Impact investing involves individual targeting of investment cash and often personal involvement in the businesses backed. You invest to make a difference.
If your idea of ethical or socially responsible investing is more than just a feel-good factor from not investing in, say, tobacco or gambling stocks, then impact investing could be just what you need.
While there is nothing wrong with ethical funds, for those who want greater involvement and targeting in the projects they support, impact investing ticks a greater number of boxes.
As with ethical and SRI funds - Socially Responsible Investment (sometimes referred to as Sustainable and Responsible Investing) – the intention with impact investing is to make money.
The fundamental difference with impact investing is that there is greater security and control on where the money is going. The reporting is a lot more comprehensive and the investment parameters are personalised.
Whereas an ethical fund will filter out particular stocks or sectors – for instance alcohol, fossil fuels, gambling, arms manufacture – social impact investing will tend be specific and more goal driven.
For example, Impactbase an online search tool to connect members of the impact investing community, highlights a UK-based $65m fund that invests in sustainable trade projects. The fund has provided more than $200m in loans to 300 small and growing businesses across Latin America and Asia, with borrower repayment rates surpassing 98%.
Essential funding for fledgling businesses
The fund has invested in a Fair Trade and organic-certified coffee cooperative located in Ecuador. The cooperative’s 300 active members are smallholder farmers. The trade finance loan allowed the cooperative to cover operating costs and invest in new processing equipment.
Additional revenue gained from Fair Trade coffee sales are used to sponsor projects in reforestation, education, and community-based health clinics in the community where smallholder farmers live.
UK-based social impact investment specialist Clearly So has worked with Aduna, an African-inspired health and beauty brand. The agreed goal is to create demand for under-utilised natural products sourced directly from small-scale producers in Africa – starting with the superfoods baobab and moringa.
Baobab powder is a rich source of vitamin C, which contributes to energy release, immune function and healthy, glowing skin. Aduna Moringa is a 100% organic green superfood made from the naturally dried leaf of the Moringa tree, one of the most nutrient-dense plants on the planet.
Potentially, the initiative will provide sustainable revenues to 8-10 million rural households in Sub-Saharan Africa.
Clearly So has helped to raise funds to enable Aduna to scale the business, including more than £250,000 directly from Clearly So.The investment will help Aduna enter international markets as well as support their rollout across the UK with retailers such as Holland and Barrett.
Growth of social impact investing
While impact investing is not new, the number of organisations operating in this space has grown markedly in recent years.
For instance, Good Capital Project, an investment firm that increases the flow of capital to innovative ventures creating market-based solutions to inequality and poverty, launched in July 2017.
Good Capital takes the view that innovation is the engine that drives change and that entrepreneurs are the ones that launch the disruptive innovations that scale, but the impact landscape is inefficient and fragmented, with a conflicting mix of investor demands.
According to Good Capital the new tools and approaches are emerging that need rapid replication to increase the volume of high quality deal flow. With this in mind, Good Capital supports working groups to refine the scope of projects and announce initial deliverables
SunFunder, a member of the GatherWell Network, is a funding platform for high-impact solar projects in off-grid communities around the world. For instance, solar cell phone charges in Rwanda and micro grids to power entire villages in Kenya.
There is no shortage of companies in the private equity space specifically focusing on impact investing. For example, there’s Adobe Capital. It has a broad ethical remit and invests in clean technology, health, affordable housing, fair trade, conservation, water and sanitation, sustainable agriculture and low-income financial services.
Adobe Capital provides tailored, flexible financing solutions and technical assistance to early-growth stage Mexican companies who can demonstrate competitive advantage in their respective sector – be that clean technology or sustainable agriculture.
Impact investing can come in a range of shapes from venture capital, microfinance, private equity, community development finance and clean technology.
There are exchange traded funds (ETFs) such as the SPDR Gender Diversity ETF and the iShares MSCI ACWI Low Carbon Target ETF. And there are web-based microfinance platforms such as MyC4, Kiva and SunFunder and pooled funds such as Clearly So and Root Capital.
ETFs are an easy-to-access option for investors. An ETF is an investment fund traded on a stock exchanges, very much like a share.
Micro-finance platforms provide loans to small but high-growth businesses (often in emerging markets). They tend to be aimed more at the private client and ultra-high-net worth investor.
In recent years, there has been a growth in philanthropic investing. And it is not just charities that are showing interest in this area, increasingly wealthy investors are seeing an opportunity to provide social benefits – and make money.
A 2015 study from investment consultant Cambridge Associates and the Global Impact Investing Network (GIIN) shows that private equity and venture capital funds with so-called impact missions produce roughly the same returns as funds just trying to make as much money as possible.
For some impact investors, making money is less of a consideration. With some impact investing projects, it is more about donation and 0% loans than any tangible returns. It is about using your money to make change for the better.
Returns largely depend on the individual investor’s motive at the outset. Some invest for below-market-rate returns, in line with their strategic objectives. Others target market-competitive and market-beating returns.
Below market rate investing
In contrast to a collective ethical or SRI fund, with impact investing, the focus is on a longer-term, targeted, more illiquid investment. This might be a bond linked to a social housing project. For instance, a short-dated five-year bond offering, for example, 4% interest.
The social housing project is benefiting from a low-cost loan; while the client is guaranteed a 4% return – which given what is being offered on cash rates currently is attractive.
In late 2016 social housing provider Places for People issued a retail bond paying 4.25% annually. The bond, the third issued by Places for People is due to mature in 2023 and with a minimum subscription of £2,000, is not exclusively aimed at the high net worth.