Impact Investing: How to Earn while Lifting Communities Out of Poverty

November 30, 2012
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| Social Fund

What is Impact Investing?

Impact investment aims to address social and environmental challenges while generating financial profit.  Imagine that you are Jane, an aspiring social entrepreneur.  Jane has a viable business idea for an eco-friendly glass manufacturing company that would be good for consumers as well as the environment.  She has access to technology where glass can be manufactured, but with a 50% lower carbon footprint than the leading manufacturers.  This would be an opportunity where impact investors could invest into a business that has the potential to yield a social as well as financial profit.

There are three modes of socially responsible investing.  Sustainable and Responsible Investing (SRI) is a broad-based approach to investing that now encompasses an estimated $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace today.  SRI recognizes that corporate responsibility and societal concerns are valid parts of investment decisions.  Impact investing is of three modes of socially responsible investing.  It involves making investments in firms or non-profits that are expected to earn a positive financial return and generate social benefits.  It is sometimes referred to as blended investing or investing for a double bottom line.  The other two forms are positive/negative stock selection in a portfolio and shareholder activism.  Negative stock selection is a portfolio with an investment strategy to exclude certain types of firms.  An example is the many decision by many investors in the 1980’s to adopt policies to not hold stock in firms with operations in South Africa where apartheid was being practiced.  Positive stock selection may involve an investment policy to buy shares in alternative energy companies, or restaurant chains that practice environmental sustainability.  Shareholder activism may take the form of purchasing stock in firms with policies with which the investor disagrees.  Holding stock in the firm allows the investor to participate in shareholder resolutions and work to change the policies of the firm from within using its governance procedures.

What’s New in Impact Investing?

Apart from investing directly in companies and projects driving social change, many new financial innovations are also offering investors more opportunities to invest for impact.  For instance, green bonds and climate bonds are like normal, tradable bonds, only that they are issued specifically to raise money for environmental projects or climate change mitigation projects.  These bonds also often include a tax exemption on the bond’s financial return.  Another new example of how innovative financing can be used for social benefit is a vaccine bond.  These bonds convert multi-year foreign aid commitments into immediate cash so vaccines can be administered earlier and to more people.  The structure can deploy very large amounts of capital, with some issues exceeding USD 3 billion.  An equally innovative example is the social impact bond, which channels private funding into social programs, with the government paying interest that rises or falls with the measured success of the venture.

The first social impact bond was launched in 2010, aiming to finance the rehabilitation and early intervention programs for ex-convicts. If the program meets its goals of steering the target group away from crime, interest rates on the bonds will rise. As such, the investor bears the upside and downside risk of the effectiveness of the program, while the government saves money on policing, processing, and jailing offenders.

The Responsible Investment and Philanthropy Services (RI-PS) framework offers investors an overview of investment solutions that can meet both the financial and social goals of the investor. The framework maps the investment solutions along a spectrum that ranges from pure donations to risk- adjusted, profit-seeking opportunities. The format allows investors to select solutions along the spectrum that best integrate their social, environmental, and financial goals.

Why Does this Matter to Profugo?

As an organization committed to International Development, Profugo believes that impact investing is a great model with a similar mission as our social capital initiative.  The social capital initiative provides the structure and resources for an individual or community to start a business, participate in a village water project, or even diffuse the financial shock of a traumatic event.  Profugo believes that every person deserves equal access to resources, especially when it comes to meeting basic needs of life.  I feel that the staff and interns at Profugo are very different from one another, but believe in one common goal: making a positive social impact.  There are endless possibilities when communities have access to tools for progressive improvement.  There is a part for each of us to play as anyone can be an impact investor with as little as a $20 investment (e.g. MicroPlace)!  For more information on impact investing, please visit www.philasocialinnovations.org and http://www.haverford.edu/mi3/impact_investing.