Impact Investing: A Profit with a difference
Dan Madahavan, CEO of Impact Investing Australia is this week’s changemakers on Probono News. My recent chat with Dan in Melbourne centered around exactly this and how there is a clear need to develop the market for impact investing. Dan’s a fantastic person to lead this space in Australia. Lots more work to do. As Dan puts it: “It’s a three hour movie and we’re 10 minutes in.”
Explain why impact investing is important to someone who doesn’t know much about it.
There are two different narratives here. Investment by its very nature involves two parties, there’s someone who needs capital and there’s someone who has money that they’re willing to invest as capital.
The most powerful thing about impact investing at the moment is that those two stories are lining up.
On the story of a mission driven organisation, whether that be a social enterprise or a Not for Profit, traditionally the social services that we all expect and the social change that we would like to see, traditionally that has been funded by Government and philanthropy.
I think even though both of us have been in this game for a relatively short period of time, it’s pretty obvious that the demand for funding is far outstripping the supply of funding from those two sources, and that gap is growing wider.
So it forces us into a pretty difficult set of decisions. We either defund those things, so start cutting services that we believe should be there or start defunding change that we would like to see. That would be a pretty bad outcome.
We either increase the supply of funding, which practically means increasing taxes because philanthropy can’t carry the whole burden, and most people you ask would probably say that is a pretty bad outcome and most Governments don’t have a lot of appetite for that.
And then there’s a third option, really the only other option, we can look around at other pools of money and use that money. That’s where impact investing comes in. From a mission driven organisation perspective, how could you potentially use private capital to fund parts of your mission?
And I say parts because it’s not going to be relevant for everything, it’s not the answer for everything and it’s not going to fund everything. It’s one tool that can be used as an addition to Government funding and philanthropy. We’re not arguing that those two things should disappear, what we’re saying is that there may be instances where you can use private capital instead of or on top of Government funding or philanthropy.