Impact investing: doing well by doing good

Opportunities have never been so available for investors who seek more than financial returns.

August 20, 2015

4 mins

Corporate & investment bankingSustainable finance

Peace Corps volunteer Sam Goldman’s life changed when he witnessed a child being badly burned by an overturned kerosene lamp in Benin. The sight moved him to take action against a tragedy that takes place all too frequently in impoverished parts of the world. He came up with d.light – safe, low cost solar lighting for households in emerging economies.

Founded in 2006 and launched with a USD1 million grant from USAID, Goldman’s solar start-up quickly expanded and was ultimately able to raise USD11 million from investors. This might not have been possible, had it not been for the increasing popularity of ‘impact investing’.

Getting actively involved

Impact investors are finding new ways to fund companies intent on solving the world’s most pressing issues, including climate change, poverty and human rights.

Unlike socially responsible investors (SRIs), impact investors go beyond ‘negative screens’, which weed out undesirable practices or products such as tobacco and firearms, and instead look actively to invest in companies that address economic and social issues.

"Excitement is building around this new type of investment, driven to a large extent by Millennials … They will become a formidable force in the investing world"

Excitement is building around this new type of investment, driven to a large extent by Millennials – people born between the early 1980s and 2000. This generation rank ‘to improve society’ as their number one business priority and are more likely to see investing as a way to express their social, political and environmental values, according to The World Economic Forum.

With Millennials projected to inherit at least USD41 trillion in the coming years, they are set to become a formidable force in the investing world.

Assets incorporating sustainable investment strategies currently account for 10 per cent of all investments, or approximately USD21.1 trillion globally, but more and more leading investment houses, banks, and private wealth managers are now offering impact investments to their high net worth clients.

At the same time, smaller firms are looking for ways to bring more investors on board.

Something for everyone

Hedgeable, based in New York, was among the first of the new crop of wealth management ’robo-advisors’ (online portfolio management with minimal human intervention) to offer impact investment to its customers. Building on strategies previously available only to clients of major Wall Street investment houses, the site allows users to opt in to impact investing, and build a portfolio based on their stated values.

Meanwhile, Swell Investing, and Motif Investments, both California-based, jointly offer clients the opportunity to focus investment on companies that work actively to end poverty, fight cancer, uphold human rights and improve education.

Courting investors who want to give this kind of investment, the Calvert Foundation recently launched Vested.org. The site allows investors to give as little as USD20 for interest-bearing notes that support the foundation’s efforts in “creating affordable housing, promoting education, protecting the environment, and creating numerous other impacts”.

Silicon Valley is home to several start-ups that aim to make a difference while earning returns for their investors, and the region is a vibrant centre for impact investing.

Large organisations are also breeding a new approach. Tesla Motors, for example, is fast becoming the world’s most recognised name in electric cars, and is challenging the auto industry to keep up. Early Tesla backer, Nancy Pfund, now leads venture firm DBL Investors, which funds socially conscious enterprises like Pandora Media, solar power company Powerlight Corp. (now part of SunPower), and luxury consignment company The RealReal.

Impact investing is not without challenges. There is a need for improved due diligence to increase the pipeline of suitable investments, as well as better methods for evaluating outcomes beyond the purely financial. Several organisations are developing metrics to measure social impact, but so far there is no single standard across the board.

Despite this, impact investing is taking hold, and poised for growth. It is still early days, but the enthusiasm of investors, coupled with innovative companies and solid returns, is an auspicious sign that this trend will continue to grow.