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—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.”

But while most PRIs historically were made to the CDFI industry, they are now being used as the riskiest tranche in complex deals to attract other investors to complex hybrid projects that address homelessness, affordable housing, education and rebuilding inner-city neighborhoods. In a speech to the PRI Makers Network conference three years ago, MacArthur Foundation President Jonathan Fanton said every PRI dollar spent on the foundation’s housing preservation initiative had unlocked $70 from public and private sources.

“Since 2001, we have awarded $50 million to preservation-minded developers and lenders across the U.S.,” he said. “By the end of [2007], these groups had used our dollars to marshal over $3.5 billion in new long-term financing—enough capital to acquire, improve and preserve 50,000 at-risk affordable homes.”

“One to 70,” he said. “[That’s] dramatic leverage by anyone’s count.”

Yes, it is. But is it enough? Or, to put it another way: Should foundations be little more than private investment companies (which receive tax benefits)—that happen to use some of their excess cash flow for charitable purposes?

That’s the question the trustees of the New York-based FB Heron Foundation (2009 assets: $240.9 million) asked themselves after a board meeting in l996 when so much time was spent reviewing investments that little time was left for program matters.

Fast forward 15 years. Today, Heron invests an astonishing 46% of its assets in alignment with its mission of helping low-income people and communities help themselves.

Here’s the key: In addition to PRIs, Heron uses its “corpus” (or endowment) dollars to further its mission. To distinguish these market-rate investments from PRIs, the term “mission-related investment,” or MRI, was adopted, and other foundations have begun to follow suit. Unlike PRIs, “mission-related” investing is not limited to foundations, and there has been a huge surge of interest by family offices.

In the meantime, the social entrepreneurship movement has exploded, especially among the young—thanks in part to the efforts of the Skoll Foundation, which was started by Jeff Skoll, the first president of Internet marketplace eBay. Social enterprises often embrace a variety of hybrid nonprofit/for-profit structures. For example, they can be for-profit companies involved in do-good ventures, or they can be nonprofits with for-profit subsidiaries.

Three years ago, the first Social Capital Markets conference ( was held in San Francisco to match investors with social entrepreneurs. Despite the near crash of the financial system the month before, the creative energy and enthusiasm of the Woodstock-like happening were high—and the optimism palpable. In February, a bill was introduced in the California legislature to create a new type of corporation where fiduciary responsibilities can include social and/or environmental factors as well as financial ones.

On the investment side, PRIs and MRIs two years ago were rebranded under the umbrella “impact investing” term. (See: “Wealthy Attracted to Impact Investing,” Financial Advisor, June 2010.) In addition to endeavors to specify how to measure social impact, efforts are being made to expand understanding of these investments and to build other infrastructure that will allow the industry to scale.

Among them:
Impact Assets Global 50 ( This is an index of about 50 private debt and equity impact investment intermediary fund managers, including leaders in community development, microfinance and fair trade.

“It’s not a trading platform, and it’s not going to be an index you can buy,” says Elise Lufkin, a managing director at Impact Assets, a nonprofit donor-advised fund spun out of the Calvert Foundation. “It’s basically a list that people and wealth advisors can access to learn more about what’s available.”

For example: E & Co. (, which has quietly invested in over 150 small clean energy companies in 25 countries in Latin America, Africa and Asia.

The list should be posted by end of March.

ImpactBase ( This is a database of available impact investing deals that accredited investors can access. Each two-page profile includes an overview, summary financial data and a section about social or environmental impact. The latter describes the fund’s criteria, indicates what metrics are being used (for example: Impact Reporting and Investment Standards, or IRIS—see and its rating by the Global Impact Investment Rating System, or GIIRS (see:, if there is one. As of March, this is just coming out of beta.

Mission Markets ( A transaction platform for impact investments, this cutting-edge exchange also incorporates technology and social media in such a way that organizations can have investor groups on it, share due diligence, have their own private Facebook pages where investors can crowd a profile, connect with other investors, share ideas and join other investment clubs.

“That’s how impact investing is done,” says CEO Michael Van Patten, whose site is FINRA-compliant. “It’s extremely collaborative. It’s not like regular investing. People want to be engaged. They want to have a relationship with the organization. So we’re creating this whole community within a transaction platform so people can invest in groups.”
Take, for example, a cluster of members in Oakland. If somebody is interested in a particular CDFI, he can write the group, express his interest, and ask if anybody wants to get together and talk about it. Slow Money (,) the nonprofit that promotes investment in sustainable agriculture and organic farms and food enterprises, has already committed to having its whole network of 1,500 members use the Mission Markets platform. Van Patten is in discussions with others.

