Once the preserve of large foundations and mega-donors, impact investing is growing in popularity, including among women and younger generations. More than 40% of millennials report engaging in impact investing, compared with 20% of baby boomers.

What is impact investing? According to Fidelity Charitable, it’s “the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns.” Of course, whether we’re writing checks to local charities, endowing a scholarship at our alma mater, or establishing a family foundation, we’re investing for impact. And every philanthropist or foundation chooses how to frame that impact, directing funds to one cause over another. So what’s different about impact investing?

Impact investing is a way for foundations to leverage their assets—beyond grantmaking—to achieve their missions. In 2023 alone, U.S. foundations were projected to provide almost $90 billion in grants in support of 1.5 million nonprofit organizations, causes, and movements. But foundations typically distribute just 5% of their assets annually. Were even a modest portion of the untapped 95%—of assets totaling an estimated $1 trillion—to be invested for impact, it could create a sea change in how philanthropy invests in the future.

Impact investing is only the latest iteration of how foundations can use their assets for the public good. Before impact investing became a buzzword for innovation in philanthropy, foundations were looking for ways to use assets to do more than generate profit for grantmaking.

Impact investing represents the next stage in leveraging foundation assets. PRIs and MRIs are about investing in under-served businesses or aligning investments with values—within the current system. By contrast, impact investing is about investing with the intention of creating systemic change—evolving markets, elevating expectations for how companies do business, and helping de-risk investments, which, in turn, signals long-term opportunities for investors. One foundation looking to improve health outcomes in one country is a good thing. A coalition of funders—public, private, and philanthropic—investing in drug research, development, and clinical trials to defeat tuberculosis can collectively shape advances in medical science as well as global markets. Other examples of impact investing include creating markets for investments in water infrastructure and leveraging investments to increase gender equity on corporate boards.

Read the full article about impact investing by Daniel X Matz at Candid.