SAN FRANCISCO (Thomson Reuters Foundation) – Investing for both financial returns and social impact is becoming more popular but unless you are wealthy it is hard to put your money to work towards your ideals.
Impact investors plan to commit $9 billion in 2013, up from $8 billion the previous year, with a predicted market opportunity of between $200 billion and $650 billion in the next decade, according to a report by investment bank JP Morgan.
But investment regulations and a lack of retail investment products mean that impact investing is the province of high-net-worth individuals and philanthropists.
Fran Seegull, chief investment officer and managing director of Impact Assets, a non-profit financial services company, spoke to Thomson Reuters Foundation at the SOCAP (Social Capital Markets) conference this month about how impact investing can be broadened to a wider investor base to help drive more capital towards social and environmental good.
Seegull also discussed why the sector struggles to measure its impact and what foundations and governments can do to give it a boost.
Q: Why should impact investing be opened up to a broader range of investors?
A: There is a set of driving forces - population growth, increasing demand for natural resources, for food, environmental pressures, people living longer, chronic public health challenges. All these irrefutable facts are shaping the future of our world. Those of us involved in impact investing see this as an opportunity to help ease some of these problems but it is also an opportunity for financial returns. If you look at the future of the world, we need to mobilise not just grant capital and government aid, but also investment capital to achieve the impact that we seek.
Q: Why has this “democratisation” of impact investing been slow to take off?
A: For now, impact investing is the province of high-net-worth individuals and accredited investors. Part of the reason why it's been slow is the SEC (U.S. Securities and Exchange Commission) rules around accredited investors. In the U.S. in order to invest in private equity you need to be an accredited investor, which means you must have $1 million of investable assets excluding the value of your primary residence. That by definition limits the number of people that can invest in some of these offerings.
But a substantial part of all investable capital belongs to unaccredited investors. We hear that young people increasingly want to invest in keeping with their values, so unless we have products that the average investor can invest in, we're missing an entire sector of that community.
There is a coming generational wealth transfer to Millennials. They already are keen to invest their money in something that they value and will continue to do so. So we need to develop products that address their desires and needs. Trying to crack this nut and thinking about impact investing products for retail investors for me is part of the solution.
Q: What steps need to be taken to develop a broader market for impact investing?
A: There are several private debt products designed to democratize access to impact investing, including our new products, Calvert Foundation's Community Investment Notes and Trilinc’s offering. On the private equity side, the SEC is developing the regulations around crowdfunding, and depending on how they rule, private equity may be widely available for the first time to unaccredited investors in the United States.
Q: What new products are you developing for retail investors?
A: ImpactAssets is bringing to market two private debt securities: one focused on microfinance and the other focused on global sustainable agriculture. Both these products are designed to be registered broadly, distributed broadly, with a relatively low minimum of $25,000 while delivering high impact and competitive returns. Currently, in order to gain access to some impact fund managers, the investment minimums can be quite high ($250,000 up to $1 million). Such minimums may be too substantial unless one is an ultra-high-net-worth asset owner very committed to impact.
Our challenge at ImpactAssets was this: How to structure and bring to market products that drive down the minimum investment to something more manageable for the average investor while giving them exposure to the world's best impact managers? That's really the vision of these products. The minimum investment is not insubstantial but it's an order of magnitude less than investing directly with the average impact fund manager.
Q: The question of measuring impact is still a grey area - how can this become a more exact science?
A: We need to measure impact and galvanise ourselves around industry standards and have a set selection of metrics and measurement practices. There are many investors who measure impact differently. If we can rally around industry standards such as IRIS (Impact Reporting and Investment Standards) and GIIRS (Global Impact Investing Ratings System) we can start to measure impact in a more coordinated way.
The challenge is that there is a heterogeneity of returns in impact investing: we have jobs created over here, gallons of water saved over there, tons of greenhouse gases avoided etc - so the portfolio accounting is very hard for an investor or fund manager to say across all these investments my impact return on investment is "x". It's inherently more complicated.
But metrics and measurement aren't the whole story. On the one hand we need to develop systems by which we can engage in more meaningful metrics and measurement reporting practices. On the other hand we just need to get going and do the practice and evolve the practice by doing. If we wait for the perfect scheme to be designed we're going to be waiting too long, it's too hard. It's a kind of holy grail in our industry, and also for philanthropy where they're trying to measure the social and environmental return on their grants. That's a similar process, so maybe partnering more closely with the philanthropic sector on this could be helpful.
Q: Speaking of foundations - it's a growing trend for foundations to become involved in impact investing. But there are only a few players so far. What are the hurdles?
A: It's slow for a couple of different reasons. One is that the fiduciaries of foundations are bound by the Uniform Prudent Investor Act, which means they must operate in the financial best interest of their foundation. For market-rate impact investments, it's a much easier sell: you have your market-rate return and you have your impact. But for some investment themes, for example global sustainable agriculture, you may have to make a trade-off to make it work and that's where programme-related investments can maybe fill the gap.
Foundations are generally risk-adverse, as institutions. You see more innovation among the family foundations, where there is a founder who is very passionate about impact. When you have multi-generations or big foundations, it's culturally and practically very hard. You see more innovation in the smaller or medium-sized foundations; less so in the big foundations, except for a few like the Gates Foundation and others.
Q: What are governments doing to boost impact investing?
A: The UK government is doing quite a lot in terms of incentives for investors to invest in impact ventures, especially through tax incentives.
The U.S. government has a number of programmes already, it's doing more and more. The Small Business Administration has its SBIC (Small Business Investment Company) programme. It allows fund managers to gain access to government debt and then they match it with equity to increase their assets under management. They reprogrammed $1 billion of the SBIC programmes to focus on impact investing sectors - that's quite exciting.
OPIC (Overseas Private Investment Cooperation), the investment arm of the U.S. State Department, has injected finance into impact investment funds that are looking to invest in the State Department's target countries. Getting leverage for those fund managers is really important. And USAID (U.S. Agency for International Development) has a development grants programme focused on impact.
Please note: The interview has been edited for length and clarity.
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