Most investors spend their time chasing returns. But what if there was a way to do good while also turning a profit?
Several nonprofit organizations have teamed up with money managers 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.
- Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
- Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
- Socially responsible (SRI) and environmental, social, & governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
One Step Further
Interest in the idea has been growing steadily for years and so have the number of products being offered. For some time, a breed of investment management companies such as Impax Asset Management, Domini Impact 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.
An example of a vehicle used in impact investing is a microfinance loan, which helps 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.
Not Just the Rich (Anymore)
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 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, called the IA 50.
ImpactAssets is also closely tied to Calvert Impact Capital, which offers investment and lending opportunities, such as the Calvert Community Investment Notes, a series of debt securities that started at a minimum investment of $1,000 when placed through a brokerage.
Growing Interest and Variety
Big investment banks are also taking note. Goldman Sachs, for example, has jumped on the impact investing bandwagon. In 2014 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. In addition, Goldman Sachs has invested in communities across the United States, supporting a wide variety of development and revitalization projects such as investments in affordable housing construction, job creation, quality education, healthcare facilities, small businesses, and more.
The Rockefeller Foundation was one of the first foundations to experiment with social impact bonds in conjunction with the Global Impact Investing Network (GIIN), a nonprofit organization dedicated to increasing the effectiveness of impact investing. The foundation also funded the development of metrics to measure the performance of these social enterprises and impact investing funds.
With the guidance of the Rockefeller Foundation, some of the biggest U.S. investment banks, including Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC), have created social impact bonds that have been applied to issues such as early childhood education, affordable housing, 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, and UBS Group (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.
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. The most recent GIIN study surveyed 294 impact investors and estimates the size of the market today is in excess of $715 billion. The report also found that a majority of respondents reported that their impact investments were meeting or exceeding their financial expectations. Approximately two-thirds said their investments were targeting market-rate returns.
Millennials Are 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 values. 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 $68 trillion in wealth, and they are already looking for ways to invest it.
Still 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 $2.8 million to invest—the average size of impact investment deals in 2019—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.