Investors and financial advisors looking for a way to achieve social and environmental impact, as well as financial reward, might want to consider impact investing.
Around the world, particularly in underdeveloped, poverty-stricken countries from East and West Africa, to Central America, to South Asia, impact investing is attracting wealthy investors. Impact investing attracted attention last year with the launch of the Global Impact Investing Network, or GIIN, based in New York, a collaboration platform and information hub designed to accelerate the development of impact investing in a more efficient, effective manner.
For investors new to impact investing, it is similar to socially responsible investing, but differs in a fundamental way: Socially responsible investors often screen out companies that they believe may cause social or environmental harm, while impact investors look to invest in businesses that produce social or environmental benefit, says Sarah Gelfand, director of the Impact Reporting and Investment Standards (IRIS) initiative of GIIN.
"Individual investors have been making impact investments for many years, but until recently, there has been little coherence or collaboration among their activities," says Gelfand. "Impact investors have not often worked together as a cohesive industry. Many have been operating in silos."
One family office that has been doing impact investing is Armonia LLC, based in Greenwich, Conn. Armonia has put family money into such impact investment funds as Root Capital, TBL Capital (TBL) and Jonathan Rose Companies LLC.
"We made a decision four years ago when we discovered impact investing. It was a way to align our personal values with our investments," says Larry Lunt, 48, a principal of Armonia and a Belgium-born citizen who has lived for 13 years in the United States. "Our purpose is to invest in anything that would help reconnect human beings with our community and the planet."
Another investor, Stuart Davidson, a managing partner and philanthropist at Labrador Ventures, based in Palo Alto, Calif., has invested for 17 years in early stage companies and sustainable funds like the Acumen Fund.
Acumen, he says, "was a natural for me because it proposes a new way to harness the tools of business and investment to create dramatic social change in the developing world."
The Monitor Institute, a research firm, in a 2009 report estimated the impact investing industry could grow from its present $50 billion or so in assets to $500 billion in assets within the next decade.
Behind its development are some big names-including the Rockefeller Foundation, B-Lab, the Acumen Fund, Root Capital, Deloitte, Pricewaterhouse Coopers, Citigroup, Deutsche Bank, JP Morgan, USAID, Hitachi and the Bill & Melinda Gates Foundation. Support has also come from other leading impact investing institutions around the world.
One barrier to realizing growth has been the lack of consistent reporting about the social and environmental performance of impact investments. "Without standard performance measures, investors are not able to accurately assess the non-financial value of investment opportunities," says Gelfand.
"Whereas there have been metrics that have defined the financial aspects of companies," says Gelfand, "we're trying to provide a set of metrics that would define the social and environmental dimensions of impact investments. If companies are reporting on these investments in a consistent way, an investor can make an informed decision and put their capital into the opportunity that is achieving the most impact."
IRIS was developed to address this need by providing a common language for reporting the social and environmental performance of impact investments. "This has the potential to unlock additional capital for the impact investing industry by enabling meaningful comparisons among investments and by increasing the understanding of the full value of these investments," said Gelfand.
The Global Impact Investing Rating System, or GIIRS, would contrast, quantify and rate the social benefits of impact investing opportunities through a system analogous to Morningstar's investment ratings or S&P's credit ratings.
Its development is being overseen by B Lab, a non-profit organization based in Beryn, Pa., supported by a consortium of organizations that have put up $6.5 million in funding. This year, about 20 pioneer funds have agreed to do a test run of the ratings system, according to Andrew Kassoy, a co-founder of B Lab.
Among them are Root Capital and the Acumen Fund. A non-profit vehicle, Root Capital, based in Cambridge, Mass., provides loans to rural enterprises and agricultural entrepreneurs that link smallholder farmers and artisans to competitive markets.
Since its 1999 launch, the fund has provided more than $175 million in credit to 265 grassroots enterprises in Central America, South America, and East and West Africa
Root Capital raises its funds from foundations, corporations, high-net-worth individuals, socially responsible investment firms and religious institutions. Generally, its direct investments start at $25,000 and range upwards to $1 million, and must be made either by an accredited investor or through a wealth management or socially responsible investment firm.
The majority of investors provide one-to-five-year loans with a rate of return between zero and 3%, according to Patricia Devaney, director of impact and assessment at the fund.
In contrast, the Acumen Fund, a philanthropic-driven vehicle based in New York with about $90 million in assets, supplies health care, clean water, housing, energy and agriculture to enterprises in East Africa, India and Pakistan.
Founded in 2001 with seed money from Cisco Systems, the Rockefeller Foundation and several philanthropists, Acumen has made $40 million in equity investments, loans and loan guarantees, and is aiming for $12 million to $15 million in investments this year, according to Brian Trelstad, Acumen's chief investment officer.
Sam Folin, 61, a managing director of Philadelphia-based Benchmark Asset Managers, ($135 million AUM), has invested well over $1 billion for clients in sustainable investment vehicles over the past 35 years, and knows the risks involved.
Still, he says, "impact investing is like any other form of investing. Those who do their homework, and make sure the risk is appropriate, will succeed. There are lots of opportunities to make reasonable returns and occasionally above average returns. While the rest of the world was getting hammered in 2008, our investors preserved capital, and kept their heads above water."
Bruce W. Fraser, a freelance financial writer in New York, specializes in writing about wealth management, financial planning, investments, personal finance and green environmental issues. Contact him at [email protected] or www.bwfraser.com/home.