Impacting the World with Your Wallet

Imagine this: thousands of children sleeping in dirty, disease-infected streets because they lack the basic security that most people call a home… a tough image but one that in many places is a terrible reality. With $100,000 you could house possibly hundreds of these children and give them the chance they are entitled to have.

For those with an extra $100,000, donating to these impoverished youth might be an appealing action, but how about those who are not so wealthy themselves? They are less likely to give and more likely to give much smaller amounts. Now imagine a different scenario: make a $100,000 donation to the same children and receive $114,000 in return.  Now, this is an offer that almost no person would turn down, and with good reason.  Profit combined with positive social impact is simply irresistible, and recently it has become possible through the world of impact investment.

In a recent report, J.P. Morgan defines impact investments as “investments intended to create positive impact beyond financial return.”  These investments provide capital to businesses that are intended to create some sort of positive social or environmental impact on our world while still providing investors with a return on their capital.  Different investments offer different returns, ranging from a simple return of initial investment to high market-beating return rates.  Investors can choose their investment based on the type of positive change they would like to support as well as what magnitude of returns they would like to receive.  Both the positive impact and the opportunity for high returns make impact investments an appealing asset class.

The social benefits of impact investing set it apart from most other classes of assets.  Impact investments usually finance programs that serve “bottom of the pyramid” consumers who are normally ignored by regular business models.  Ignored consumers still have needs, and impact investments exist to serve these needs through a number of different objectives.  The social objectives range from helping to provide access to financial services to improving agricultural productivity.  These objectives are real, tangible efforts to help people improve their living conditions.

Impact investing not only serves worthwhile objectives but also does so in a way that philanthropic organizations and governments cannot.  These investments remain business deals framed by a competitive market.  In order to attract investors, businesses must compete to prove that they are efficient and viable companies, and this internal competition leads to cheaper, better, and more widely available services for bottom of the pyramid customers. Thus, social impact is reached effectively.

The possibility of financial return also sets impact investments apart from philanthropy.  The J.P Morgan report on impact investments predicts profits from these investments to reach between $183-667 billion in the next ten years, with the average expected return on investments in emerging markets ranging from 8-15%.  Profitability in this new asset class is a huge draw for many investors who want to promote social change but also wish to seek profit.  People can help create change without experiencing significant losses. Of course not all impact investments prove to be so highly successful.  Some investments may only realize a return of initial investment or possibly a loss, but in such scenarios hopefully the ultimate goal of impact investments, positive social impact, can console investors.

In addition to these clear benefits of impact investments, there has also never been a better time to invest in this emerging asset class.  In the recent past, impact investments proved to be tricky endeavors because it was difficult to find worthwhile investments or to measure just how much positive impact they generated.  Without the help of institutions to categorize and rate different investments, investors were more or less on their own.  In 2007, however, The Global Impact Investing Network (GIIN) was conceived with the prime purpose of building a more coherent and user-friendly industry of impact investing. The GIIN has since come very far to help the world of impact investing, most recently releasing its first full data report in a “universal language” for all impact investors to understand and utilize.

Impact investing is quickly becoming a popular and successful asset class as people begin to realize its many positive aspects. The concept of profitable investments that promote positive impact has strong appeal and now that the GIIN is marching forward to solve the problems that impact investors face, this asset class will only rise in popularity and success. Why not come grab a slice of the pie, providing others with some as you do so?