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Message: IMPACT INVESTING
Impact Investing: Making A Difference And A Profit
By Leslie Kramer on June 10, 2014 idealhomegarden.com
Most investors spend their time chasing returns. But what if there was a way to do good while also turning a profit?
Several not-for-profit organizations have recently been teaming up with money mangers and investment banks to create and market a new line of products that offer investors the opportunity to engage in what is now being touted as impact investing, a form of socially responsible investing. The goal of this scheme is to invest money in companies, organizations, funds or projects anywhere in the world that can effect a positive social change, while at the same time deliver a financial return to investors. (For related reading, see The Value In Socially Responsible Investing)
One Step Further
Interest in the idea has been growing steadily over the past couple years and so have the number of products being offered. For some time, a breed of investment management companies such as Pax World Management, Domini Social Investments and Parnassus Investments have been offering mutual funds that invest in socially and environmentally conscious and responsible companies. But today’s impact investors are going one step further, looking to invest in bonds and other investment vehicles that invest directly in socially oriented projects. (For related reading, see Understanding Social Impact Bonds)
An example of a vehicle used in impact investing is a microfinance loan, which help people with little or no access to capital start a new business. High-net-worth individuals, in particular, are finding these offerings attractive and are willing to take on some calculated risk to invest in them. Businesses started with microfinance loans are providing competitive returns to their investors through the bonds that back them. In some instances, impact investment vehicles have been able to garner higher returns for their investors than the broader markets did, especially during down cycles.
One example of an impact investing project is a community solar program. A platform called Mosaic allows people to invest as little as $25 to fund solar projects that save money for homeowners, schools or other institutions while reducing carbon emissions. (For related reading, see Impact Investing: The Ethical Choice)
Not Just The Rich
What may have begun as a niche for wealthier investors is starting to get the attention of the larger retail market. Accordingly, the number of organizations offering these products is increasing. One such organization is ImpactAssets, which offers donor-advised funds and impact investing notes to individuals and advisors looking to produce positive social and environmental change. Each year, the organization publishes a list of 50 investment managers who specialize in impact investing techniques.
ImpactAssets is also closely tied to the Calvert Foundation, which offers investment and lending opportunities, such as the Calvert Community investment notes, a series of debt securities that start at a minimum investment of $1,000.
Growing Interest and Variety
Goldman Sachs has also jumped on the impact investing bandwagon. Just last year, it rolled out its GS Social Impact Fund, which deploys capital toward the physical, social and economic revitalization of disadvantaged communities across the U.S. The fund’s investment strategy is to addresses social challenges and to mobilize new sources of private capital into the social-impact arena, while also providing its investors with a financial gain.
The Rockefeller Foundation was one of the first foundations to experiment with social impact bonds in conjunction with the Global Impact Investors Network (GIIN), a not-for-profit organization dedicated to increasing the effectiveness of impact investing. The foundation also funded the development of a metrics to measure the performance of these social enterprises and impact investing funds.
And now, with the guidance of the Rockefeller Foundation, some of the biggest U.S. investment banks, including Goldman Sachs Group, Inc. (GS), JP Morgan Chase & Co. (JPM), and Bank of America Corp. (BAC), have created social impact bonds that are being applied to issues such as asthma, early childhood education, diabetes, and prison rehabilitation programs.
With investor demand for impact investing products continuing to rise as the idea becomes more mainstream, several financial institutions, such as Morgan Stanley (MS), Merrill Lynch and UBS Inc. (UBS) have also been developing impact-investing platforms that their wealth advisors can tap when clients request impact investment funds geared toward a certain cause.
Morgan Stanley Wealth Management’s Investing with Impact platform recently began offering about 100 third-party products, including exchange-traded funds, mutual funds and some other “do good” alternative investment products. It's also looking to offer private debt and equity investments to impact investors in the near future.
Returns Keep Them Coming Back
The move by these investment banks and money managers to offer more impact investing products seems to be a profitable one. A GIIN and JP Morgan study that looked at 125 impact investors who committed $10.6 billion to impact investing in 2013 found that about 91% reported that their impact investments were meeting or exceeding their financial expectations. Approximately 54% said their investments were targeting market-rate returns. The group, as a whole, plans to increase their investments in this sector by 19% this year, which would result in close to $13 billion in investments.
Millennial Next In Line
The next generation of investors is already exhibiting a desire to put their investment dollars behind projects, companies and funds that are in line with their own core valves. Millennials, or people born between the early 1980s and the early 2000s, are the latest group of investors who see impact investments as a way to stand up for their beliefs while also investing in their own futures.
Studies show that these investors are also now turning to financial professionals to help provide them with opportunities to generate a strong financial return, while creating a positive social impact. They want their advisors to offer them value-based investing products as an alternative to what is being offered to them in the general markets. And while they may be young, and low on cash at the moment, this segment of the population shouldn’t be overlooked. Millennials are expected to inherit about $41 trillion in wealth from their parents, and they are already looking for ways to invest it.
Skewed To Wealthier Investors...For Now
More and more opportunities will continue to open up for investors seeking to align their own financial futures with their desire to make a difference in the world. For now, though, most scalable impact investing options are still geared to wealthier investors. For those investors with less than $3 million to invest, sustainable and responsible investment vehicles, such as mutual funds focused on socially and environmentally responsible investments, are still the way to go. Private deals that require a fair amount of due diligence may still be too risky for the average investor.
