Earlier this year, C-suites the world over were surprised when Larry Fink, CEO of the world’s largest asset manager BlackRock Inc., issued a letter challenging companies to have a demonstrable positive impact on the world beyond profit for shareholders – or risk losing BlackRock’s funding. Mr. Fink wasn’t referring to CSR – the charitable giving a company has to do to be seen as a good corporate citizen – but to real social impact.
Mr. Fink’s letter, combined with the growing global divestment movement, is the latest sign of a shift away from investing with profit as the sole motivator. Investors are increasingly asking questions about what their money is funding – driving investment professionals to respond with better, more transparent options. Returns still matter; impact investors simply want to generate them without compromising their values. The good news is the data indicate they can.
The global impact investing market is expected to reach $307-billion by 2020. A study recently published by MaRS and SVX found that 90 per cent of the high-net-worth individuals surveyed were interested in becoming impact investors, and 47 per cent intended to increase their allocation of assets toward impact investing in the coming year. A little more than half (51 per cent) of the same respondents wanted to invest through financial institutions or advisers. Working with an adviser you trust can help you invest with confidence, but whether you go the adviser route or go it alone, you’ll want to first understand what your impact priorities are, and have some basic knowledge about the different types of impact investments and their respective risk profiles.
When considering the impact you want your investments to make and how it's measured, the United Nations Sustainable Development Goals (UN SDGs) are generating excitement among investors with their framework for tackling the most pressing global issues such as affordable clean energy, responsible consumption and production, and eliminating hunger. The 17 SDGs, primarily geared toward governments, are designed to "mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind." Almost all are investable.
If your risk profile is low, consider liquid impact investments. These include green bonds or the public equity of social enterprises. Their risk and return profile is similar to the market, so they can be traded easily and at a fair price. Illiquid impact investments, such as private equities or private debt, tend to have greater return potential, but are difficult to trade and have a higher risk profile. Venture impact investments have the greatest social impact potential. They're not unlike venture capital, in that they provide financing to startups with growth potential, but apply exclusively to small firms with an impact focus. If you're comfortable with higher risk, venture impact investments come with liquidity risks but can result in greater returns.
One of the most common mistakes new impact investors make is not diversifying, which is even more important in the impact sector as private investments often come with a higher risk profile. Another is not ensuring your impact and financial goals are aligned with those of the companies you invest in – if your goal is to have a tangible social impact and your investments are striving for a strong market return at the expense of a more philanthropic mission, you may be disappointed. A good way to make sure you set yourself up for both strong financial and emotional returns is to know which causes or social issues you want to move the needle on, and have a shortlist of companies working in that space, so you don't miss any capital calls.
Here are a few questions that will help you decide whether a specific impact investment is aligned with your goals:
● How is impact measured?
It’s one thing to have a strong mission statement, quite another to know how a company is holding itself accountable to that mission.
● What is the liquidity and time-frame?
When can you expect to see returns and how easily will you be able to access them? This is of particular importance with private investments.
● What are the expected returns and are their additional risks?
Although there are always variables at play, it’s completely reasonable to ask about what those variables are and what you stand to make.
● How does this fit into my overall portfolio and financial goals?
You don’t have to sacrifice return potential to become an impact investor. An analysis of 53 private impact funds by the Wharton Social Impact Initiative found that the average gross internal rate of return for portfolio companies between 2000 and 2014 was 12.94 per cent, similar to market returns for small-cap equities over the same period. Once you’ve decided to give impact investing a shot, decide whether you measure returns financially, socially, or a combination of the two, start your shortlist of companies to watch and put your money to work for good.