By Rebecca Spohrer, Acumen+ London Chapter volunteer
It’s not impact investing vs. charity. It’s impact investing AND charity… Here’s why.
Impact investing is transforming the way the development sector thinks about delivering social goods and services. But where does this leave charity? I recently caught up with Chris Walker, former Acumen Fellow and now Social Innovations Director at Mercy Corps, to learn more about how impact investing and charity together can be a powerful force for development.
R: First of all, what is impact investing?
C: Impact investing is when investments are made with the intention to generate positive social or environmental impact alongside a financial return. You can find out more from the Global Impact Investing Network, which has a wealth of resources available on this topic.
R: What are the benefits of impact investing compared with pure charity?
C: In the right contexts, impact investing does several things more directly than charity, including encouraging financial sustainability and scale, and introducing a new skill set that can improve effectiveness.
Financial sustainability and scale: Charity alone is insufficient to solve the world’s biggest problems. Because grant money is finite, it is also unsustainable. Reliance on charity over the long term requires continuous fundraising, making future planning a challenge. When an organization’s approach allows it to tap into investment capital, it has the potential to achieve a greater scale of impact than would have been immediately possible through grant support alone, while also giving it access to a larger pool of capital that can enhance its financial sustainability.
Introducing a new skill set: Investors need to justify the risk they are taking in order to generate a financial return, so they bring a whole different mindset to the table than grant makers do. They can apply their business and financial expertise to help ensure that a new product or service will be viable in the marketplace. In addition, when you receive debt or equity financing, you have to generate a return. This prospect can help social entrepreneurs focus on sustainable, efficient, and effective models.
R: So are you saying that impact investing is a much more effective use of funds than charity?
C: Not necessarily. Not all social activities generate financial returns. Areas like human rights, assisting people who have suffered from a natural disaster, and refugee situations are all examples where charity is critical.
We need a big toolkit to solve social and environmental issues at scale. Impact investing is complementary to charity, as well as to policy approaches. We shouldn’t forget about governments – what they do makes a major difference in addressing social issues at scale.
R: Tell me more about how charity and impact investing can be used in combination.
C: Charitable dollars are great for developing new models: Impact investors may not be ready to make an investment because there are too many uncertainties or risks. This is why businesses looking to achieve social impact in low-income economies often have difficulty accessing the capital they need when they’re still at an early stage of development. This is a great opportunity for grant funds to be used – for activities like market research, technical assistance, and showing proof of concept – all to de-risk the investment while ensuring that the approach will actually generate a positive impact.
R: OK, I understand the concept from a product perspective, but should basic services like education, clean water, or healthcare really generate a financial return?
C: Yes they can, in certain circumstances. Social enterprises often step in to bridge gaps where public systems and pure charity fail to deliver, and they focus on developing models that can be financially sustainable over time—which is attractive to impact investors.
Here’s an example: in 2004, India was in real need of organized and professional emergency medical services, including an around-the-clock ambulance service. A group of Indian entrepreneurs stepped forward to found Ziqitza Health Care Limited with a single ambulance. Their market-based approach, with a pricing structure that allowed them to serve everyone in need while generating revenues to sustain their service, attracted Acumen as an early investor. Today, they operate more than 1,250 ambulances. They respond to over 350,000 calls per month across the country, providing life-saving services including to India’s poor.
R: So what’s the takeaway message?
Impact investing is one approach that can potentially expand the amount of financing available, create financial sustainability, and enhance scale, but will not alone be enough. In other words, impact investing is not a panacea for development. We need all hands on deck: including charity, good policies, and strong coordination to tackle the world’s greatest challenges. We’re showing great progress along the way, but we have much more work to do.