Interested in becoming involved in one of the newest emerging asset classes? How about solving world problems while investing in this new asset class? Perhaps global social impact investing is your niche.
A LITTLE BACKGROUND
Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market, to market rate, depending upon the circumstances. This is according to nonprofit Global Impact Investing Network (GIIN), an organization dedicated to increasing the scale and effectiveness of impact investing and a sponsored project of Rockefeller Philanthropy Advisors
GAINING POPULARITY
GIIN together with J.P. Morgan earlier this year released Perspectives on Progress, a report that revealed the experiences, expectations, and perceptions of 99 impact investors in 2012, as well as their plans for 2013. In the report, eighty-six percent of respondents said they felt that “many” or “some” investors are starting to consider the impact investment market opportunity. The survey is the third in a series of reports, started in 2010.
Despite the market’s early stage, these investors indicated that their portfolios are meeting financial expectations in addition to social and environmental expectations, noted Yasemin Saltuk, director of research for J.P. Morgan Social Finance and co-author of the report.
KEY THEME
Social impact investing was also a big topic of conversation at the World Economic Forum 2013 in January. The WEF touts itself as an independent international organization that is committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas.
In January, the Schwab Foundation for Social Entrepreneurship and the investor community of the WEF co-hosted a gathering that brought together around 30 CEOs, CFOs and chief investment officers of the world`s most powerful private equity, venture capital, and investment management firms with 20 social entrepreneurs, as well as foreign investment authorities, pension funds and business professors.
In an interactive and dynamic simulation, participants at the gathering were challenged to build a concrete investment case from an economic and environmental, social, and governance bottom line. The goal was to build a spirit of collaboration among the diverse members of the group.
But while there has been some attention given to impact investing as of late, with a USD 1 trillion or so-sized market, the actual volume of impact investment transactions remains limited.
Abigail Noble leads the WEF’s work on impact investing and new economic thinking. She says that while there has been an increase in global social investing in recent years, it has happened only slowly.
She notes that there has been roughly USD 9 billion committed among impact investment funds in 2012, equating to over 200 transactions – a drop in the bucket considering the world pool. This, however, was up from a total commitment of USD 8 billion in 2012.
According to Noble, whose work explores the evolution of alternative investment asset classes, including venture capital, private equity and hedge funds and their potential impact on markets, social entrepreneurs had been hearing that it was difficult to get on the radar screen of investors and that impact investing seemed more of a hype than a potential opportunity for them. “So WEF started using the World Economic Platform…bringing together the leading social entrepreneurs and the most influential investors together,” she says.
Participants in the investment community say concerns about the market include that the market is still challenged by a lack of appropriate capital across the risk/return spectrum and a shortage of high-quality investment opportunities.
“I am very hopeful that if we figure out the right kinds of instruments and tools, and work to make the impact investment ecosystem more developed — some of the goals of our project and what we are working on coming up with solutions around — then we can make some more inroads and success stories for the impact investment sector,” Noble says.
Noble says that while there are some cases where the financial returns in this type of investing are even above market, many impact investments are at market and often times there is a lower return.
BEYOND FINANCIAL RETURNS
The real payback in these cases?
“I like to think that people feel better about themselves and lead more integrated lives when their decisions not only embody their values but also contribute to the kind of world they would like to see for their children,” says Noble. “A lot of impact investments have future positive externalities, whereas many financial-only investments might look good on a quarterly- or annual returns-basis but may not produce positive returns, socially, environmentally or financially in the long-term.”
STAY TUNED
What specifically are some of the investments currently available in impact investing? So glad you asked. TraderPlanet will feature related interviews and investment ideas in the months that follow. Next up, we’ll take a look at how UBS recently launched a $100 million impact investment fund among high-net-worth clients to invest in small enterprises in developing countries. The fund reports back to investors and compensates fund managers based on social impact as well as financial returns.
