So, you want to be an impact investor?
LINA SALAZAR AND NORMA ZACARIAS
Investing for social or environmental impact is still a brand-new field. Here's a road map to take you past the pitfalls.
the basic orienting principle is this: capital plus positive social/environmental impact plus profit equals impact investment. A dizzying array of new terms, concepts and actors has emerged within that large, noble and money-making concept. The basic structure is straightforward: banks and other specialized groups provide the capital to support specific investment firms that, in turn, invest in specific sectors, using traditional means of finance or investment—though often with a healthy dose of training and advice along with the financial support. That part's pretty easy to grasp. Within each sector, though, there are multiple actors, and among them are different criteria to select projects, investment standards to certify that investments are meeting social and environmental goals, and sector-specific forums for sharing information and educating financial managers and the public. Here is a handy guide to the exploding, exciting world of impact investment.
What do you do if you or the fund you manage wants to invest for social or environmental impact? There are several steps to follow. Since this is a relatively new field, unless you're one of those rare people who handles their own investment decisions, part of this will involve educating your money manager or counselor on what impact investment is and what the options are. Fortunately, to fill this informational void, a number of groups have emerged. One of them is ImpactAssets, a nonprofit financial services company that aggregates and invests assets and has built a database of 50 experienced investment funds. The next step is deciding what type of fund to invest in. There are different options, from coupons that pool investments for larger loans to direct investments in enterprises. And there are a range of investments by theme. There is also the question of rates of return on investment—since, after all, this is not only about doing good, but earning a profit—and those vary. And last, there is the question of where to invest: some funds are multiregional; some focus on developing regions; and others focus on the United States.
This is where the money comes from. It includes banks (multilateral, private, commercial), companies, foundations, funds (pension/mutual) and individual or group investors. So far, impact investors have tended to be family foundations and philanthropic endowments that seek to do good with their own investments while still maintaining a positive balance sheet. J.P. Morgan, among the larger banks, has established a Social Finance Unit. Multilateral banks like the World Bank's International Finance Corporation (IFC) and the Corporación Andina de Fomento (CAF) have also jumped into the fray. Funds like the Calvert Foundation and Partners for Common Good (because they are nonprofits under the SEC's eleemosynary [charitable] exemption rule) fit into this category, since they offer coupons or notes to pool the investments of smaller investors.
Development financial institutions
IDB, IFC, U.S. Overseas Private Investment Corporation (OPIC), FMO Entrepreneurial Development Bank
J.P. Morgan, Citigroup, Prudential,
Morgan Stanley, UBS
Investors Circle, Toniic
KL Felicitas Foundation
Bill and Melinda Gates Foundation,
David and Lucile Packard Foundation
Generation Investment Management LLP
Funds & Target Sectors
Funds target diverse social and environmental needs. Depending on the nature of the investment, some funds provide support and services to the projects they invest in, from business development training to marketing.
The funds detailed on page 75 use different means to raise capital and invest it. Much depends on the status of the fund/organization and whether it is a for-profit or a nonprofit. Among the most common tools are blended debt, bonds, commodities, community development venture capital, debt investment, deposits, equity hybrid structures, guarantees, linked deposits, private equity, quasi-equity, real estate, social impact bonds, and trade finance guarantees.
Commonly used to refinance previous loans. A new loan is established with an interest rate higher than the old loan, but lower than the future rate.
A note sold to an investor. The bond rate is not a fixed interest rate.
Purchase or support of bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa. Often used as a way to support agriculture and fair trade.
Community development venture capital
Capital raised by local communities to support entrepreneurs and projects in low-income areas.
Purchase of bonds instead of stock.
Capital deposited in a bank for a specific destination—in this case for a social mission.
Equity hybrid structures
Specific securities that flow between debt and equity. Also known as hybrid security or hybrid instrument.
Issued to guarantee investors or buyers the timely payment of interest and principal.
Deposit with a financial institution to induce support for specific projects.
A short-term debt security, usually with a maturity of five years or less.
Direct investment in private companies, often from retail or institutional investors.
Debt taken on by a company that has some traits of equity, such as having flexible repayment options or being unsecured.
A piece of land, the air above and under it, and any buildings or structures on it. For impact investment, affordable housing and sustainable development.
Social impact bonds
Initial capital raised by private investors for a new project. The government later repays the investors with bonus.
Trade finance guarantee
Guarantee to back credit acquired by businesses for manufacturing, processing and/or distributing.
Money invested in firms and small businesses with perceived long-term growth potential.
It's a new field, so money managers or investors have to be educated on the options. Websites and groups like ImpactAssets (www.impactassets.org) or Impact Base (www.impactbase.org) provide information on funds, size, areas of investment, management, and current portfolio.
Then there's the question of evaluating funds and projects. The profit part of the equation of impact investing is easy to evaluate: what is the rate of return? It's the other side—social and environmental good—that sets impact investing apart. Fortunately, there has been progress on this front. To be able to allow investors to evaluate that side of the equation—and to weed out fakes—the field has developed a series of principles, guidelines and standards—most of which are for now voluntary. The best known is the Impact Reporting and Investment Standards (IRIS).
More can be found at the Americas Quarterly website at:
It's important to stay focused on the standards that should guide your investment. For these you can turn to the Consultative Group to Assist the Poor (CGAP) Disclosure Guidelines, SMART Campaign Client Protection Principles and the UN principles.
Certifications and Third-Party Assessments
Accurate and objective real-time assessments are critical. You can check that funds and projects are meeting basic criteria for impact investment through the following indices: B-Corp; CARS Comprehensive Ratings for CDFI Investments; and the GIIRS Global Finance Investment Rating System.
Investment Platforms and Markets
Vehicles for pooling impact investment funds and deals to raise capital and provide a common framework for reporting and evaluation have begun to emerge. These have included incipient stock markets like the Exchange IIC Asia, Impact Exchange IX and UK Social Stock Exchange. There are also platforms that perform a similar information sharing function: NeXii Platforms and Mission Markets.
Research Centers and Forums
Like any new field, impact investing has spawned dozens of organizations and networks dedicated to researching, sharing information and improving impact investment. These are just a few: Aspen Network for Development; Global Impact Investment Network; Social Capital Networks (SOCAP); Financial Alliance for Sustainable Trade; Social Venture Network; Conscious Capitalism; Institute for Responsible Investment (IRI) at Harvard University; Social Enterprise Knowledge Network (SEKN); Financial Access Initiative (FAI); and Consultative Group to Assist the Poor (CGAP).