David BurrowsImpact 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.
Arms fair in Excel, London. Most ethical funds will blacklist arms manufacturers from their portfoliosFor 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.
Loans to fair trade coffee producers have helped investment in modern 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.
Examples of the Aduna rangeBaobab 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.
Investment in the business has enable Aduna to gain contracts with retailers such as Holland & 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.
Simple solar panels powering a fishing village in KenyaThere 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.
Financial support is essential for early-growth companies associated with sustainable agriculture
Investment options
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
Social housing projects can benefit from low-cost loansIn 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.
Tax breaks
Whatever the returns offered, it is important to remember there are tax incentives for impact investors.
Individuals who make an eligible investment can deduct 30% of the cost of their investment from their income tax liability, either for the tax year in which the investment is made or the previous tax year.
The investment must be held for a minimum period of 3 years for the relief to be retained.
Islamic finance
Sharia law prohibits speculation and any investment in gambling, arms, or alcohol. The central tenets of Sharia or Islamic finance would, on the face of things, be highly suited to the social impact arena. For example, Sharia law prohibits speculation and any investment in gambling, arms, or alcohol.
Investment in companies that exploit employees are also a forbidden. Businesses are encouraged to pay to charity and obliged to pay yearly zakat (obligatory charity). They are also encouraged to price fairly and avoid monopoly or price wars, which fits well with the fair-trade ethos.
On a box-ticking level, impact investing should be highly appealing to Islamic investors, though it is difficult to gauge whether this has or will be translated into large and quantifiable investment activity.
Many impact investors are anonymous and there are also many Islamic Charity projects that may attract large tranches of money.
Big Data – the game changer?
Perhaps for impact investing to move from a relatively niche to a mainstream market, whether for Islamic or non-Islamic investors, more transparent and meaningful data must be readily available.
Big data could see impact investing grow significantlyAs Jean Case explains in her research for the Stanford Social Innovation Review, says: “We truly believe increased sharing of data and better mapping of the ecosystem will result in more robust activity from investors and entrepreneurs. Simply put, using data to inspire and educate both new and experienced actors holds the promise of larger capital flows toward impact.”
Ultimately, big data will identify field-wide patterns to show current and prospective investors where the activity has been by investor, geography, investment round, impact objective, and so on.
Case also points to high profile backers of impact investing, notably the Ford Foundation’s recent commitment of $1bn over 10 years, which she sees as the kind of “big bite” the movement needs to scale.
The foundation will gradually carve out funds from its existing investment portfolio and deploy them over time into funds seeking to earn not only attractive financial returns but concrete social returns as well.
The foundations two initial areas of focus were affordable housing in the US and access to financial services in emerging markets.
High profile impact investors
Awareness of how targeted investment can crucially work to the benefit of wider communities has also been helped by high profile philanthropists such as Bill and Melinda Gates. The Bill & Melissa Gates Foundation has particularly focused on health and education improvements – a ‘survive and thrive’ vision.
The Bill & Melissa Gates foundation has long-standing associations with health and education programes in the US and the developing worldFor instance, the foundation’s Maternal, Newborn & Child Health programme works to expand coverage of high-impact interventions to ensure that women and newborns survive and stay healthy during childbirth and beyond.
Investment aims to improve the quality of healthcare services and practices and the interactions between health workers and families. The foundation also actively advocates for national and global policies that benefit maternal, newborn, and child survival.
The foundation has also committed over $2bn to agricultural development efforts, primarily in Sub-Saharan Africa and South Asia. The approach is based on basic principles: listening to farmers and addressing their specific needs; increasing farm productivity and fostering sustainable agricultural practices.
The corporate world has also helped to stress how direct impact can make a tangible difference to countries and communities. Consider the partnership of GSK and Save The Children to save one million children’s lives over five years. A decade ago, a partnership of this kind between a charity and a pharma giant, would have been unthinkable.
But in a more enlightened era, charities who have expertise on the ground in the developing world and giant pharma companies with their proficiency in R&D, immunisation, and supply chain logistics, are able to achieve more working together than apart.
Now companies are far more aware of corporate responsibility and how impact investing is no longer just something that you pay lip service to. Social media has meant it much easier for companies to be taken to task if their grand words are not translated into action.
GSK and Save the Children are not the only high-profile corporate/charity partnerships - P&G and
P&G and UNICEF with their ‘1 Pack = 1 Vaccine’ campaign and M&S and Oxfam, with their clothes exchange, are just two more examples of charities and corporates working together to make an impact.
Benefits to society
Impact investing is not just about global initiatives. Closer to home we have seen pilot schemes such as the Social Impact Bond at HMP Peterborough. Funding is obtained from private investors to pay for interventions to improve social outcomes for prisoners.
The first report into the pilot scheme showed that the necessary investment in the Peterborough SIB was found and there appeared to be a strong appetite for “mission-aligned” investment.
The first report into the pilot scheme showed that the necessary investment in the Peterborough SIB was found and there appeared to be a strong appetite for “mission-aligned” investment.
It also stated that funding of the service was perceived as flexible. Staff reported that it was quicker and easier than in other interventions to access resources to cover, for example, temporary B&B accommodation, phone credit and other consumables. This flexibility could prevent crisis situations (such as homelessness), and incentivise engagement.”
The report also states that the Peterborough pilot led to wider benefits such as improved relationships between local agencies, commissioned providers and HMP Peterborough.
For the time being at least, the government appears to be committed to the SIB concept.
The then Justice Secretary, Ken Clarke, visiting HMP Peterborough at the launch of the Social Impact Bond in 2010If interventions like HMP Peterborough are effective, this should result in savings to government and wider benefits to society. The government agrees to pay a proportion of these savings back to the investors. If outcomes do not improve, investors do not receive a return on their investment.
Martin Bamford, chartered financial planner at Informed Choice comments: “Investing directly in local projects that do positive good in your community is often more appealing to our clients than allocating money to a broadly invested fund.”
With products such as the HMP Peterborough bond, there is a real risk of no return. However, the philanthropic element may be the key driver for the investor. The ‘cause’, in some cases, takes precedent over financial gain.
