Donors are increasingly looking for ways to make a measurable impact, whether that’s through donations or investments. While traditional approaches to impact include straight donations and impact investing. Both aim to create a better world, they differ significantly in their goals, expectations, and mechanisms.
This post will explore the key differences between impact investing and charity, helping you understand how each approach works and which might be best suited for your philanthropic or financial goals.
What is Charity?
Charity is perhaps the oldest and most traditional form of giving. It involves donating money, time, or resources to help causes, with no expectation of receiving anything in return. The primary goal of charity is to address immediate issues.
Charities can be local or global, and they often rely on donations from individuals, corporations, and governments to operate. They use these donations to provide direct services, such as food, shelter, or medical care, or to fund long-term projects aimed at improving living conditions for disadvantaged populations.
For those curious about whether charity money can also be invested, check out our post, “Can Charity Money Be Invested?“, which explores how some charities use investments to grow their funds sustainably while continuing their philanthropic missions.
Key Characteristics of Charity:
- Funded by Donations: Donors give without expecting any private benefit. The reward is purely public, as the act of giving helps further a charitable cause.
- Some Tax Incentives: In many countries, donations to registered charities provide some tax relief. This provides some incentive for individuals and companies to give, though the tax relief does not make up for the cost of giving. And, is still guaranteed to leave the donor worse off financially compared to not donating at all.
- Accountability for Results: While charities often report their activities and impacts, donors don’t typically expect a detailed financial return or specific results tied to their individual contributions. Traditionally, the focus is more on providing support rather than measuring outcomes.
What is Impact Investing?
Impact investing is a relatively newer concept that blends the principles of traditional investing with philanthropy. It involves making investments in companies, organizations, or funds with the goal of generating both financial returns and a positive social or environmental impact. Unlike charity, impact investing is not a one-way street. Investors expect a financial return alongside the charitable good their investment produces.
Investors can make impact investments in many forms, such as buying shares in a clean energy company, investing in affordable housing projects, or supporting social enterprises that tackle poverty, healthcare, or education. These investments target sustainable solutions that not only help society but also provide a return on capital, making them an attractive option for those who want to combine financial growth with positive change.
For more on how strategic giving can be structured to maximize both financial returns and social impact, see our post on “Choosing the Best Donor Advised Fund (DAF) in Canada“, which can serve as a useful guide for those considering DAFs to support their giving strategies.
Key Characteristics of Impact Investing:
- Financial Return: The primary difference between impact investing and charity is that investors expect some financial return, which can range from below-market to market-rate returns, depending on the investment. The financial gain funds future investments, scales impact, or supports investors’ personal financial goals.
- Accountability and Measurable Impact: Impact investors typically expect measurable charitable outcomes, not just financial returns. These can include metrics like the number of lives improved, tons of carbon emissions reduced, or communities uplifted. This accountability is a key feature of impact investing, as it ensures that both financial and social goals are being met.
- Scalability: One of the advantages of impact investing over charity is scalability. Because impact investing generates financial returns. Capital can be reinvested to grow the original investment, enabling larger-scale projects over time. This creates a sustainable cycle of funding and growth, which charity often lacks.
Impact Investing vs Charity: A Detailed Comparison
Purpose
- Charity: The sole purpose of charity is to further a cause, often addressing immediate or short-term issues such as hunger, shelter, and disaster relief. The focus is purely on the cause, with no expectation of any financial return.
- Impact Investing: The purpose of impact investing is twofold: to generate financial returns for the investor while simultaneously addressing long-term social or environmental challenges. It aims to create sustainable solutions that benefit both the investor and society.
Financial Expectations
- Charity: There is no financial return when giving to charity. The donor gives money or resources without expecting anything back, aside from potential emotional satisfaction or tax relief.
- Impact Investing: Investors expect a financial return in addition to the social or environmental benefits of their investment. The level of return can vary, but it is always part of the decision-making process.
Approach to Problem-Solving
- Charity: The approach is usually direct, providing immediate aid or services to those in need. For example, a charity might deliver food to a community affected by a natural disaster.
- Impact Investing: The approach is indirect but sustainable. Impact investors seek to solve systemic problems by funding businesses and organizations that create jobs, provide essential services, or protect the environment. For example, an impact investor might fund a company that develops solar energy solutions.
Risk and Reward
- Charity: There is no financial risk in charity since donors do not expect any monetary return. However, the social impact is limited if the charity is not effective or if resources are mismanaged.
- Impact Investing: There is a financial risk involved in impact investing, as with any investment. However, the potential reward is twofold: financial gain and positive social or environmental outcomes. The level of risk varies depending on the investment.
Conclusion: Which is Right for You?
The choice between impact investing and charity depends on your goals and values. If you’re looking to address urgent, immediate needs and are comfortable giving without expecting anything in return, then charity is the ideal route. It allows you to provide direct support to the causes you care most about, often with immediate results.
On the other hand, if you’re interested in combining your desire to do good with a financial return, impact investing is an option to consider. It allows you to tackle long-term challenges while still generating income, making it a sustainable way to contribute to positive change.
Ultimately, both approaches are valuable, and many people choose to engage in both charity and impact investing as complementary strategies. Whether you prefer the direct aid of charity or the scalable, long-term solutions of impact investing, your contribution helps to create a better world.
