Impact Investing: A Fast-Growing Asset Class
Impact Investing is creating significant buzz. It falls somewhere between charitable giving and socially responsible investing. Here are some starting distinctions: Charitable giving can be characterized as investing in social benefits, expecting no direct return; socially responsible investing often expects financial returns while avoiding social or environmental harm; and impact investing is the deploying of capital to produce both social benefits and financial returns. Unlike charitable donations, impact investments usually go to for-profit companies with businesses that are socially or environmentally driven. Note that although sometimes they're lumped together, impact investing is considered distinct from microlending.
Cocoa Pod. Image: Root Capital.
This asset class is a rapidly becoming a significant part of the investment landscape. Research jointly conducted by J.P. Morgan and the Global Impact Investing Network showed that investor groups -- including fund managers, development finance institutions, foundations, and diversified financial institutions -- planned to commit $9 billion to impact investing in 2013.
A key issue with impact investing is understanding which businesses are prepared to use the investment well, and deliver both types of return. As Beth Sirull writes in Philanthropy News Digest, "Where are the investment opportunities to put capital to work for social impact and financial returns, whether at market or below-market rates?"
As a potential investor, you might see that some companies are underdeveloped as organizations, because of a lack of resources in the past. Or they may not be ready to expand their services with a sudden investment infusion. And some companies may need a longer period of time before they can show the promised return on investment. Where can you go to find good places to invest?
There are a number of big players on the scene to help understand where your impact investing can be most successful. Among these are investment firms such as JPMorgan Chase, Goldman Sachs, and Morgan Stanley, which have dedicated staff to advise on impact investing. Check out their websites to gain some intelligence about investment vehicles and strategies.
There are companies that have a specific focus on impact investment, including HIP Investor, the Omidyar Network, Impact Engine, and LGT Venture Philanthropy. These companies specialize in impact investing, so have developed investment- focused approaches.
Some prominent charitable foundations, including Rockefeller, MacArthur, Ford, and Surdna, are engaged in funding education and research about impact investing. Their websites have lots of reports and useful information, particularly on the social outcomes of the investments.
Nonprofits are also players in this part of the sector. Check out the Global Impact Investing Network, the Calvert Foundation, Root Capital, RSF Social Finance, and the Nonprofit Finance Fund. As they reinvest their resources to grow this sector, these nonprofits are especially useful for information about strategies for social or environmental change.
More and more, there are overlaps between charitable giving, impact investing, socially responsible investing, and traditional investing. Those gray areas are rich with potential and opportunity. However, as you're looking at a financial as well as a social or environmental return, it helps to have some sense of your goals at the outset. Because Motley Fool community members are continuous learners who do the research, you might be the ideal participants for this asset class. Step right in and share your experiences in the comments section below, so we can all keep learning about this exciting and growing investment area.
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