In 2004, a half dozen of Trillium Asset Management's well-heeled clientele wanted to invest a portion of their portfolios to improve the environment and find alternatives to harmful carbon dioxide emissions. On the group's behalf, Trillium invested $1.5 million in EcoEnergy International, a developer of renewable energy, including hydro, wind and coal-carbon capturing.
When EcoEnergy was sold to Suez Energy in 2008, the investors made two and a half times their investment. When the deal closed, they'd both helped the environment and generated a spectacular return. Matthew Patsky, CEO of Boston-based Trillium, calls this a prime example of impact investing, which involves investing in community development projects or companies that benefit society - and produce solid returns.
Ten years ago, a community organizer in New England in his twenties inherited $400,000 from his grandparents, who'd been educators and missionaries. He turned to First Affirmative Financial Network, which specializes in socially responsible investing, and asked how he could put his inheritance to use in ways to help society as a testament to their legacy. First Affirmative recommended Calvert's Community Investment Notes, which loans money at a fixed rate of return to community development groups that invest in such projects as overseas housing and women-owned international micro-businesses.
He earned 2% to 4% annual yields over 10 years, says First Affirmative's CEO George Gay, who's also a CFP. The organization, based in Colorado Springs, Colo., handles $700 million in assets. Greenvestment Resource Center, part of First Affirmative, holds a three-day annual conference, SRI in the Rockies, set for Oct. 2-5 in New Orleans this year, covering the latest socially responsible investing and impact investing trends. For more information, visit sriintherockies.com.
Charly Kleissner, one of the first engineers hired by software and info-tech company Ariba, came into a multimillion dollar windfall when he sold his sizable stock options when he left in 2002. Feeling a responsibility to try to exert societal change, Kleissner and his wife, Lisa, challenged financial planners to do something positive with the money and make sure the results were measurable.
As a result, Kleissner launched the Beartooth Capital Fund to help ensure land conservation in the West. Beartooth is a real estate fund that produces income in two ways: selling conservation easements to conservation funds run by nongovernmental organizations and land to developers who agree to follow sustainable development practices.
A TIGHT FOCUS
The latest catchphrase in the socially responsible investing community is "impact investing," intended to appeal to institutional and high-net-worth investors focused on private equity or nonprofit projects rather than public stock. While much socially responsible investing tries to change or reward the practices of publicly traded corporations, impact investing affects society on a neighborhood or micro-level by helping families, strengthening small businesses or building housing, says Justin Conway, a relationship manager at the Calvert Foundation in Bethesda Md. Calvert's Community Investment Notes, which launched in 1995, lends to a portfolio of 257 nonprofits involved in affordable housing, micro-finance and community development.
JPMorgan Chase, TIAA-CREF, UBS and the Rockefeller, Kellogg and Casey Foundations, as well as a number of venture capital funds, have all gotten into the act, working with nonprofit organizations that specialize in socially responsible investing, such as Calvert and RSF Social Finance. A handful of retail mutual funds, such as Pax World, are making direct investments, and an individual can open an account with the Calvert Foundation for as little as $1,000.
A NICHE FOR PLANNERS
Impact investing is presenting an opportunity for financial planners who become savvy about potential investments, know how to arrange and pursue deals, and do the due diligence. High-net-worth families and asset managers are exhibiting a growing impatience with the old ways money was used to solve deeply entrenched problems, says Antony Bugg-Levine, managing director of the Rockefeller Foundation and co-author of Impact Investing: Transforming How We Make Money While Making a Difference.
Impact investing taps deeper pools of capital than philanthropy. "The challenges around climate change and poverty are so vast that giving a little to charity isn't up to the task," he says. In fact, he adds, the idea for impact investing emerged from discussions among early investors in environmentally friendly technology and micro-financing.
The Opportunity Finance Network established a rating system to help evaluate community development financial institution investments. The ratings found at carsratingsystem .net, measure how well a program is meeting its mission and assigns a 1 (the highest) to 5 (the lowest) rating on creditworthiness and financial performance. The ratings can help planners identify opportunities in certain geographic areas and determine whether investments are sound. The service costs about $15,000 a year and is used mostly by financial institutions, socially responsible investors and government agencies.
BUSINESS SAVVY
Underlying the genesis of impact investing was the belief that business could be a force for good, not just for generating personal wealth, Bugg-Levine says. Just as some businesspeople have taken their talents to opening charter schools in impoverished areas, many successful entrepreneurs have turned to impact investing to use their business savvy to make a difference. They use their experience not only to screen out bad investments, but also put their money to work for good causes, he says.
Several years ago, clients of financial planner Raul Pomares, now a managing director with Spring Creek Global Investment in Corte Madera, Calif., started asking how they could do more with their capital than socially responsible investing. Pomares found some in the financial community antagonistic to his inquiries.
"Philanthropy is philanthropy and investing is investing," one advisor told him, cautioning him about merging the two. Pomares resisted the advice. His view: If clients are asking for this kind of investment, this is an opportunity. He transformed himself into an investment advisor specializing in impact investing.
There's nothing inherently different about impact investing from a financial planner's viewpoint, he says. Investing still entails analyzing various asset classes and strategies, and deciding whether to invest in, say, private equity real estate deals or in credit union community banks.
