Individual Americans gave $241.3 billion to charities in 2013, the most recent year for which data are available. They gave even more to their future selves, investing some $300 billion in their retirement accounts. Clearly, $241 billion in donations has the potential to accomplish a lot of good. But what about the investments?
The conventional view of investing is that it has one purpose: to make money. The interest paid by most savings accounts doesn’t keep ahead of inflation, so savings lose value over time. In contrast, investments can grow over the long term at rates that comfortably exceed inflation. For people without employer pensions, the growth provided by their own investments may be the only way to ensure they will have enough money to meet their needs when they stop working.
Of the $241 billion donated by Americans to charities, most of it went to religion, education, human services, and grantmaking foundations. Where did the $300 billion in investments go? Mostly into the pockets of other investors. When you buy shares of stocks or mutual funds on the stock market, you usually purchase them from another investor who’s selling them. The investor uses the money from the sale to buy other investments, or cashes it in for personal or business use.
A growing number of investors and philanthropists see that as a lost opportunity. What if you could put your investments to work in doing good, while still earning a decent financial return? That question is at the heart of a branch of socially responsible investing known as impact investing.
What is Impact Investing?
Impact investing bypasses the stock market to invest directly in companies, organizations, and projects that generate social and/or environmental returns in addition to financial ones. It’s not a tradeoff: impact investors don’t accept below-market returns in exchange for the satisfaction that their investments are contributing to a better world. Instead, they look for blended value: they seek competitive returns along with social and environmental benefits.
One of the most compelling examples of impact investing involves the company that brought mobile phone service to sub-Saharan Africa. Antony Bugg-Levine and Jed Emerson describe this story in their book, Impact Investing: Transforming How We Make Money While Making a Difference. Celtel Africa, founded in 1998 by a Sudanese engineer named Mohammed Ibrahim, initially had a hard time attracting capital. Conventional investors saw Ibrahim’s venture as too risky and with limited potential for return. Eventually Ibrahim found a firm committed to investing in Africa and other emerging markets. With that seed money, Celtel Africa went on to find more than 6 million customers, and was sold in 2005 to another company for $3.4 billion, providing triple-digit returns to its investors. Cell phones have revolutionized life for many Africans, including creating a new mechanism for transferring funds. Charities such as GiveDirectly, which rely on mobile phones to deliver payments, wouldn’t exist if it weren’t for the commitment of those original impact investors.
How You Can Participate
When I first learned about impact investing a few years ago, I got excited. I saw it as a logical way to complement my charitable giving. I was already investing for retirement, so it made sense to start putting those investments to work in ways that benefit others, not just my own bottom line. But I quickly learned that unless you’re a venture capitalist or an accredited investor, opportunities for impact investing are limited. Most impact investments available to small individual investors in North America, Europe, the UK, and Australia involve debt rather than equity: your money is used to provide loans to organizations and projects, rather than investing directly in companies. That means the potential for financial return is low, similar to what you might get from bonds or guaranteed savings deposits. Furthermore, many of the opportunities available to small investors aren’t eligible for tax-sheltered retirement accounts.
But impact investing is a relatively new area, and things are changing rapidly. Efforts are underway to make a broader range of investment opportunities available to small investors. If you’re intrigued by the concept, take time to learn more and consider whether impact investments would make sense as a portion of your portfolio. They may not be as effective as the best charities, but they’re likely to provide more social and environmental benefits than those of traditional investments. Visit the sites I’ve linked to below to monitor new developments.