Impact Investing

Expect wealthy clients not only to ask about investing in companies whose processes are green and socially responsible, but also about companies whose very missions provide an environmental or social return in addition to a financial profit

Expect wealthy clients not only to ask about investing in companies whose processes are green and socially responsible, but also about companies whose very missions provide an environmental or social return in addition to a financial profit. For advisors who want to get up to speed on “mission-related investing,” aka “impact investing,” the first step is to learn about what’s happening—and the opportunities offered—across the pond.

The United Kingdom is showing what’s possible in mission-related investing. Two years ago, the government established a cabinet level position called the Office of the Third Sector, with a broad mandate to improve the environment for social investing. The "third sector" is the term for hybrid enterprises combining for-profit and charitable missions.

One of the most interesting recent developments in this sector is an effort to launch a “social stock exchange,” where mission-oriented companies can raise money from investors interested in ensuring they're doing good even as they profit.

The term "impact investing" can have different meanings to different people. But the bottom line generally is that the goal goes beyond “negative screening” for investments, that is to say, making sure a portfolio doesn’t include companies that do bad things. Getting rid of stock in companies that support apartheid is so 1980s. Investor consciousness has since evolved. Now, many want to put their money in firms that have a stated, constructive mission to save the world in some way—by doing anything from selling environmentally friendly products to building affordable housing.

Thinking Big

There’s a steady, growing mission-related investing movement in the United States. But the United Kingdom is trying to innovate on a grand scale. The social stock exchange is being developed by Pradeep Jethi, a former new product development manager on the London Stock Exchange and Mark Campanale, a long-time expert in socially responsible investing for institutional investors.

The goal of the exchange is to address probably the biggest problem facing social enterprises: Once they start to grow, their alternatives for raising money are limited. “We believe the one thing that blocks these enterprises when they get into the mid-stage of their life cycle is just where to go for their next capital expansion,” says Jethi.

Because mission-related companies have two, and sometimes three, purposes—financial, environmental and social—they tend not to be as profitable as traditional businesses. If acquired, the companies take the chance that their new owners won’t continue to concentrate on the social mission, choosing instead to make changes likely to increase profitability. Similarly, if these companies go public, shareholders will demand that compromises be made in the mission. For example, a company devoted to manufacturing its product locally might be forced to outsource production to China.

That’s where the social stock exchange comes in. The only companies listed are to be double- or triple-bottom line enterprises. Investors would be buying into a commitment that these companies will not dilute their missions to turn a bigger profit. “These investors would want to see a social return,” says Jethi. “They wouldn’t focus just on profit maximization.”

The exchange is still in the early stages of development. Co-founders Jethi and Campanale are researching demand for it, with a $500,000 grant from the Rockefeller Foundation. They are going to need approval from the Financial Services Authority (the U.K. equivalent of the Securities and Exchange Commission), a process that, according to Jethi, could take a year. Once all that’s squared away, they have to arrange with an existing stock exchange to lease a trading platform.

But already, says Jethi, they’ve identified about 1,200 of the 55,000 social enterprises in the United Kingdom as candidates for listing on the exchange (only 12, he says, are needed to launch the exchange.)

One such company is a 10-year old firm called Ethical Property Co. It buys buildings, then rents space to social-change organizations, offering low rent and access to technology and other shared resources. It’s also a public limited company, a type of business in the United Kingdom that’s public but not listed. Ethical Property has about 1,500 investors, who put anywhere from 100 to 1 million British pounds into the company. Founder Jamie Hartzell says that he never considered a conventional listing, because “we’d lose control over our mission.” Clearly, a social exchange would be right up his alley.

All Together Now

The effort to form a social stock exchange in the United Kingdom is sparked by a climate that’s considerably friendlier to social enterprises than in the United States. The U.K. Office of the Third Sector is now engaged in developing a social investment bank, a wholesale institution that would lend to retail banks working with social enterprises. Also, the government in 2005 introduced something called the "community interest company," a legal structure for social enterprises so they can establish themselves as companies while ensuring that their profits or assets be reinvested in a way that supports their mission.

Added to this mix in the United Kingdom are a slew of charities, foundations and venture capital firms involved in impact investing.

There’s even a company offering a new twist on portfolio management. Investing for Good, a four-year-old company, is pioneering a way to make it easier for private banks and wealth managers to invest clients’ money in social ventures. “The mission is to embed social investing in mainstream financial portfolio management,” says Investing for Good’s CEO and founder Geoff Burnand, who worked as a financial advisor at Merrill Lynch for 15 years.

Burnand creates customized portfolios comprised of private, socially responsible ventures that fit each client’s needs, drawing from a group of about 230 heavily researched businesses and funds. For advisors with a client interested in affordable housing, for example, he’ll put together a portfolio emphasizing companies involved in that type of work. He’s also coming out with a blended social impact fund this year.

But that’s just one more reason for advisors to be conversant in the world of British-style social investing—before their clients start asking about it.

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