Impact Investing: Make Money While Doing Good

Image via Wikipedia

How would you like to help a fair trade farmer in Costa Rica, or build affordable housing in Chicago, or provide venture capital to a solar lamp company in India, all while growing your money?  In the emerging field of impact investing, you can make a difference in the world while making money at the same time.

Impact Investing is a cross between philanthropy and investing.  You’re putting your money with businesses and organizations that not only seek to make a profit (or at least be self-sustaining in the case of a non-profit) but also do some social or environmental good.  It’s a way to harness private enterprise and private money in meeting some of the world’s toughest challenges.

With impact investing, your money generates not only financial returns but also social/environmental returns.  For instance, by supporting microenterprise, small farmers, or renewlable energy, you can help alleviate poverty, promote healthy agriculture and food systems, and reduce green house gas emissions.

It sounds great but before jumping in with both feet, you need to consider a few things:

• Risk – these investment products are not insured or guaranteed in any way.  There’s a chance you can lose all your principle or make a lot of money.  It’s your responsibility to assess the risks involved and decide if it’s suitable for you.
• Return – financial returns on these investments vary greatly, from very small (i.e. almost nothing) to hitting the jack pot.  As with all investments, the higher the risk, the higher the potential return is.  But in general, people are not in impact investments to make a huge profit.  It’s the triple bottom line of people, planet, and profits that matters.
• Impact – how do you know your money is really making a difference?  This nascent field is still honing industry wide standards, ratings, and reporting tools to measure social and environmental results.  Regardless, every legitimate investment will provide regular documentation of its financial and social/environmental performance.  You should scrutinize these reports to see if the investment is measuring up to your standards.

With all that in mind, if you want to investigate further, your options depend on how much money you have.

At the level of the average middle class investor, the way to participate in impact investing is primarily through lending.  You lend money to an organization that provides funding for various purposes such as community development (affordable housing, small business start up, etc.) and international development (often microenterprise).  In return, you earn interest comparable to CDs.  From what I’ve seen recently, rates range from 0%-3%, depending on the terms of the loan.  But remember that unlike CDs, these loans are not insured but the risk of default is fairly low.

Here are a few resources if you’re interested in investigating further: Microplace allows you to invest as little as $25 to help fight poverty and promote fair trade and environmental initiatives in developing countries.  To make investments in the U.S., Slow Money (yes it’s related to the Slow Food movement) has a good list of possible investments for various income ranges.

If you’re a very wealthy and sophisticated investor, there are more options available to you.  As an accredited investor, you can invest directly in private equity, debt, and real estate.  Their social focus range widely, from land conservation to charter schools to clean technology.  Here the financial risk and return can be high.  It’s not uncommon to see required minimum investments of $100,000 that need to stay invested for 5+ years.

If you qualify as an accredited investor, get started by looking into Investor’s Circle, a membership organization of individuals and institutions focused on funding triple bottom line businesses.  Impact Assets has a list of 50 funds that focus on impact investing – another good place to start researching.

Now impact investing is not a replacement for charitable giving.  Philanthropy is important and necessary.  It’s probably the most appropriate way to combat problems that don’t lend themselves to market solutions such as domestic violence and disaster relief.  But philanthropy alone is not enough.

In 2010, total charitable giving in the U.S. was estimated to be $290.89 billion – this includes individual, foundation, and corporate giving.  In the same year, investable assets of U.S. households alone was $30.2 trillion.  This doesn’t include the funds of institutional investors such as endownments, pensions, and foundations.  If individual investors in the U.S. put just 1% of their money into impact investments, that’s an additional $300.2 billion that can be channeled towards positive change in the world.

So consider if impact investments have a place in your investment portfolio, both for your benefit and for the greater good.