The Bottom Line
The desire to meld investments and social responsibility is growing at a fast pace among the rich and not-so-rich. And the groundwork has been laid for the creation of numerous products to meet the demand of a new generation of socially conscious investors. As long as such investments produce competitive returns – both financial and social – their popularity will only grow.
Several not-for-profit organizations have recently been teaming up with money mangers and investment banks to create and market a new line of products that offer investors the opportunity to engage in what is now being touted as impact investing, a form of socially responsible investing. The goal of this scheme is to invest money in companies, organizations, funds or projects anywhere in the world that can effect a positive social change, while at the same time deliver a financial return to investors. (For related reading, see The Value In Socially Responsible Investing)
One Step Further
Interest in the idea has been growing steadily over the past couple years and so have the number of products being offered. For some time, a breed of investment management companies such as Pax World Management, Domini Social Investments and Parnassus Investments have been offering mutual funds that invest in socially and environmentally conscious and responsible companies. But today’s impact investors are going one step further, looking to invest in bonds and other investment vehicles that invest directly in socially oriented projects. (For related reading, see Understanding Social Impact Bonds)
An example of a vehicle used in impact investing is a microfinance loan, which help people with little or no access to capital start a new business. High-net-worth individuals, in particular, are finding these offerings attractive and are willing to take on some calculated risk to invest in them. Businesses started with microfinance loans are providing competitive returns to their investors through the bonds that back them. In some instances, impact investment vehicles have been able to garner higher returns for their investors than the broader markets did, especially during down cycles.
One example of an impact investing project is a community solar program. A platform called Mosaic allows people to invest as little as $25 to fund solar projects that save money for homeowners, schools or other institutions while reducing carbon emissions. (For related reading, see Impact Investing: The Ethical Choice)
Not Just The Rich
What may have begun as a niche for wealthier investors is starting to get the attention of the larger retail market. Accordingly, the number of organizations offering these products is increasing. One such organization is ImpactAssets, which offers donor-advised funds and impact investing notes to individuals and advisors looking to produce positive social and environmental change. Each year, the organization publishes a list of 50 investment managers who specialize in impact investing techniques.
ImpactAssets is also closely tied to the Calvert Foundation, which offers investment and lending opportunities, such as the Calvert Community investment notes, a series of debt securities that start at a minimum investment of $1,000.
Growing Interest and Variety
Goldman Sachs has also jumped on the impact investing bandwagon. Just last year, it rolled out its GS Social Impact Fund, which deploys capital toward the physical, social and economic revitalization of disadvantaged communities across the U.S. The fund’s investment strategy is to addresses social challenges and to mobilize new sources of private capital into the social-impact arena, while also providing its investors with a financial gain.
The Rockefeller Foundation was one of the first foundations to experiment with social impact bonds in conjunction with the Global Impact Investors Network (GIIN), a not-for-profit organization dedicated to increasing the effectiveness of impact investing. The foundation also funded the development of a metrics to measure the performance of these social enterprises and impact investing funds.
And now, with the guidance of the Rockefeller Foundation, some of the biggest U.S. investment banks, including Goldman Sachs Group, Inc. (GS), JP Morgan Chase & Co. (JPM), and Bank of America Corp. (BAC), have created social impact bonds that are being applied to issues such as asthma, early childhood education, diabetes, and prison rehabilitation programs.
Morgan Stanley Wealth Management’s Investing with Impact platform recently began offering about 100 third-party products, including exchange-traded funds, mutual funds and some other “do good” alternative investment products. It's also looking to offer private debt and equity investments to impact investors in the near future.
Returns Keep Them Coming Back
The move by these investment banks and money managers to offer more impact investing products seems to be a profitable one. A GIIN and JP Morgan study that looked at 125 impact investors who committed $10.6 billion to impact investing in 2013 found that about 91% reported that their impact investments were meeting or exceeding their financial expectations. Approximately 54% said their investments were targeting market-rate returns. The group, as a whole, plans to increase their investments in this sector by 19% this year, which would result in close to $13 billion in investments.
Millennial Next In Line
The next generation of investors is already exhibiting a desire to put their investment dollars behind projects, companies and funds that are in line with their own core valves. Millennials, or people born between the early 1980s and the early 2000s, are the latest group of investors who see impact investments as a way to stand up for their beliefs while also investing in their own futures.
Studies show that these investors are also now turning to financial professionals to help provide them with opportunities to generate a strong financial return, while creating a positive social impact. They want their advisors to offer them value-based investing products as an alternative to what is being offered to them in the general markets. And while they may be young, and low on cash at the moment, this segment of the population shouldn’t be overlooked. Millennials are expected to inherit about $41 trillion in wealth from their parents, and they are already looking for ways to invest it.
Skewed To Wealthier Investors...For Now
More and more opportunities will continue to open up for investors seeking to align their own financial futures with their desire to make a difference in the world. For now, though, most scalable impact investing options are still geared to wealthier investors. For those investors with less than $3 million to invest, sustainable and responsible investment vehicles, such as mutual funds focused on socially and environmentally responsible investments, are still the way to go. Private deals that require a fair amount of due diligence may still be too risky for the average investor.
The Bottom Line
The desire to meld investments and social responsibility is growing at a fast pace among the rich and not-so-rich. And the groundwork has been laid for the creation of numerous products to meet the demand of a new generation of socially conscious investors. As long as such investments produce competitive returns – both financial and social – their popularity will only grow.
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