Impact Investments: Creating Positive Impact Beyond Financial Return
An emerging asset class goes beyond socially responsible investing to seek social and environmental impact in addition to generating profit
Increasingly, ethical investors are not just interested in investing in socially responsible companies, but want their investments to provide social or environmental returns as well. This style of investing is called impact investing. While socially responsible investing or ethical investing merely tries to reduce social and environmental harm caused by investments, impact investing isn't so passive: Its goal is to create an actual positive social and/or environmental impact as well as financial returns. And as an asset class, impact investments represent a new and dynamic space. How new? Well, it was just in November of 2010 that the Rockefeller Foundation and J.P Morgan’s Investment Bank published a report entitled, "Impact Investments: An Emerging Asset Class."
The potential scale and profit of the impact investment asset class is impressive. As the report's authors state, "Applying our methodology to selected businesses within five sectors—housing, rural water delivery, maternal health, primary education and financial services—for the portion of the global population earning less than $3,000 a year, we find that even this segment of the market offers the potential over the next 10 years for invested capital of $400bn–$1 trillion and profit of $183– $667bn."
IA 50: LEADING THE IMPACT INVESTMENT CHARGE
If you're interested in getting to know about this mode of investing, a good place to start is the IA 50, the first open-source, publicly available, annually updated list of fifty of the leading equity and private debt impact investment fund managers. It's not an investable fund or an index, but simply a research tool to help understand this emerging realm of finance. It was launched by ImpactAssets, a nonprofit financial services firm based in Bethesda, Maryland, dedicated to the advancement of social or environmental change through investment, while also delivering financial returns.
The list was created by a selection committee of industry experts chaired by ImpactAssets chief strategist Jed Emerson. To be selected for this list, firms must have over three years of impact investment experience, invest through equity or private debt and demonstrate a commitment to social and/or environmental impact on the portfolio level and corporate responsibility at the firm level. The IA 50 2012 represents $10.2 billion of capital invested across several impact areas, such as community development, microfinance and clean technology.
CONNECTING INVESTMENTS TO PERSONAL VALUES...AND A SUSTAINABLE FUTURE
The fifty firms represent a wide array of sectors and geographic regions, from Accion, a Boston-based nonprofit microfinance organization that has helped build 62 microfinance institutions across the globe, to the Bethesda-based Calvert Foundation, which recently launched the "WIN-WIN" impact investment initiative to create opportunities for underserved women around the world, to RSF Social Finance, a San Francisco-based financial services organization that has made over $275 million in loans and over $100 million in grants to non-profit and for-profit social enterprises working in the areas of food and agriculture, education and the arts, and ecological stewardship since 1984.
With a skyrocketing human population, food, water, land and resource security will continue to be central concerns for human development. Connecting investments to actual solutions—as opposed to merely reducing harm—is critical for achieving a sustainable future. And people are increasingly making the connection: Investment decisions can make a difference. For one, the climate crisis has made environmental issues more pressing among the public (a recent poll, for example, found that the majority of Americans believe that global warming has made extreme weather events worse); people are recognizing more and more that both consumer and investor decisions can help to reduce carbon emissions. And the financial crisis has likely also played a central role in the increasing interest in impact investing.
"I think that what we're seeing is tremendous demand from individuals who are questioning core assumptions of Wall Street, where the trust factor is very low," said RSF Social Finance president and CEO Don Shaffer. "They are looking for alternatives and ways to align their values with their money."
Rockefeller Foundation and J.P Morgan. Impact Investments: An Emerging Asset Class. November 29, 2010. Accessed October 12, 2012.
RSF Social Finance. RSF Social Finance selected for the ImpactAssets 50 2012. October 2, 2012. Accessed October 12, 2012.
ImpactAssets. ImpactAssets 50: An Annual Showcase of Impact Investment Fund Managers. September 21, 2012. Accessed October 12, 2012.
Joe Van Brussel. Impact Investing Fund RSF Social Finance Offers Alternatives To Wall Street. Huffington Post. October 11, 2011. Accessed October 11, 2012.
image: A business in South Sudan benefiting from microfinance (Elitre, Wikimedia Commons)