This month, Spring Creek Global Investment is launching the $250 million Global Social Impact Fund, a private equity and debt fund. It will have a minimum investment of $500,000; financial planners can pool investors' money together. The fund plans to invest one-third of its capital in Latin America, one-third in Africa and one-third in Asia, focusing on financial services, sustainable agriculture, health care, community-based energy, and small and micro enterprises. The 12-year fund has lofty goals: an annual return of 8% to 10%.
Impact investors tend to focus on seeing measurable results for their causes and want to receive a modest return on their investment. Most don't view their impact investment as philanthropy, says Mary Rinehart, founder of Rinehart Wealth Management in Charlotte, N.C., which manages about $260 million. She says most people interested in impact investing accept a 2% to 3% return. Amit Bouri, the New York-based director of strategy and development at the Global Impact Investing Network, says some of the causes that have attracted the most money are affordable housing, climate change, access to clean water, sustainable food and agriculture.
SELF-HELP
One popular choice for clients is to open an account with a credit union that invests in projects they value. For example, Durham, N.C.-based Self-Help invested $293 million last year to help build homes, charter schools and childcare centers. Self-Help also works with the Ford, MacArthur and Bank of America Foundations; Pax Mutual Fund; and the United Methodist Church to offer loans that develop community projects.
For example, in 1998 in the blighted Walltown neighborhood of Durham, Self-Help collaborated with Habitat for Humanity, Duke University and churches to purchase 80 dilapidated houses and rehabilitate them. David Beck, a policy director at Self-Help, said it aimed to rehabilitate enough homes to reach a tipping point, so the neighborhood would turn around. Homes sold for about $80,000 and were acquired by working people who averaged $25,000 a year in income. The entire project cost about $5 million and was credited with making the neighborhood safer and reducing drug dealing.
Self-Help also assists entrepreneurs. It loaned $123,000 to Kim McIntyre, clinical director of Personalized Therapy, an outpatient mental health clinic, in Greenville, N.C., in 2010. The loan enabled the clinic to expand its day treatment program and help 12 students who had been expelled or suspended from school. "Without this money, we likely couldn't have helped these kids," McIntyre says.
PERSONAL COMMITMENT
Impact investing often derives from a client's personal commitment to a cause and geographic area. Trillium will recommend two nonprofits and three community banks working on reducing poverty and explain how the client can invest, for example, $25,000 in a five-year loan and gain 2.5% interest, which is much higher than a money market fund.
Ironically, Kleissner says, impact investing can serve as a hedge during tough financial times. Beartooth Capital, which focuses on land conservation, worked out a deal with the Nature Conservancy that yielded 4% to 5% during 2008 when the stock market tanked. Conservation agencies pay top dollar to conserve land, he says, even during tough times.
Last year, when Gloria Nelund, a former asset manager at Deutsche Bank and Bank of America, launched TriLinc Global, a private impact investment fund, she hired a brand manager to survey what financial planners' clients wanted most out of the fund. The consensus was that they wanted a product with a minimum investment of $5,000 that offered stable returns and low volatility.
"Most funds are going after high-net-worth individuals, and you can't attract scalable capital just going after them," Nelund said. She's registering TriLinc with the SEC and expects to gain agency approval to raise money and activate the $1.2 billion fund early next year. She wants to invest in small to medium-size businesses in developing countries like Bolivia, Bulgaria, Brazil and El Salvador.
There are hurdles that obstruct financial planners from pursuing impact investing. Except for certain Calvert funds, many investments aren't included in brokerage accounts. And many of these assets aren't included in traditional performance reports because it's not a stock, bond or cash asset. Fees can be a deterrent since some investments offer a minuscule 0.025% payout to financial planners.
PORTFOLIO PLANNING
Still, impact investing plays a modest role in many portfolios. Trillium's Patsky recommends that investors put about 2% of their portfolio in impact investments. Addressing worries about the risks, Patsky says in his experience only one of 100 community development groups files for bankruptcy.
The Calvert Foundation's Conway sees impact investing proliferating in the next few years. Impact investing "provides a unique opportunity to provide something investors can't do in another asset class, such as philanthropy," he says. "It's a way to achieve measurable social results while gaining financial returns."
How do investors know that impact investing has actually had a positive effect? Ideally, they should check it out themselves. First Affirmative's Gay has traversed the South Side of Chicago and Philadelphia's rundown neighborhoods, where no investing has taken place, and contrasted them with areas where community projects have blossomed. "Places that have access to capital have renovated buildings and thriving small businesses versus a bombed-out neighborhood," he says. "Access to capital is everything."
Kleissner predicts financial planners who don't pay attention to impact investing will lose business. Savvy investors, he says, want to see results of investing.
In addition, advisors who offer it help differentiate themselves from competitors and help clients diversify more broadly. Some are tying impact investing with family wealth management to ensure that their heritage produces societal results. "It creates more opportunities to put money where an investor's values are, often in their own community," Bouri says.
Gary M. Stern is a New York freelancer who's written for Fortune.com, CNNMoney, Investor's Business Daily and collaborated on Minority Rules: Turn Your Ethnicity into a Competitive Edge.
