Origins
While this manner of investing has existed for decades, the actual term impact investing originated in 2007 during a meeting at the Rockefeller Foundation Bellagio Center. A group of investors created a new type of investment that went beyond just the “responsible” moniker to investments that actually generated an “impact,” hence the name. Similar to traditional socially responsible investing (SRI), impact investing aligns a portfolio with an individual’s values. The primary difference stems from impact investment moving beyond negative screens, divestment or shareholder activism. Instead, impact investments have an eye towards enacting positive, measurable change while targeting a competitive rate of return.
Asset Classes
Impact investing can be achieved across several asset classes and the choice is mostly a function of the investor’s values, the underlying issue, the desired impact and the potential for financial return. Impact investing appears predominantly within private equity because of the direct connection between capital and impact. However, there are an increasing number of strategies within real estate, infrastructure and fixed income that have garnered investor attention.
The actual investments span a variety of global sectors including (but not limited to) sustainable farming, clean technology, clean energy, healthcare, education, community initiatives and the environment. The underlying investments in each of these sectors range from the relatively unknown to companies and products that are well-known and commercial.
At a grassroots level, private funding exists and targets less mainstream, but important global issues. Whether fair-trade organic coffee farmers in Ecuador, African villages in need of clean drinking water or low income housing developments here in the U.S., all illustrate impact investment opportunities of various size and scale.
At a mainstream level, one recognizes successful brands like Tom’s Shoes and Warby Parker Eyeglasses whose business models match a pair for every pair sold. Both examples represent companies backed by private equity impact funds. On the public side, you often see governments and municipalities participating as well. For instance, New York’s Metropolitan Transit Authority (MTA) plans to issue $500 million of “green bonds” in order to satisfy the demand of its growing millennial investor base. Here, green bonds are being issued as a means to fight climate change as they require the issuer, MTA, to adhere to socially responsible guidelines as part of its “impact.”
Growth
As the space has grown, so has its usage and notoriety. Research by JP Morgan Chase projects that impact investments will approach $1 trillion by 2020. To date, pioneers of this movement have principally consisted of larger foundations and high net worth families because of their more nimble portfolios and greater investment in non-traditional assets. According to a recent survey by U.S. Trust, roughly a third of high net worth investors either own or are interested in owning impact assets.
Not surprisingly, this growth has also caught the attention of money managers in the SRI space, leading to more options and lower minimums. On the lower end, for the investor that has a smaller portfolio, there are mutual funds available that address an array of issues, investing only in companies that meet strict suitability requirements. These mutual funds have minimums as low as $2,000 for a retail investor. On the higher end, for the investor seeking to commit and concentrate more capital, private equity funds have minimums ranging from a couple hundred thousand dollars up to a million dollars or more. We should caution that impact investing is also an area where upfront manager due diligence is paramount. Similar to private equity or private real estate funds, the difference between a good manager and a bad manager is uncovered in the details and due diligence required prior to investing.
Where and Who?
Like any portfolio, the investment objective section of an Investment Policy Statement (IPS) should serve as the starting point. From there, risk, return and asset allocation all follow accordingly. As outlined in our recent white paper, "Responsible Investing 101", SRI is a somewhat all-encompassing term. Therefore, missions and values are best outlined as clearly as possible in the investment objective section. Because they span a range of asset classes, impact investments can conceivably fit anywhere within a portfolio and at any size.
Impact investing can play a meaningful role for anyone or any organization looking to go beyond traditional SRI investing, enact positive change and earn a competitive rate of return. Impact investing is no longer limited to foundations and high net worth families. Individuals now have access to the widest variety of impact funds and strategies in recent history and impact investing will remain a growing opportunity within socially responsible investing.
For assistance with evaluating impact investments or any other SRI considerations, please contact any of the professionals within The Wealth Office™ at DiMeo Schneider & Associates, L.L.C.
