Social Impact investing: A new frontier?

A new concept has been unfolding stealthily in the last decade, it is been hatched in various talking shops, NGOs and universities. Cynics say it is a fad of very questionable value, optimists say it is the holy grail that will solve all of the world’s problems. Realists – like myself – believe that it is a positive development with the potential to increase global prosperity and opportunities for those left out of mainstream finance. The concept is Social Impact Investing and at its core is the belief that the pursuit of the public good can be incorporated into traditional investment decision making. In essence, social impact investors seek to prove that doing good to society is not necessarily decoupled from making good returns on investment.

Socially Responsible Investing (SRI) has been in vogue for many years and has been mainly practised through the use of negative screens. So investors can decide not to invest in tobacco companies, strip mines, users of child labour etc. Social impact investing takes this further by applying positive social and environmental screens to investment decision making. Impact investors have double bottom-line investment criteria: the investments must make sense from both financial and social perspectives. Money must be there to be made and lives must be improved in the process. Empirical data has shown that companies and investors have profited – in clear monetary terms - from becoming greener and/or becoming more socially conscious. Wal Mart – the biggest discount retailer – is expected to save hundreds and millions of US Dollars from its green initiatives. It is saving energy costs, reducing its carbon footprint and improving its operating margins simultaneously. Fedex is expected to also save millions of dollars in annual fuel costs through the introduction of hybrid vehicles into its fleet of delivery vans.

On the investing side, Mohammed Yunus’ work with the Grameen Bank has proven that a portfolio of microloans granted to poor market women in Bangladesh is not necessarily riskier than a corporate loan book in the United States or Europe. The financial results published during the IPO of Banco Compartamos , a for-profit microfinance bank in Mexico has also shown that microfinance can be very profitable. This robust historical financial performance made the IPO 13 times oversubscribed. Microfinance is not the only success strory, companies have made money investing in clean energy sources, promoting healthcare in poor and undeserved communities and regions and affordable (not subprime!!) housing.

The Clinton Global Initiative (CGI) – often derided as the “Philanthropy Oscars” because of its glitz – has teamed up with JP Morgan and the Rockefeller Foundation to set up the Global Impact Investing Network (GIIN). GIIN will work to set up common standards, benchmarks and infrastructure to speed up the adoption of impact investing worldwide. Its work may end up motivating businessmen and activists to jettison the counterproductive “sue the bastards” approach that had characterized their relationships in favour of mutually beneficial partnerships.