Social Impact Investing: It's Not Wall Street as Usual

As grumbles over economic inequality and Occupy Wall Street-inspired protests spread across the country, GOOD has been sharing alternatives to business as usual for our financial system, from peer-to-peer lending for savings and loans to crowdfunding for startups. Today, two experts in the budding field of impact investing—putting your money to work for your bottom line and your values—explain the tremendous potential that comes with melding of philanthropy with investment banking.

Jed Emerson and Antony Bugg-Levine’s book Impact Investing: Transforming How We Make Money While Making A Difference, was published in August. They e-mailed with GOOD about their investment philosophy.

GOOD: You argue our current investment and philanthropy system is antiquated. Explain what you mean when you describe it as “bifurcated.”

ANTONY BUGG-LEVINE and JED EMERSON: The “bifurcated” world is built on two fundamental beliefs: that the only purpose of investing is to make money and that the only way to solve social and environmental challenges is to donate money to charities or wait for government to act.

This is a lost opportunity since, at its core, value is not divided, but rather is whole; it is a blend of economic, social, and financial components which, when taken together, give us the total returns we seek in our investing, in our philanthropy and in our lives.

Many people and institutions are rejecting this bifurcated world view. They are investors interested in the pursuit of both financial and social/environmental returns together and philanthropists who use market-based techniques to pursue a charitable goal. Our laws and regulations, methods for measuring value, investment structures, and even language do not meet the needs of this growing group of investors. Instead they are left to force-fit their new aspirations into old systems to generate integrated returns.

GOOD: What are some examples of impact investments? Why can’t government or foundations make those?

EMERSON/BUGG-LEVINE: Impact investors are helping to close the education gap in the slums of India with loans to affordable private schools, enabling coffee farmers in Central America to increase their incomes sustainably by financing their participation in more lucrative export markets, and enabling families in New Jersey to stay in their homes by financing community-based nonprofits to buy up and restructure distressed mortgages.

Impact investing’s sweet spot is exactly where the limits of traditional philanthropy and governmental programs begin. Especially now, government and traditional philanthropy lack the resources to solve social challenges alone. Impact investing is not a replacement for government action or philanthropy, which will always be necessary to provide true public goods and push the frontiers of social justice. But impact investing can be a powerful complement to government and philanthropy.

GOOD: Who is doing this? What kinds of profit are they making?

EMERSON/BUGG-LEVINE: Very rich individuals and families have been best positioned because they have greater control and choice about what to do with their money. Most of us cannot make impact investments ourselves but instead rely on institutional investors who manage our deposits or our retirement funds and they are typically slower to embrace innovation like this.

For now, we cannot say “impact investing generates X level of financial performance.” Research last year by the Rockefeller Foundation and JP Morgan that examined financial return expectations among more than 1,000 impact investments showed clearly that some impact investors are willing to accept a lower financial return.

[But] as an example, in 2008-2009 many impact investors saw their traditional, market rate commercial investments lose 20 to 30 percent or more of their financial value. At the same time, throughout the downturn, many impact investors in microfinance bonds received a consistent 6 percent return…not a bad financial return at all given where traditional market rate investments had headed—into the deep south!

GOOD: What sectors, companies and countries are most likely to feel the affects of impact investing?

EMERSON/BUGG-LEVINE: Impact investing can take off anywhere traditional approaches by government or mainstream markets will not suffice and where an enterprise addressing the issue can monetize enough of the value it creates to pay back investors.

In developing countries, millions of poor families suffer under both market and government failure, leaving them paying more for basic goods and services than their middle- and upper-class compatriots. Enterprises that can figure out how to provide these services at more affordable prices can substantially improve the lives of these families and generate profit—a perfect environment for impact investors to support these enterprises. For example, in Mexico, the impact investing pioneer IGNIA Fund has invested in businesses that help poor customers to build better homes, pay for medical care and access more affordable telecommunications services.

Impact investing is also poised to grow in developed countries, especially where governments are retreating from their traditional roles as the funder and provider of extensive basic services. In the United States, impact investors are providing early-stage financing in a wide range of sectors from education companies to grocery stores moving into urban “food deserts.”

GOOD: On the flip side, how much profit is too much profit for an impact investment to count?

EMERSON/BUGG-LEVINE: Profit is actually a relative term. Muhammad Yunus, founder of the Grameen Bank, argues that there should be a cap on profits returned to investors and on salaries paid to venture managers. It’s important he draw that line in the sand. At the same time, he does not own the beach: the impact investing capital market needs to offer a full range of potential returns to all investors.

GOOD: How, or when, can everyday people get involved in this? Can I put my retirement money in impact investments?

BUGG-LEVINE: We’ve seen a growing trend toward the “democratization” of impact investing.

Today the “best” deals are still often only open to those investors with more assets to deploy—with staff to vet the right opportunities [and] meet the minimums, which can be quite high/ But most people with a bank account can now participate. In the United States, retail investors with as little as $1,000 can invest in a diversified impact investing fund through the Community Investment Note offered by Calvert Foundation, or a similar offering from RSF Finance.

If you are setting aside money for donations, you can open a donor-advised fund through the Giving Fund at ImpactAssets.org and immediately have your assets invested for impact as you decide where you will eventually donate them. Soon, impact investing products will increasingly be offered by “mainstream” advisors and wealth managers at much lower investment minimums than is possible today.

EMERSON: We should not be limited by the label “impact” in assessing our options for investing for impact. For example, personally, my bank accounts are all at a small, rural bank where I live in the Rocky Mountains. Simply by keeping my funds there—and not at some faceless, massive national banking institution—and taking my loans from that same local bank, I’m supporting community banking and economic development in my area. I am investing for impact!

By joining a credit union bank or similar institution, anyone can do the same thing. By exploring how to source agriculture produced locally and participate in one of the various Slow Money initiatives that are increasingly active around the world, I am engaging in impact investing. By managing my 401K through a social fund listed at Social Funds, I’m engaging in impact investing—and in fact, all my personal retirement assets are invested on a sustainable/impact basis and I’ve been quite happy with their performance.