Interested in adding an ethical component to your investing? Experts say it’s possible to make an impact and still see healthy returns.
So called ‘impact investing’ where investors aim not only to make money but also to make the world a better place with their investments is a relatively new concept – but, thanks in part to the efforts of such high-profile individuals as Mark Zuckerberg and his wife Priscilla Chan to combine investing in for-profit ventures with philanthropic aims, interest in the idea is growing.
And why shouldn’t it? Helping others while you’re helping yourself is a wonderful idea. Plus, as impact venture fund Impact Engine points out, ‘investors see big financial opportunity connected to impact: PwC’s megatrend analysis points to several trends that suggest health care, education, urbanization, the rise of emerging economies, and climate change will be among the biggest challenges and opportunities in the coming years.’
But is the idea too good to be true? Should investors who want to add an impact component to their choice of investments expect a steep decline in returns? How should such investors balance financial concerns with questions of impact?
Impact first or seeking synergy
The happy news from a number of experts seems to be that achieving both aims is very much possible, but the first thing to consider is whether that’s what you want to do.
The term ‘impact investing’ covers a broad spectrum of investors with a range of philosophies, as the graphic from British impact fund manager Bridges Ventures below makes clear. Some dub themselves ‘impact-first’ and happily sacrifice some returns for greater social good. Others (e.g. Bridges’ growth and property funds) see no need to make such trade-offs.
Among this latter camp is Bonny Moellenbrock, Executive Director of Investors’ Circle, a network of angel investors focused on social impact. Her organisation seeks out opportunities where the social impact is so baked into the business model of a company that there are no tradeoffs between impact and returns. Doing well financially means doing good in the world.
‘It’s not like, well, I’m going to do something impactful, so I’m not going to make as much money,’ she explained in an interview. ‘The goal is to look for business models where, the more money the company is making and the better they’re doing financially as well as on the impact side.’ She gives the example of a solar panel firm – more panels installed means both more money in the bank but also less CO₂ in the atmosphere. Such win–wins are possible in a range of industries, from renewable energy to education and healthcare.
Moellenbrock stresses that ‘if the business model isn’t strong, then you’re not going to have the impact either’. If the company goes under or isn’t sustainable, in other words, they’re not helping anyone.
What kind of returns should I expect?
So it is possible to get market-rate returns while still considering impact, but is it likely? That very much depends on the specific sectors in which you invest, Moellenbrock insists.
‘Depending on what kind of impact interests you have, your opportunities may vary in terms of return, just based on what is going on in those marketplaces,’ she says. ‘So if you’re doing tech-oriented things versus something in developing world health, that could be a lot more challenging to find business models where there is a likelihood of Google buying the company for a huge multiple of return. It just isn’t going to happen.’
But it is possible to get market-rate returns if you proceed with that aim in mind. Research by David Musto, Chair of the finance department at Wharton, and Jacob Gray, Senior Director of the Wharton Social Impact Initiative, compared the results of social impact funds focused on achieving market-rate returns as well as exits of mission-aligned companies with returns from investing in startups with no particular interest in impact.
According to the Chicago Tribune, the results were clear: whether you put your money in a straightforward micro-cap stock index or impact-driven companies, you’re likely to get a ‘low two-digit’ return.
But that message isn’t always getting out to would-be angels, according to Moellenbrock, who says that an assumption that impact investing doesn’t have the same return potential is one of the most common misconceptions her organisation encounters. She concurs with the Wharton findings, however. If you apply the same financial rigor to impact investing as you would to traditional investments and don’t let yourself be dazzled by the mission or passion of the entrepreneurs you meet, there’s no reason you’ll make less putting your money in businesses that inspire you.
Moellenbrock just advises angels new to impact investing to bring both their heart and their head to bear on investment decisions. ‘Really dig in on the business model,’ she says. ‘Don’t allow your passion and the entrepreneur’s passion to overweigh concerns about the financial feasibility of the project.’ And if you do that, there’s no need for your returns to suffer.
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