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Sep 11, 2014

Investing to Make a Difference Is Gaining Ground

The New York Times  and Bloomberg News recently ran articles  that reported on the growing interest by individuals to put a portion of their investment portfolio into impact investments.  As many recall, impact investing describes investments that have a major social objective as well as a financial objective.

Reports Bloomberg, “Impact investors vary in their expectations for profit. Some mandate “impact first,” meaning they will accept lower-than-market-rate returns in favor of a positive social outcome. Others, like Case, usually expect competitive returns with broad market indexes. About 35 percent of impact-investment funds target returns above 20 percent, according to a 2013 report by the World Economic Forum….

“’A new generation of investors is emerging that wants more than just a financial return,’ Jean Case, 54, said in an interview…. With private wealth at a record, rich investors such as the Cases, members of the Pritzker family and Pierre Omidyar are increasingly looking for ways to put their money to work and do good. It’s an investing niche previously limited to a sprinkling of mutual funds that avoided stocks such as tobacco and gun manufacturers.”

The pro-active approach called Impact Investing differs from the more familiar approach called “socially responsible investing” which identifies which companies NOT to invest in because of the perceived detrimental effects of the companies’ business activities.

The Times article describes wealthy investor David Keller’s involvement: “10 percent of his wealth is in so-called impact investments — those made in companies, organizations and funds with the intention of generating a measurable, beneficial social and environmental impact.  While these investors are also seeking a financial return, the kinds of private investments Mr. Keller has made tend to be risky in the same way other private equity investments are and less liquid than investments in public companies.”

The Times notes that impact investing is increasingly being embraced by non-millionaire investors. Here is their advice:  “Such enthusiasm about an investment approach that has no accepted benchmark and, for the most part, still requires large minimums and long holding periods might seem frothy. And few people talk of impact investments’ ability to outperform investments made with an eye solely on a company’s profitability. (That’s because they generally don’t.)

“The first rule of thumb is to go slowly.  The second rule is to find a guide, often in the form of an adviser similarly interested in impact investing.”

Impact investing can have the greatest “impact” if it is concentrated on a community.  While much investing is focused globally because of the natural appeal of global-scale endeavors, I suggest that focusing on a community may actually have higher impact and less risk.  Why?  Because smaller scale allows learning through pilot-sized start-ups, as opposed to throwing tens of millions of dollars on a new concept.  A good local impact investment will demonstrate its ability to provide both a social and financial return — and most businesses  that can achieve that can be replicated elsewhere to whatever scale matches the need.

In Central Ohio, we are focusing on developing impact investments in our community.  Good investments need good support from the concept stage through to fully vetted business plans and initial operations.  And impact investors, as noted in the Times article, are advised to go slowly and to work with others who are also interested in impact investing.  To accomplish this we have formed the Center for Social Enterprise Development to focus on developing good investments and we are forming the CINCO Fund to help individuals and corporate foundations to get involved in impact investing in a manner that limits their exposure to any single investment while pooling expertise to vet potential investments and oversee implementation.  If you want to know more about our ideas, contact me at info@cincohio.com.

Get with the trend….to make our communities stronger through market-based social impact.