InvestmentsAug 16 2016

Impact investing for retail investors

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      The official definition of Impact Investing provided by the Global Impact Investing Network (GIIN), is “investment that is made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.”

      Historically, impact investing has been seen as being most active in private equity, debt and infrastructure investments in sectors such as energy, health and education.

      It is a growing institutional area but historically has not been available for individual, retail and private client investors, principally because of its illiquidity and the level of specialisation.

      However, there is good news for those individuals and their advisers that want their investments to have a positive social and environmental impact and also earn market like returns, as increasingly there are accessible fund products for retail and individual investments which are designed to do both.

      Brief history

      Impact investing has twin roots in charitable grant making and the move to analysing companies in terms of stakeholder rather than shareholder value, meaning that it has both a solid foundation in practice and theory.

      Investment capital could be put to work in better ways in order to meet the aims of making returns, managing risk and being positively impactful

      FB Heron, a US philanthropic foundation that was set up in 1992 with the mission of helping communities to help themselves, has been a leader in the field of developing impact investing across asset classes and a broad portfolio of investments.

      Originally, like other charitable organisations, grants funded from their portfolio were used to address social problems. They were faced with the ‘old problem’ of making effective grants that sought to alleviate problems rather than solve them.

      Heron’s board of directors started to realise that the grant income alone was too small in relation to the scale of the issues to make a meaningful impact.

      Magnifying impact

      Heron began to explore whether they could magnify their impact on the world by investing in a way that started to solve the root causes of social and community problems rather than just alleviating them.

      This realisation set the scene for some creative thinking, where the board saw that investment capital could be put to work in better ways in order to meet the aims of making returns, managing risk and being positively impactful.

      Initially, these were small steps focusing on making the most efficient use of active, index and enhanced funds to free up time for grant making, engagement and lowering costs without increasing risk or reducing returns.

      Heron’s mission and market related approach evolved to span a range of impact investments, including private equity, subordinated loans, senior loans, cash and fixed income.

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