Investing doesn’t have to be just about making money-it can also be about making the world a better place to live in for all of us.
That’s the mantra behind social impact (or sustainable) investing, which in its various forms seeks to harness the power of capital markets to meet the challenges of long-standing problems like fighting poverty, promoting the growth of clean energy, protecting the environment, ensuring access to clean water and other resources in underserved areas, and meeting other social needs.
This type of investing “may be one of our most powerful forces for positive social change at our disposal,” according to Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing. While it’s often assumed that social investing means sacrificing returns, Choi points to research that finds sustainable investing could outperform portfolios of companies that focused primarily on quarterly earnings.
Social impact investing may represent a relatively small part of the market now. But it’s estimated that social impact investment opportunities could constitute a $10 trillion market by 2050. That makes it worthwhile to take a closer look at this rapidly growing field.
A wide range of firms, financial services providers and investors are increasingly looking to social impact investing to address intractable societal problems. Here are a few examples of how this innovative investing approach is making a real difference in the world today.
TOMS and Patagonia: Rise of the Corporate Social Impact Fund
You’re probably familiar with TOMS Shoes, the for-profit shoe company with the “one for one” policy-that is, they give away a pair of its shoes to an impoverished child for every pair sold. TOMS (it’s not someone’s name, but an abbreviation for “Tomorrow’s Shoes”) has expanded its product line to include eyewear, with the goal of donating glasses to citizens of developing countries for every pair sold. That philanthropic commitment has earned the company tons of goodwill from its many fans.
But TOMS isn’t just limiting itself to making a difference by selling and donating products. Company founder Blake Mycoskie also opened the TOMS Social Entrepreneurship Fund, an independent venture capital fund that invests in for-profit businesses with a clear social business. The fund launched in 2015 with a portfolio of 11 initial investments, including Artlifting, which sells art to benefit the homeless, and Owlet, a “smart sock” that monitors infants heart rates and oxygen levels.
Similarly, the outdoor gear supplier Patagonia of Ventura, Calif., has built its corporate identity around being a leader on environmental protection and sustainability. Like TOM’s, Patagonia has sought to add to the company’s social impact by starting their own investment fund, the $20 Million and Change Fund, aimed at steering private capital toward environmental protection goals.
Benefit Chicago Mobilizes $100 Million for Community
Social impact investing isn’t just for corporate leaders with a philanthropic bent-non-profit entities are also getting in on the game. In Chicago, the Benefit Chicago initiative seeks to reimagine the way social services are delivered to underserved populations in the Windy City.
Instead of another government program or charitable donations, the $100 million Benefit Chicago program is funded in part by selling “Community Investment Notes”- bonds in denominations as low as $20-to investors to encourage private sector investment in the local community.
The funds will be distributed, primarily in the form of loans, to Chicago-area nonprofits and private businesses that provide a social benefit. Those benefits include, according to Curbed Chicago, a “diverse array of community dividends in the form of new small businesses, grocery stores, health clinics, affordable housing, transit-oriented real estate developments, educational programs, community gardens, green infrastructure, and sustainability improvements.”
Bridge International Academies
Socially beneficial investments can allow investors to express their goals through their investing activities.
Education has long been viewed as an area in need of innovative thinking and disruption. Bridge International Academies seeks to improve local education in underserved areas in Africa (and soon in Asia) through a social impact investing approach rooted in a commitment to technology, standardized teaching techniques and data-driven analysis. Bridge’s founders are challenging the long-held assumption that governments rather than companies should lead mass education programs. The company’s goal is to eventually educate 10 million children and make money by expanding its standardized, Internet-based education model across Africa and Asia.
Investment opportunities, such as Bridge International, provide a target for socially-minded investors. Bridge International has been able to secure more than $100 million in investment capital from notable high-profile investors, including Bill Gates and Mark Zuckerberg.
Facebook’s CEO Mark Zuckerberg wrote in a blog piece explaining his $10 million investment to support education, “Education is a powerful force for lifting up people and societies. I’m hopeful this investment will create incredible change in many communities.” The school may pursue an initial public offering as early as next year to gain access to a larger pool of capital.
In Kenya, where the for-profit Bridge International is based, the private schools stand in stark contrast to the dysfunctional public school system. Teachers with Web-enabled Nook tablets present standardized lessons to smaller classes; parents pay a modest tuition fee, which gives them a stake in their children’s education; all data on student and teacher performance is stored electronically; and test results are used to track progress
Early results are promising, but more research is needed to determine the long-term effectiveness of the approach.
As the Wall Street Journal article concluded, “Bridge’s progress comes as for-profit companies play an ever-bigger role in Africa’s development, seeking to make money through businesses that often serve a social purpose.”
‘More Creative and Dynamic’ Than Government Solutions
As New York Times opinion writer David Brooks notes in a 2015 column, social impact investing could help address social challenges at times when government action on critical matters like infrastructure and social services is constrained by tight budgets or gridlock.
“Impact investing is not going to replace government or be a panacea, but it’s one of a number of new tools to address social problems,” Brooks writes.
Not all of these approaches described above may succeed in the long term-some may fall short of their achieving their social aims, and others may not achieve significant financial returns for investors. That’s the reality of pursuing an unconventional approach, whether in the for-profit or non-profit world-it can be difficult and carries risk, as any investment does.
But by asking new questions about what’s possible and testing their proposed solutions in the real world, these social impact investing leaders are charting a path that others will follow. It’s an innovative approach that bears watching.