Impact investing aims to make a difference and, sometimes, a profit.
This article first appeared in the April/May 2011 issue of Morningstar Advisor magazine. Get your free subscription today!
In the wake of recent natural disasters around the globe, investing with a social or environ- mental objective, in addition to a financial one, has been gaining traction as investors search for ways to apply market solutions to local problems around the globe.
Often called "impact investing," this strategy has the potential in the next five to 10 years to grow into a market of approximately $500 billion, or about 1% of total managed assets, according to a 2009 report by the Monitor Institute, a consulting firm. Microfinance, which
involves making small loans to entrepreneurs in developing markets, is the most mature of the impact-investment options, in part because of the proliferation of microfinance institutions. But the overall impact market-which includes investment options built around improving the environment, health, education, and community development-is still in its early stages.
"Impact investing is similar to the early hedge fund days when there were no rankings or comparisons of the offerings. That context doesn't exist yet," says Ron Cordes, co-chairman of Genworth Financial Management and a Calvert Foundation board member.
Simply finding the appropriate impact investment is a time-consuming task. At last count, nearly 1,900 microfinance institutions had reported data to the Microfinance Information Exchange, which provides information and analysis on microfinance providers. Plus, there is no centralized place to compare ROI and social impact across similar investment types. Despite these barriers, impact investing has appeal. Investors can feel like they are making a difference in the world, while gaining a new source of portfolio diversification and, at times, consistent returns.
Leaders of the Pack
Numerous private equity and debt funds, as well as funds of funds that focus on social enterprise projects, are available, but many are difficult to find, research, and buy. Attending industry events such as the Take Action! Impact Investing Conference Series in San Francisco and the Chicago Microfinance Conference can help investors gather information straight from providers.
The more-mainstream players target individual investors and make their options easily accessible. These firms include MicroPlace, Kiva, Calvert Community Investment Note, ImpactAssets Giving Fund, and the Certificate of Deposit Account Registry Service.