When socially responsible investing (SRI) first gained traction in the 1980s, the focus was on the negative — students pressured universities to divest from South African companies and SRI mutual funds screened out tobacco companies and defense contractors. The US SRI market stands today at $3 trillion, according to the Forum for Sustainable and Responsible Investment. As this investment sector grows, so too is it evolving. Today’s socially conscious investors and fund managers want to do more than avoid harm–they want to promote good, though, as you’ll see below, this isn’t always as easy as it should be.
Microfinance (aka “microcredit”) is one of the more innovative forms of impact investing. By some estimates a $70 billion a year industry, microfinance involves making very small loans to very small businesses in developing countries. These loans often go to women operating cottage industries, improving the status of women and directly benefiting the women’s families and villages. Recently, exposure of usurious interest rates imposed by some lenders has led to a cooling of interest in this sector and a call for stricter regulation. For now, the onus is on the investor to see to it that the microfinance institution is scrupulous in its lending practices.
One relative newcomer to the impact investing arena is MorganStanley, which now offers financial advisors a menu of companies committed to bringing about social or environmental change. I can’t tell you any more than that, because MorganStanley would not disclose any of the companies on this platform nor the cost of accessing it. Suffice to say, if you’re a professional investor or have one in your hire, this platform may be worth exploring.
On the more controversial end of the impact investing spectrum are social impact bonds that raise money for local government or non-profits trying to achieve a social goal such as reducing criminal recidivism. Bondholders are repaid only if the social goal is achieved. It’s a creative, albeit unproven, approach for cash-strapped charities and municipalities, though one that critics say treats marginalized individuals like financial pawns.
Impact investing is catching on with institutional investors as well, many of whom took a shellacking during the subprime mortgage meltdown. Take the California Public Employees’ Retirement System (CalPERS): By March 2009, it had lost 38% of its $260 billion portfolio. This past January, it announced it will invest $800 million over the next three years in infrastructure projects in California, including transportation, water and, drumroll please…energy. The announcement coincided with the release of CalPERS’ “Towards Sustainable Investment” report outlining its plans to integrate sustainability across all of its asset classes. Given its focus on sustainability, it seems likely that some or all of its energy portfolio will be in renewables.
CalPERS commitment to responsible investing reflects an economic reality surely not lost on the fund managers: Casino capitalism nearly sunk the Golden State, triggering a $42 billion budget deficit that resulted in thousands of layoffs and furloughs for the very employees whose pensions CalPERS guards. CalPERS is prudent to invest in projects that hasten the state’s economic recovery.
One of the most exciting impact investing vehicles is suffering a bit of an existential crisis in that it doesn’t yet exist, but when it’s born…bam, it’s gonna be big! I’m talking about
Clean Energy Victory Bonds, US Treasury bonds that would finance renewable energy projects, much like the Victory Bonds sold during World War II to pay for the exponential increase in defense spending. The Clean Energy Victory Bond baby is currently in utero in the form of HR 6275. Feel free to sign the pledge to buy these bonds here.
Despite the current dearth of sound impact investing channels for regular folks, the outlook for impact investing is bright: The impact investing activities of giants like CalPERS and MorganStanley serve to mainstream the sector and this will steadily increase consumer demand for financial products that do well by doing good.
Investors large and small increasingly understand that economic prosperity is a shared and multi-pronged endeavor — a rising tide will only lift boats that don’t have gaping holes in their hulls. By repairing the social fabric and restoring and protecting the environment and its precious natural resources, impact investors create a stronger foundation upon which sustainable businesses can thrive.
Follow Erica Etelson @iluvsolar