Imagine investing in-not donating to-nonprofits that make small business loans in Appalachia, develop affordable housing in New Orleans, support fair trade initiatives for chocolate and coffee growers, or maybe extend credit to micro-entrepreneurs or small businesses that sell clean energy or deliver access to water in the developing world.

Or perhaps your clients prefer to invest in a for-profit loan fund that supports organic farms, or a private equity fund that preserves ranchland or develops sustainable forests. Or a venture capital fund focused on climate change solutions.

Welcome to the world of "impact investing," a way to invest to solve the world's social and environmental problems while earning a financial return-as little as a return of capital to as much as well-above-market rate.

These investments, which range from CDs in community banks to private placements limited to accredited investors, can also include various tranches in massive development projects involving partnerships between governments, foundations, banks and pension funds. An impact investment includes buying into an IPO, but not trading in the aftermarket. The rule of thumb: It must consist of new capital.

"People absolutely want to do more of this," says Patrick Drum, senior portfolio manager and financial advisor at The Arbor Group, the wealth management division of UBS Financial Services in Seattle. Drum points out that part of the attraction is the "high creativity" involved. "There are all kinds of structures that didn't exist a few years ago," he says. "They also like the fact that the assets are uncorrelated and that social impact can be measured."

Impact investing has garnered the attention of the likes of JP Morgan Chase (See Impact Investing: An Emerging Asset Class at or click here) due to the 20%-plus annual profit margins often associated with clean technology and microfinance. (Indeed, the latter has become increasingly controversial due to the perhaps too-successful IPO last summer of SKS Microfinance, the largest microfinance institution in India.) But, in fact, this proactive form of do-good investing got its start in the philanthropic world during the late '60s with the invention of something called "program-related investments."

The idea: Instead of grants, foundations can make investments that further their charitable mission. Since these investments can count toward their 5% distribution, any financial returns must be recycled as grants-or more PRIs. In this way, foundations can compound their social or environmental impact.

But here's the hitch: Since the main purpose of the investment must be charitable, most PRIs (which can take any form of debt, equity, guarantee, etc.) have been designed as low-interest (below-market) loans.

Between them, the Ford Foundation (which pioneered PRIs) and the MacArthur Foundation have invested hundreds of millions of dollars building the virtually invisible $30 billion industry of "community development finance institutions," or CDFIs-the community banks, credit unions, loan funds and venture capital funds that serve minority and low-income people. In l989, for example, MacArthur made a PRI to the Center for Community Self-Help, a Durham, N.C.-based CDFI that, among other things, promotes responsible lending and has created a secondary market in responsible mortgages. At the time, it had $7 million in capital; today, it has over $1 billion.

Within seven weeks of Hurricane Katrina, MacArthur loaned nearly $7 million to New Orleans-based CDFIs. The ten-year loans carried an interest rate of 0%. "We asked ourselves whom we knew in the region," Debra Schwartz, director of program-related investments at MacArthur, told me three years ago. "We were able to tap into that infrastructure. [The CDFIs in New Orleans] were the cavalry. They hung in there when the banks left and chaos ensued. For me, it was the value of having built institutions rather than individual projects."

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