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Impact investing: the search for an ethical return

Prodigy Finance - February 07, 2013

Impact Investing

Coinciding with a public indictment of the "big banks" has been a parallel movement towards impact investing, the practice of investing in alternative assets with socially beneficial returns as well as financial ones.

Impact investing has been hailed as a new, important force that can address critical societal challenges in a financially sustainable way.

We are proud to count ourselves as part of this new trend, and we have spent the last few months learning more about the impact investment community. We attended the last Social Capital Markets conference (SOCAP12); have followed the great work of GIIN, GIIRS, Impact Assets, and others; dug into wonky reads about the Social Stock Exchange, BDCs and social impact bonds; and recently been invited to the prestigious Skoll World Forum on Social Entrepreneurship. In fact, Economia magazine recently highlighted us in an article about triple bottom lines.

We've heard industry leaders speak both optimistically and pessimistically about the future of the field, and we'd like to share some of what we've learned. Forcasted growth of impact investments

According to a report by the Monitor Institute:

"it's certainly plausible that in the next five to ten years, investing for impact could grow to represent 1% of global assets under management in 2008. That would create a market of about $500 billion."
In particular, some experts say that now is the time for impact investing to grow because: 
  1. Interest rates are low and investors are looking for other kinds of investments;
  2. Wealth is being passed on to the children of baby boomers, and this new generation is generally more mindful about social impact (particularly "green" sustainability and education); and
  3. Even for those kinds of investors who don't care about social impact, the large scale of the developing world provides promise for new kinds of ways to make money.
Indeed, our targeted returns of c.5% p.a. are comparatively high, our investors tend to be young and socially-minded, and we get quite a bit of press for being--for the most part--an "emerging markets" investment. In fact, our CEO Cameron often talks about how difficult it used to be to convince investors that talented developing world students (who make up over 75% of our borrower portfolio) are a great investment.

"Even just a few years ago, people used to be very skeptical," Cameron says. "And now, they're thrilled to be diversifying their portfolio and investing in emerging markets in a really secure way."

Growing pains for a young asset class

On the flip side, other impact investing experts caution about the dangers of such a young asset class. Their three main points seem to be:

  • Investors are still very cautious, particularly because they've been so recently burned. So outside of foundations, private investors are still finance-first, not impact-first.
  • Likewise, while there is an incredible amount of interest in the field, there is a fear that sources will dry up as global economies improve and there are other, higher-return investments.
  • There needs to be stronger coordination to mature the network-- to encourage collaboration, coordination, and establishment of clear, universal standards.
Not a silver bullet

Impact investing is not going to be the singular solution, and it cannot supplant philanthropy, particularly when dealing with the ultra-poor. (See the three-part article on "The Trouble with Impact Investing" in the Stanford Social Innovation Review.)

But it is a powerful tool for secure "assets" like the top-caliber students we fund. Together with the power of crowdfunding, it can fill an important market gap.

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