Also just out of beta testing, the platform at press time had $325 million of offerings representing 15 deals including a sustainable agriculture fund, a mid-market private equity-type fund that focuses on family-run enterprises that are important to communities, a smattering of social enterprises, an environmental offering, debt deals for CDFIs and carbon projects. In early February, Mission Markets announced the first two companies for which it raised capital: Hotfrog LLC, an early stage triple-bottom-line new-med company, and Lumni Inc., which facilitates investments in higher education for low-income students. There are online video road shows and Q and A’s, along with recorded versions. The site pays broker commissions.

Although the site currently only accepts accredited investors as members, Van Patten plans to add offerings for non-accredited investors. In April, the platform will list its first Direct Public Offering of a company usually only listed in one state: The Workers’ Diner, which is wholly owned by its workers. It will be public in the states where it operates (New York, New Jersey and Connecticut).

“A non-accredited investor [living in one of those states] can buy $500 worth if he wants to,” Van Patten says. “It’s a way to get into impact investing without spending lots of money.”

Without spending a lot of money is the operative phrase.

According to “Money For Good,” a provocative study conducted by Hope Consulting ( based on in-depth focus groups of affluent individuals (with incomes of $80,000-plus,) there is $120 billion available from individuals for impact investing—half of that in amounts of less than $25,000. Even so, 95% of the respondents said they would invest less than $25,000, and 85% said they would invest less than $10,000. Even wealthier respondents who could invest larger amounts preferred to spend $10,000 or less. (About a quarter of this money would be new to financial advisors.)

Thus, one has to wonder about all the attention devoted to accredited investors.

According to the study, most people are concerned more with downward risk (they don’t want to lose their money) than they are with upward gain. In that respect, community investments fit the bill. “Even though these investments are supposed to be below-market-rate vehicles, community investments have been getting above-market rates for the last couple of years,” says Dorigen Hofmann, portfolio analyst at Clean Yield Asset Management, based in Norwich, Vt.
Although there are too many community investments for the scope of this article, they also fit the growing demand for “local” investments. Hofmann’s firm uses two local funds: The New Hampshire Community Loan Fund and the Vermont Community Loan Fund. But, she says, the paperwork is “onerous,” and the firm’s oldest primary community investment is the Calvert Foundation Investment Notes.

“It’s easy for us, and we know the loan loss reserves are ample,” she says. “We know their mission and how they work is upright.”

Through its investment notes, the Calvert Foundation offers non-accredited investors the same opportunities as accredited investors to make impact investments for as little as $1,000 (or $20 at MicroPlace.) The notes represent $230 million invested in 250 CDFIs, microfinance institutions, and nonprofits involved in affordable housing, the environment, fair trade and social enterprises.

Although James Frazier, a financial advisor at Natural Investments LLC, “loves” the Calvert notes because they give people the opportunity to “learn about really compelling nonprofits, CDFIs and incredible organizations that promote amazing causes,” he feels “challenged” that Calvert last September dropped the rates from 2% to ½% for one year.

“A lot of advisors charge asset-based fees,” he says, “and the problem is that the fee is higher than the return. The challenge is that you are actually recommending an investment that is going to lose money after fees. The response we’ve had so far is to push them out longer term so that the return is higher again.” (The top return is now 2% for five years.)

Justin Conway, sales manager at Calvert, understands the problem but says there really was no choice. “Now that rates have been low for so long, [the CDFIs and microfinance institutions we lend to] want to lend at lower rates. So we lowered our rates to provide more flexible and affordable capital to them.”

Something else Frazier likes: the opportunity for Calvert investors to target their funds. “It’s a neat way to involve them,” he says.

About one-third of Calvert’s investors target their funds to one of eight geographic regions in the U.S., international and microfinance, the Gulf Coast or green strategies. But virtually all of Frazier’s clients take advantage of another targeting program Calvert offers, one designed to help individual nonprofits that have been donor-dependent to test an investment program.

“Since we have a retail investment product that also has by far the biggest distribution in terms of financial advisors, [nonprofits] have been interested in leveraging that to use our product to raise money for themselves,” Conway says. Calvert provides the prospectus, and the nonprofits don’t have to deal with a back office and staff, figure out how to mail l099s, or engage in investor reporting. “All of the risk is still with the Calvert Foundation,” Conway says. “[Investors] are investing in our product. But it’s a way an investor can target and support a specific organization.”

The first nonprofit to use the program: Oikocredit, the microfinance institution based in the Netherlands. It was so successful that Oikocredit now has its own investment program, though it still continues to access financial advisors through Calvert.

In this way, Calvert represents the essence of this new style of investing: collaboration. It echoes a sentiment that Drum, the UBS analyst, hears again and again.

“Investors feel lucky that they have the wherewithal to make an effective difference,’ he says. .•