Published February 18, 2014
Maybe it’s not all about the money.
More people are turning to social impact investing to not only bring home market rate returns, but also make a measurable positive social or environmental return, according to Christina Alfonso, founder and CEO of impact advisory firm Madeira Global.
“We are certainly seeing impact investing and social enterprise is increasing in visibility in the marketplace,” Alfonso says. “And retail investors and global banks are starting to take notice.”
This market is currently estimated to be between $30 and $50 billion, and has growth projections ranging from $500 billion and $1 trillion over the next decade, according to the Global Impact Investing Network (GIIN).
Whereas traditional philanthropic efforts may suffer from “donor fatigue,” Alfonso says social impact investing forces the recipient organization to be more accountable.
“It’s not dependent on raising donor dollars, which makes it an attractive alternative,” she says. “While it won’t replace traditional philanthropy, it will allow someone to get a financial return from a social mission.”
Looking to get started as a social investor? Here are a few tips from Alfonso:
Find your cause. Alfonso says social objectives are unique to each individual, making investment choices differ.
“Advisors can help to refine and translate their objectives on the social side into their geographic and industry preferences,” she says. “We also create a risk profile with a sliding scale, where you are either a financial first investor or a social first investor. That dictates your expectations.”
Examples of social investments include basic resources, sanitation, water purification, agriculture, sustainable forestry, charter schools and renewable energy, she says. Microfinance loans for businesses in emerging markets are another popular option for impact investors, she adds.
Practice due diligence. Filter your options, and decide where and how you want to invest, Alfonso suggests.
“The common myth is that an impact investment needs to be something found in a foreign market,” she says. “But you can identify a charter school [to invest in] in America. Newark [New Jersey] and Detroit are two popular options for investors.”
Assess risks. Just like any other investment, there are risks associated with impact investing.
“There is often a lack of liquidity on the supply-and-demand side,” Alfonso says. “There is also access to capital and volatility with currencies. And a big one is fees—there are introductory costs and due diligence fees.”
Pick an investment type. Once you have taken the above steps, it’s time to invest.
Alfonso says there are traditional loan investments, community notes, grants and more. Find the cause and type of investment that works best with your profile and start impacting change. Incorporating commonly used reporting standards such as IRIS (impact reporting and investment standards) can also provide investors with a benchmark to guide their impact investment decisions.
“Catalyzing social change used to rely on the government and non-governmental organizations,” she says. “Impact investing is allowing private investors to catalyze social change through their own investments.”