Impact Investing — A Paradigm Shift
By: Shaan Fye, Editor-in-Chief
Bill Gates is among one of the many prolific businessmen and women calling for a “21st century capitalism update.” This economic model seeks to combine the intrinsically positive aspects of the free market with a social component. In essence, this “updated” capitalism will solve the problems of the poor as well as the rich. A central component of this new paradigm is impact investing.
In the past few decades, impact investing has exponentially grown into a mainstream force, helping to reshape investors’ goals. From 1994 to 2007, the total amount of capital in impact investments has risen from $639 billion to $2.71 trillion, a 324% gain. The paradigm for centuries has been to simply seek out an investment that offers an optimal blend of risk and return. Now, with the advent of impact investing, capital has a more nuanced role: solving global problems while also providing an attractive financial return. So how are some individual groups revolutionizing capitalism?
These egalitarian ideals are strongly embodied by Acumen, a non-profit revolutionizing capital flow to developing countries. Acumen takes from two areas, investment and aid, combining both into a unique strategy to combat problems plaguing Africa and South Asia. As a non-profit, Acumen raises charitable donations that allow it to make patient long-term debt or equity investments in early-stage companies providing reliable and affordable access to agricultural inputs, quality education, clean energy, healthcare services, formal housing, and safe drinking water to low-income customers. It takes impact investing to another level, reinvesting all of its profits from the impact investments into even more investments.
Acumen is revolutionizing aid delivery with impact investing. Instead of granting money, Acumen takes an equity investment, introducing capitalistic accountability and viability. These companies are expected to eventually turn a profit, enriching the local communities economically and socially. These projects range from affordable solar solutions in Pakistan to improving sanitation facilities in Kenya. Acumen’s investments quantitatively improve residents’ lives (see “investment snapshot”) by combining a viable business plan with a solution to a pressing problem in these underserved areas. Acumen expedites this market mechanism exclusively, and puts all the gains back towards the same cause. Acumen has and will continue to create sustainable ventures, prove new business models, attracts new investment capital, and helps catalyze new markets that serve the poor.
Acumen is structuring impact investing as non-profit, but can investors do the same thing, except for profit? Ron D. Cordes built AssetMark Investment Services into a nationwide company with 400 employees and $9 billion in client assets. In 2006 Cordes and two partners sold out to Genworth Financial Wealth Management for $230 million. He then decided to create a foundation, the Cordes Foundation, but was soon faced with a problem. The 95% of capital within the foundation used to support the 5-7% donations every year was not helping any cause, while at the same time, dwarfing the money being used towards good purposes. He decided to direct 1/5 of the fund into impact investment. Surprisingly, after a year, the foundation’s impact investments outperformed the rest of the portfolio on a monetary basis with the added bonus of having strong ethical backing to the investment itself. Like Acumen, the impact investments generated financial as well as social returns. Cordes expanded his foundation’s initiative, and now speaks around the country now, advocating impact investing to not only foundations, but to investors seeking a ROI.
Will impact investing continue to bridge “the gap between the efficiency and scale of market-based approaches and the social impact of pure philanthropy,” as Acumen describes impact investing, or is this whole idea infeasible, asking investors to look at social benefits to others as well as the more traditional financial benefits to themselves. Personally, I hear more and more from my fellow classmates, the Millennials, about how important it is to help underserved communities succeed and thrive. Recent statistics confirm my first-person account, as a Spectrum Group study recently found that 45% of Millennials would like to use their investments to benefit others, markedly higher than Generation X (30%). Impact investing is already greatly contributing to social and environmental issues today, but has an even larger potential. It is up to the Millennial Generation to harness that potential for the good of the world.