Philanthropic efforts have long helped to alleviate poverty and direct funds into areas that are left behind by profit-oriented forms of investment. However, philanthropic capital is also well placed to play a unique and potentially vital role as the world looks to adapt its output-focused economy to become more sustainable, evolving to the impact economy.
Mounting concerns about climate change, biodiversity loss and social inequity are putting pressure on countries to shift their economic focus from solely looking at maximizing production levels to also considering the inherent value of natural capital, biodiversity, and the ecological health of the planet. This requires a shift to the impact economy, which would place quantifiable values on natural resources and social equality.
Philanthropy can play an important role in this adjustment. Funds used for philanthropic purposes are, by definition, not concerned about investment returns, but their capital is carefully monitored for real-world value, or impact. These funds can be utilized with the larger pool of profit-oriented private capital to support the many investment projects that are urgently required to combat climate change and biodiversity loss.
The idea would be to combine public finance, philanthropic capital, and private capital in varying forms of blended finance. The philanthropic element would be integral to this, as it can act as a catalyst to support relatively risky projects and help to ensure funds are employed effectively so as to maximize impact.
For example, philanthropic capital can potentially work with public or multilateral funds to act as first-loss absorbers when it comes to financing emerging technologies or to support investments into infrastructure projects in emerging countries. This blended finance approach should help to persuade major asset owners such as pension funds, sovereign wealth funds and major asset management companies to use some of their investment capital to support these projects.
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