Impact Investing: Making Social Good Pay Well

Adam Jiwan - Value Investing

In 2007, the Rockefeller Center convened philanthropists and investors at a convention center in the small Italian town of Bellagio. Responsible investing had already been a concept – shielding money from businesses believed to cause harm – but it was at this gathering that the more active term of “impact investing” was coined. Within a year, the Foundation opened a fund with $38 million behind it. So what is impact investing, anyhow?

Impact Investing Goes Beyond The Do-No-Harm Approach of Responsible Investing

Instead, it actively seeks to make a positive impact on the world while also making a profit for the investor. The Global Impact Investing Network (GIIN) defines impact investments as “investments intended to create positive impact beyond financial returns.” There is a growing ecosystem built around impact investing, with GIIN’s upcoming investor forum in Paris next month.

Social Impact: Open For Business

According to a Rockefeller Center report, there is a need for investment-ready activity to absorb capital, for stronger rating systems and standards, and for investment infrastructure to bridge impact investments with ventures in emerging economies. Judith Rodin, the Center’s president, expects tremendous capital to be released as pension fund policies are loosened to enable more investments in this area.

With unabsorbed institutional capital, a potential river of investment from pension funds and crowd investing platforms to engage a younger generation, this may be the optimal time to capitalize on impact investing.

Rethink What You Know About Bonds

The bond market – at least for the average investor – is intended to be the least innovative part of their portfolio.

Social Impact Bonds (SIBs) Are Another Story Altogether

These are pay-for-performance contracts in which an outside investor provides capital and the recipient must pay it back based on a social outcome.

For one concrete example, let’s look to Rochester and New York City where impact investors agreed to pay more than $13 million to train and employ 2,000 former convicts. The contract defined social targets, such as reducing recidivism and increasing convict employment, which were valued at a savings to the government of $7.8 million. Based on reports from an independent assessor, investors will be paid by the U.S. Department of Labor and the State of New York. This has created an entirely new paradigm for investment, with a similar model used for special needs education in Utah.

What The Future Holds

The growth of impact investing will be driven by visionary investors, the Global Impact Investing Network and institutions like the Rockefeller Center. Yet it will also be driven by entrepreneurs who innovate on how to connect capital with deal flow, develop global impact standards and create new investment vehicles (like social impact bonds).

When a sector is developing among big players yet still feels like a wild frontier, it grabs my attention. Supporting this new marketplace will be a growing demand for ordinary investors to take part as well. While this may involve policy changes that democratize impacting investing beyond high net worth individuals, this may also indicate a need for intermediary businesses that can scale up profitable social impact while attracting venture capital.

Adam Jiwan, founding shareholder of Climb Credit (www.climbcredit.com)

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