Here's what you need to know about impact investing, where returns are not the only reward
- Impact investments generate specific, positive and measurable environmental, social and/or good governance outcomes, oftentimes with market-rate financial returns.
- Due to risk, many investment opportunities are available only to accredited investors. However, retail investors can get in the game with direct debt and peer-to-peer micro-lending.
- Some believe most investors won't trade returns for social payoffs. Experts say this is untrue.
Growing rapidly within the socially responsible investing landscape is the world of so-called impact investing, which deploys your money more directly toward solving societal problems.
Largely executed through direct investing platforms, this approach addresses specific problems, such as alleviating poverty in certain communities or reducing pollution.
These investments are designed to generate specific, positive and measurable environmental, social and/or good governance outcomes, oftentimes with market-rate financial returns, said Michael Kramer, managing partner of Natural Investments in Kona, Hawaii. Furthermore, outcomes can have a local or a societal focus.
"It's very solution focused, very proactive — often investing in innovations, and supporting social entrepreneurs and socially focused start-ups," he said.
Channels — accredited investors
There are a growing number of channels for impact investing; however, due to risk, many investment opportunities are available only to accredited investors.
Kramer listed several major categories, including:
- Direct equity: investing in socially focused companies through platforms such as SoCap and Social Venture Circle, which serve as meeting places and learning communities for impact focused investors and entrepreneurs.
- Indirect private debt and equity funds: for example, funds investing in B-Corporations or in clean tech companies with a water orientation or a focus on preventing carbon from entering the atmosphere.
- Community development venture capital: creating infrastructure to benefit a community (e.g., repurposing old malls). Investments are made through socially focused fund managers or financial advisors who evaluate the potential impact and invest on behalf of clients.
Donor-advised funds can also be invested in alignment with a donor's values, said certified financial planner Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Virginia. She works through ImpactAssets, an organization that offers sustainable investing choices to these types of funds.
Bonds can also be adapted to engender a specific social impact. Rachel Robasciotti, founder and CEO of Adasina Social Capital in San Francisco, has developed a municipal bond strategy to deliver a positive social and environmental impact in underserved, predominantly Black communities across the U.S.
Channels — retail investors
Retail investors do have some opportunities to participate in impact investing, along with their accredited counterparts.
Two of the most accessible, according to Kramer, are direct debt — i.e., investing in certificates of deposit and other loan instruments sponsored by socially focused lending institutions, such as community development financial institutions (privately owned banks that invest in struggling communities) — and peer-to-peer micro-lending platforms such as Kiva, which enable individuals to invest directly in small businesses worldwide.
Another option for the retail market is to use Calvert Impact Capital's Community Investment Notes instead of traditional CDs, Kirchenbauer said.
"These are CD-like, not FDIC-insured, normally with solid reserves behind them," she said.
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The money is being lent to local community organizations for causes like micro-enterprises and low-income housing. The investor can target themes or geographic areas, lock in a term and pick an available interest rate, usually lower than market rate, she said.
Investing through activist financial advisors also provides investors ways to directly influence corporate behavior, whether through filing shareholder resolutions and other engagement or through exposing negative corporate behaviors.
In the latter case, Robasciotti and her team have developed extensive public databases around corporate behaviors that negatively affect racial, gender, economic and climate progress. The publicity has influenced hundreds of companies to discontinue practices such as forced arbitration that allow perpetrators of sexual harassment to remain anonymous.
There are two widespread misconceptions about impact investing: first, that it cannot provide market returns, and second, that clients would not accept a trade-off between social value and returns, advisors say. But those who specialize in this approach have found the opposite to be true.
"Impact investing challenges the established view that most advisors have, that impact isn't market rate and that investing should only be about making money," said Alex Lamb, partner with New Summit Investments in Manchester, Massachusetts, a fund-of-funds manager of private market impact funds. "But it turns out that investing in solutions to social problems can be profitable."
As examples, he cites market returns realized from investing in innovative companies solving problems like affordable access to health care for poor families or delivering skills training for prisoners or reducing pollution.
In terms of giving up returns, it's important for advisors to recognize their biases in this area. They should be asking clients not about returns, per se, but "What's important to you about investing?" Kirchenbauer said.
"What you're interested isn't necessarily the same as your clients," she said. "Many people care more than just about return.
"Investors want to feel good about how their money is being used," Kirchenbauer added. "We're especially going to find the younger generation focused on 'What am I doing with my money?' — not just 'What am I making?'"