Investing in ethical funds is all very well but what if you want to be more involved? Impact investing allows greater control on how your money can generate social or environmental benefits.
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 individual investors are seeing an opportunity to provide social benefits – and make money.
According to the Global Impact Investing Network (GIIN), impact investments are cash injections into companies and organisations with the intention to generate social and environmental impact alongside a financial return. So as with ethical and SRI funds the intention is to make money.
The fundamental difference with impact investing is that there is greater control on where the money is going. The reporting is a lot more comprehensive and the investment parameters are more clearly targeted.
The personal touch
In a collective ethical or SRI fund, there is no ‘personalised’ element. Certain sectors are screened out (for instance tobacco, gambling, alcohol) but otherwise the fund manager controls where money is invested.
With a collective ethical fund, you are effectively buying an off-the-shelf product that is, to some extent, aligned to your principles.
The fund manager makes the asset allocation decisions and their incentive is to show a decent return or the fund may soon experience outflows. It can be difficult to find suitable ethical funds tailored to investors' requirements, as many use similar negative and positive criteria to filter stocks.
With impact investing, the focus is on a longer-term, targeted, more illiquid investment. This might be a bond linked to a specific social housing project. For instance, a short-dated five-year bond offering , say, 4% interest.
The social housing project is benefiting from a low-cost loan; while the investor 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 set at a relatively modest £2,000, is by no means exclusively aimed at the high net worth.
How do impact investments perform?
Returns largely depend on the individual investors 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.
GIIN reports that respondents to the network show portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging and developed markets.
Of course, investor expectations at the outset may be more modest compared to investors investing in mainstream, non-restricted, high-growth orientated funds.
Impact in action
The easiest way to get involved in impact investing is to do so via a micro-finance specialist. For instance, Root Capital is an agricultural impact investor that provides finance to small but growing agricultural businesses in Africa and Latin America.
One of its case studies is The Savannah Fruits Company. The Ghanaian company produces shea butter for export and improves livelihoods for rural women by providing a stable, well-paying market outlet for raw shea nuts.
Root Capital’s trade finance loans remove cash flow barriers and allow the company to source the butter in larger volumes, enabling the business to grow, incorporate more women suppliers, and pay their suppliers a premium over the market price.
The following year, with access to trade finance from Root Capital, Savannah saw sales increase six-fold.
iDT Labs, an IT and software development business in Sierra Leone, was provided essential finance from impact investment management company Truestone.
Back in 2014 when the Ebola crisis was at its height, major issues began to emerge concerning the inability to make hazard payments to 30,000 frontline medical staff.
With Sierra Leone possibly only days away from a complete breakdown of its medical services which would have left Ebola to spread even more rapidly, iDT developed a solution to pay the emergency workers in the country. It was a hugely effective innovation by iDT and the business has developed strongly since.
Benefits to society
Closer to home we have seen pilot schemes like the Social Impact Bond at HMP Peterborough. Funding is obtained from private investors to pay for interventions to improve social outcomes - specifically to reduce reoffending among male prisoners.
If these interventions 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 which do positive good in your community is often more appealing to our clients than allocating money to a broadly invested fund.”
Clearly with products like 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.
The general rule of thumb is that the more impact individuals seek; the less returns are made.
But as Bamford points out, returns are not necessarily a crucial factor for higher-net-worth individuals who are only allocating a very small part of overall wealth to a social impact investment.