Impact Investing

By James Frazier

Having recently returned from SRI in the Rockies, the annual conference for the socially responsible investing industry, I’m eager to report on a topic that generates more energy and excitement each year: Impact Investing. While it might sound like just the latest industry buzzword, impact investing inspires genuine enthusiasm in those of us who focus on the marriage of money and meaning. Perhaps this is because it strikes to the essence of what we strive for: using investments to create an immediate, measurable, and positive social and/ or environmental impact.

It is these concrete, measurable impacts that distinguish impact investments from “traditional” SRI approaches. The classic example of SRI is a fund that invests in the stocks of progressive, sustainability-focused companies. While such a fund plays an important role in many portfolios, simply investing in such funds or companies does not necessarily create any clear changes in how these companies operate, or their impact on the world. Impact investments, on the other hand, are designed to directly contribute to solving the world’s challenges, producing a result that goes beyond the purely financial.

Impact investing is starting to garner attention from the upper echelons of finance. J.P. Morgan and the Rockefeller Foundation recently released a report entitled “Impact Investments: An emerging asset class” in which they made the case that impact investing will grow to become a unique and widely recognized investment class in its own right. They forecast that over the next ten years, foundations, banks, and other large institutional investors could invest one trillion dollars or more in businesses working in high impact sectors such as agriculture, clean water, affordable housing, primary education, health care, energy, and microfinance. Some of these investors expect to receive less financial return than they would get from a non-impact investment, essentially paying a premium for the impact, while others expect extra profits as a result of the investment’s positive impact and forward-looking engagement with the sustainable economy of the future. Because investment money is intended to be returned with interest or profit, the pool of capital available for impact investing should be able to renew itself sustainably over the long run, thereby creating a new niche that combines the best of for-profit business and non-profit philanthropy.

Many of these large institutions have formed the Global Impact Investing Network in order to advance this movement and help realize its full potential. One of the network’s current projects is ImpactBase.org, which will be an online database for accredited (high net worth) investors and their advisors to search for impact investment funds. As of this writing,

ImpactBase is very close to launching, and may soon play an important role in developing this new marketplace by connecting investors with impact investing opportunities.

What does impact investing look like for the average person? Currently, it is far less organized, and exists as a variety of “Do It Yourself”-style investments that are mostly still in their early stages. Examples include:

  • Calvert Foundation Community Investment Notes, which can be purchased through Charles Schwab, measurably help build affordable housing, grow small businesses, provide microcredit, and promote fair trade.
  • Community Development Financial Institutions (CDFIs) which accept loans or deposits from investors and use them to finance affordable housing projects, small businesses, and increasingly, environmental projects.
  • Kiva.org, where investors lend money directly to selected entrepreneurs to help start or grow their businesses.
  • The local investing movement, in which investors connect directly with local business owners and non-profits to further each other’s goals and strengthen their local economy in the process.

The lack of simpler, more organized impact investing vehicles for the general public is starting to be recognized by the SRI industry as an exciting and important challenge to overcome. At the SRI in the Rockies conference, people working on this problem from a variety of different angles were able to connect and start collaborating in new ways.

There is a collective realization that:

  • The impact investing movement is picking up steam
  • We have early success stories that can and will be built upon
  • Opening access to impact investments to the public could catalyze incredible social and environmental change
  • The time is now!

As always, the advisors at Natural Investments are deeply engaged in this industry-wide conversation, and look forward to bringing more impact investments to our clients and the world. Watch this newsletter for more impactful develop- ments in the coming times!

This article first appeared in the Winter 2011 edition of the Natural Investing newsletter

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James Frazier

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