A ”sustainable investment” program is often thought of as an investment strategy comprised of “exemplary corporate citizens”. Indeed, this is usually the case, but that’s just part of the story. To create a full sustainable portfolio, investors are challenged to apply these principles to other asset types such as bonds, commodities, and specialty equity investments – bringing an overarching theme of responsible and profitable investing to each of them.
Within the “specialty” category, one finds what are now called “Impact Investments” — companies organized to meet a societal need and turn a profit while doing so. It is a remarkable business model that was described in a recent JPMorgan & Co. research report as the next big asset class. They referred to impact investing as ”A One Trillion Dollar Investment Opportunity”.
(That will get your attention.)
Last week, I had the great pleasure of meeting with three groups of entrepreneurs doing some of this very important work. It became clear to me that the folks at JPMorgan are on to something. Bringing corporate experience and a profit motive to what was previously the work of non-profits is a powerful combination. The real power is that a single investment can create years of impact, thanks to the recycling of profit back into the business.
Could this be a “good deeds perpetual motion machine”? Quite possibly.
These investments are, of course, not without risk. Portfolio investors can participate at different risk levels, with some investments resembling fixed income (less risky) and others having private equity-like characteristics (illiquid and far riskier). Most often, these are accessed through pooled vehicles that diversify the risk of any single investment. In all cases, investors are likely to connect with the companies in which they invest, creating a deeper, richer investment experience.
Organizations such as Kiva (kiva.org) have become quite popular with investors by doing just what I described above – connecting people with one another through small loans (often just $25). The power of knowing that your $25 will help a Wilson, a Kenyan farmer purchase livestock or Grace, a Filipino clothing maker buy fabric, has been a powerful draw for investors as an alternative form of philanthropy. Kiva’s 98.9% repayment rate keeps them coming back.
While Kiva is among the most well-known entities in an area called “microlending”, other organizations are taking this a step further, offering the potential of profits or interest income to the investor while dealing in larger investable sums. Groups such as Gray Ghost Ventures, RSF Social Finance and Village Capital are each trying a different angle on empowering and unleashing entrepreneurs to profitably address some of the world’s most vexing problems. Hundreds, if not thousands, like them are operating with little fanfare but with great impact.
Sustainable investors are more likely than most to embrace knowing what they own and understanding how each investment is providing financial and societal benefits. Impact investments are a natural extension of that philosophy. And while rapidly expanding and trendy, they are just one highly visible “grass roots” part of a sustainable and responsible investment portfolio.