Impact investing and philanthropy can jointly address Asia’s most pressing challenges

AS GLOBAL challenges such as climate change loom, social investments are critical to fill the US$3.9 trillion financing gap to reach the Sustainable Development Goals in developing countries. In addition to philanthropic capital to help plug this gap, impact investing is gaining traction with the market reaching an estimated US$1.16 trillion in 2022. Families increasingly recognise that integrating their philanthropic and investment capital, which can assume higher risk for asymmetric societal gains, achieves greater impact. When families harness their expertise and networks across their portfolios, cross-pollination opportunities abound.

In Asia, these trends have enormous potential. Among 42 per cent of Asia-Pacific family offices, sustainable investing is expected to increase from 29 per cent to 50 per cent of their portfolios within five years.

The Milken Institute released a report on Unlocking Asian Philanthropy and a white paper on Single-Family Offices which highlighted that Asian families have not fully integrated their impact investing and philanthropy. With Asia set to become the world’s second largest wealth hub by 2026, the time is ripe for supercharging social investment to accelerate global change.

While this partnership holds immense potential, it also faces its fair share of challenges that need to be addressed.

Balancing risks and returns

Philanthropic capital is often more patient and accepts lower or no financial returns, while impact investors seek positive societal outcomes in addition to a financial return. Families can embrace an entrepreneurial mindset where risk becomes an opportunity rather than a deterrent, and unlock opportunities to amplify the impact of combined philanthropic and impact investing efforts.

Families must recognise their unique role in filling gaps other funders may not address. One approach is to discuss potential opportunities with risk-averse institutional capital regarding working and synergising with high risk-taking capital. Establishing common measurement frameworks that capture the multidimensional impact of collaborative efforts is demanding but essential for building trust and transparency in the sector.

Two critical factors must be addressed to combine philanthropy and impact investing effectively. First, families need the necessary knowledge to navigate the breadth of opportunities available for their capital. This includes guidance on which tools to use and how to combine them to achieve their desired objectives strategically. Secondly, investing in the capacity of other stakeholders within the ecosystem is crucial as limited budgets for organisational capacity building and insecure, short-term funding impede social ventures and service delivery organisations from planning for the long term and achieving meaningful impact.

Erasing traditional boundaries

Sophisticated philanthropy models hold significant potential to drive transformative change in Asia. Despite its relatively lower adoption in Asia compared to regions such as North America and Europe, we witness a growing number of inspiring collaborative efforts.

Impact investing complements philanthropy by allowing philanthropists to leverage market mechanisms, such as loans and equity investments, to drive social and environmental change. While traditional grant-making effectively addresses market failures, impact investing goes further to achieve long-term sustainable impact, as the investments can be reinvested to catalyze additional impact.

Impact investing excels in certain scenarios, such as emerging markets and sectors with high social and environmental impact, like renewable energy and affordable housing. It goes beyond allocating resources based solely on financial potential and tackles challenges head-on through market-based solutions. Family offices, in particular, play a crucial role in impact investing. Unlike large institutional investors with fiduciary duties and limited risk-taking capabilities, they have the flexibility to invest in seed-stage ventures and economically disadvantaged regions.

Basketball player Jeremy Lin’s family office, JLIN LLC, exemplifies this by empowering underserved communities in Asia and the US through direct investments and venture capital funds. Their focus on education and financial inclusion initiatives is demonstrated through investments like Ascent Funding, an education financing company that provides loans to students based on academic ability rather than socioeconomic background. They prioritise future prospects over current circumstances and expand access to higher education for youths from all income levels.

Venture philanthropy, like impact investing, uses investment capital to drive impact on multiple fronts. It emphasises active involvement and grant-based support, recognising the unique role of philanthropic capital in taking risks and providing patient capital to fill gaps that traditional financing may not address or where market-based approaches may not be viable. Investment returns in venture philanthropy are recycled for further impact, amplifying the fund’s long-term effect.

Venture philanthropy is uniquely suited to tackle monumental challenges that demand immediate attention and require innovative solutions from local to global levels. Challenges like these are often complex to navigate and require long-term support, grant funding, strategic advice, and access to talent which can be addressed by venture philanthropy.

James Chen, chair of the Chen Yet-Sen Family Foundation, is a “moonshot philanthropy” pioneer. Over the last two decades, Chen deployed early-stage risk capital into high-stakes investments, and revolutionised access to affordable eyecare for the 2.2 billion people with uncorrected poor vision worldwide.

As the world faces increasingly multi-faceted and urgent challenges, it is clear that more than traditional approaches to philanthropy and investing are required. By adopting a holistic approach and breaking down silos, families can maximise their impact by leveraging various resources and tools. Families have the unique opportunity to punch above their weight as global change-makers, driving transformative and sustainable change. Now is the time for families to embrace their role as change catalysts, actively engaging in impactful initiatives and making a lasting difference.

Melissa Petros is former director of philanthropy (Asia) at the Milken Institute, where Ella Tan is a senior associate of policy and programmes (Asia).