Pope Francis would be proud; impact investing is the idea that profit seeking investment can be used to create social or environmental good- and it is growing in popularity.
In the past there has been movements for divestment, most noticeably from South Africa which ultimately contributed to the dismantling of apartheid. Now some investors are going a step further past divestment and are actively trying to seek out investments that can have societal and environmental benefits at a scale that traditional philanthropic institutions can’t achieve.
Driven by greater social and environmental consciousness and a wider variety of socially responsible investment options impact investing is rapidly growing. The Monitor Institute estimates that impact investing has the potential to reach 1% of all managed assets, an estimated 500 billion. Impact investing can take many forms, through microfinance groups, targeted allocation in public companies by asset managers and crowdfunding platforms and Mission Related Investing (MRI) by foundations.
There is a proverb that says, “give a man a fish and you feed him for a day–teach a man to fish and you feed him for a lifetime.” This maxim is being applied as charities and organizations like Microplace that give loans to the impoverished instead of giving them donations.
The advantage to this strategy is that it allows these people to engage in productive economic activity and will give them the tools to provide for themselves in the future when aid runs out. An elderly Jordanian woman Um Khaled took out a loan of $425 with Microplace in order to expand her agricultural business by purchasing a number of young goats. This has allowed her to increase her goat herd population and better provide for her seven children.
Microfinance loans often bridge the gap between charity and investing. Most investors are not investing for the modest returns of 1-2% a year, but instead it allows them to help the poor, who have no other means of obtaining financing, while conserving their capital.
Socially Responsible Asset Management
Lacking investment experience, most Americans and large organizations with idle cash use asset managers to direct their investments. At the same time that these individuals and organizations want to receive the best return, they are also considerate of the real world impacts of their investments.
Asset managers like New Island Capital and Green Alpha Advisors offer investors the assurance that their money will be used to support socially responsible and environmentally friendly organizations without sacrificing returns. When investing in public equities (stocks), asset managers choose companies like Tesla or SolarCity. Although these companies are for-profit corporations, they revolutionize the way we use and produce energy resulting in less pollutants and greenhouse gases.
Regulation has been the biggest hindrance to crowdfunding, but governments are loosening regulation to stimulate economic growth and to respond to popular demand. This may make crowdfunding may be the next big thing in impact investing. Most crowdfunding platforms, like Windcentrale, Abundance Generation and Mosaic provide the opportunity to fund renewable energy generation sources, while simultaneously offering competitive returns.
Paul Simon who manages the family office for Lord Stanley Fink met with the Mosaic team and was interested in Mosaic’s investment due to his focus on impact investing, but also for the reason that it offers an attractive investment in the space of energy security. Simon claims, “We are impact investors and do care about the environment, but we are at the commercial end of the spectrum, so we would not compromise on returns.”
Mission Related Investing
Mission Related Investments (MRIs) are impact investments conducted by foundations of other non-profit organizations. These organizations seek to maximize the impact they can have, not just through donating to causes and organizations, but instead using their often multi-billion dollar endowments to invest in projects that result in social or environmental good.
One type of MRI that foundations can take advantage of are Program Related Investments or PRIs. PRIs allow investments in mission related endeavours to count towards a foundations 5% distribution that allow for favorable tax benefits. This can be a powerful tool when foundations are attempting to either grow their endowment after problems such as the Great Recession or to maximize their impact.
In a globalized world it is important that all of us take into account the effects of our actions. Most of us don’t realize the plastic water bottle we drink out of might end up in the great Pacific garbage patch, a trash-filled zone the size of Texas in the Pacific Ocean. Consequently it is even more important for investors, who as a group control trillions of dollars and have the largest impact on our world, to understand the difference between funding a coal plant versus a solar plant is thousands of pounds of pollutants contributing to respiratory illness, acid rain and global warming. We should all be conscious how we can act and invest to ensure a brighter future.
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Gabe McHugh recently joined Mosaic’s Institutional Investor Marketing team. He has previous experience with Morgan Stanley in portfolio construction and the California Lighting Technology Center (CLTC) in lighting efficiency. He enjoys travelling, the beach and the ideas of sustainability and decentralization.
Disclaimer: Any opinions expressed herein by persons not affiliated with Mosaic reflect the judgment of the author and not necessarily that of Mosaic. Nothing herein shall constitute or be construed as an offering of securities, or as investment advice or recommendations by Mosaic. Mosaic’s investments are limited to investors who meet applicable suitability standards based on income, net assets and state of residence. Please click here to learn more.