Impact Investing: Investments for a Cause

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Today’s investors don’t have to sacrifice personal wealth to make philanthropy a priority. That’s the beauty of impact investing, the progressive strategy that generates a real financial return while making a positive social impact.

Take d.light, for instance — a startup that aims to reach 100 million base-of-the-pyramid consumers with solar lanterns.

In villages where electricity is unreliable, consumers normally use inefficient kerosene lamps for cooking, eating, studying, and socializing. Unfortunately, these lamps are a major source of indoor air pollution, fires, and household expense. Disrupting the market with an affordable alternative saves families money, improves their health, and reduces carbon emissions.

Marrying social and environmental benefits with economic gain is a hallmark of impact companies. Unlike donation or grant-based philanthropy, though, the impact investment model doesn’t require a constant injection of capital to keep the engine running. It’s a sustainable solution that creates long-term economic prosperity.

Why Impact Investing Is Suddenly All the Rage

Companies that do well by doing good aren’t a new invention, but several factors have contributed to impact investing’s growing popularity.

In 2012, the World Economic Forum launched its (X) Mainstreaming Impact Investing Initiative to increase the flow of capital into these types of investments. Technology helped information about impact investing spread quickly, and more investors began to discover its value. Now, many consider it just another asset class in their investment portfolio.

Passage of the JOBS Act in 2012 also provided entrepreneurs with access to new sources of capital, and the Crowdfund Act made new types of investments more widely available to everyday investors.

Last year, there was a 20 percent increase in sustainable assets under management from 2013 alone. Over the next decade, impact investing is projected to grow into a $1 trillion global market.

How Millennials Will Accelerate the Growth of Impact Investing

There’s a growing category of investors who are seeking an opportunity to do something more with their money than earn a traditional rate of return. And as the millennial generation grows to dominate the U.S. adult population, this category is only going to expand.

Millennials are interested in investing, and they’re going to have plenty of capital to invest. This generation is set to inherit a whopping $30 trillion from their baby boomer parents over the next 30 years, but they’re unlikely to invest in traditional stocks.

Coming of age during the Great Recession left many millennials disillusioned with the stock market and risk averse. More than half keep their savings in cash, but they’re more willing to accept a higher risk and lower return from investments that make a positive social or environmental impact.

Sixty-seven percent of millennials view investments as a way to express their values (compared to 45 percent of the general population). And in recent years, millennials’ spending on brands dedicated to social good has driven a rapid increase in corporate social responsibility. Impact investing is the next evolution of CSR, so it makes perfect sense that they’ll be setting their sights on these assets.

How to Get Started With Impact Investing

If you’re looking to get in on the ground floor with impact investing, you must do your due diligence.

Individual impact investments can run the gamut from a 0 percent return to a 20 percent return. However, making the right investments can yield a return that’s comparable to traditional funds.

One study found that a sample of 51 impact funds generated a return of 6.9 percent (compared to an 8.1 percent return for the sample of 705 nonimpact funds). Another found that 70 percent of impact investments target a return of 11 percent or higher.

There are thousands of brokers in the U.S. that deal with impact investments, but unfortunately, the impact investing market lacks a centralized hub for investment data surrounding these companies.

TriLinc Global, LLC, a private investment company co-founded by Gloria Nelund, is one company working to demystify the industry. TriLinc Global is a mutual fund that invests in Main Street retail businesses in developing countries. Unlike enterprises that focus on so-called “microloans,” this investment company focuses on growing the middle class, diversifying its portfolio with responsible businesses, and making these opportunities available to non-accredited investors.

If you’re thinking of building a portfolio yourself, here are a few ways to vet potential investments:

  • Look at metrics. Check out a company’s GIIRS Rating, and take a look at the IRIS Metrics catalog to see how its social, environmental, and financial performance compares to other investments.
  • Research the company’s reputation. How does the company conduct itself as a corporate citizen? This will be a good indicator as to whether the company will actually pay dividends.
  • Check for transparency. Take a look at the company’s sourcing, supply chains, and workforce. As Patagonia discovered earlier this year, it’s becoming increasingly difficult to police supply chains for unethical treatment of workers. Make sure the company conducts regular audits and is committed to weeding out child labor, unsafe working conditions, and other unfair labor practices.

While impact investing is still a new and exciting industry buzzword, it’s just a fresh twist on an old, deeply held desire to make the world a better place. As impact investing grows in popularity, more people will learn that individual prosperity can be good for the planet and the global economy.

About the Author: Vincent Molinari is the co-founder and CEO of GATE Global Impact, a leading electronic marketplace platform that’s helping the world’s leading organizations standardize and accelerate impact investing. Vincent is also a managing partner at Constellation Fin Tech, and he consults with members of Congress and regulatory agencies on issues related to capital markets, early-stage companies, and secondary market liquidity.