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.