While investing in the public markets through mutual funds, index funds, and exchange-traded funds (ETFs) is available to all investors, much of the deepest impact created by investing in private businesses is largely the province of wealthy, so-called “accredited investors” (see sidebar). So what about impact investing for the rest of us? How is impact investing being democratized and mainstreamed for the retail investor across asset classes?
Impact investing is here to stay, and retails investors like you can help build its future. You can gain exposure to impact through depository institutions like community banks, mutual and index funds, as well as entities offering select private debt securities. Some of these investments may be appropriate for taxable assets. If you work with a wealth advisor, communicate your interest in impact investing clearly. If he or she has not heard of impact investing, encourage your wealth advisor to learn more about it. Other impact investments might be more appropriate for your retirement account. Check to see if your 401(k) plan has SRI and ESG mutual fund options, and if not, ask your plan administrator about them. A number of retirement funds, including Social(k) and TIAA-CREF, currently run retirement plans with strong impact options.
Impact investors believe that making investment choices based on positive values is the future of all investing. That said, not all options are available to you as a retail investor at this time. But with your interest, engagement, and advocacy, the market will evolve to meet your needs.
Fran Seegull is Chief Investment Officer at ImpactAssets, a nonprofit investment firm seeking to increase the flow of capital to impact investing. She oversees impact product development for the firm and heads investment management for The Giving Fund, a $200 million impact investing donor-advised fund. Seegull is Adjunct Professor of Entrepreneurship at the Lloyd Greif Center for Entrepreneurial Studies at USC’s Marshall School of Business. She tweets at @franseegull.
“Report on U.S. Sustainable, Responsible and Impact Investing Trends 2014,” USSIF, 2014.
Performance and Sustainable, Responsible and Impact Investing, USSIF, http://www.ussif.org/performance.
What is an Accredited Investor?
In order to invest in most private companies, one must meet the definition of “accredited investor” under applicable SEC private placement rules. The SEC requires individuals to have a net worth of at least $1 million, excluding the value of equity in their primary residence, or net income of at least $200,000 in each of the last two years and a represented expectation of net income in that amount in the current year. These standards are imposed, generally, because of the relative risk and illiquidity associated with investments in most non-public companies when compared to public companies. Because of the risks associated with these investments, prospective investors in these offerings must have the financial resources to withstand a full loss of invested capital.
Retail investors interested in impact should consider starting with their banking relationships. Alternatives to traditional banks include a range of community banks and community development finance institutions such as New Resource Bank and Beneficial State Bank, as well as credit unions. These financial institutions accept deposits, and in turn, lend capital to ventures and projects designed to positively impact local communities and environments, often extending credit to individuals and entities disenfranchised from the traditional banking sector.
Investing in the stocks and bonds of publicly traded companies is one of the easiest ways for the retail investor to get started in impact investing. Socially Responsible Investing (SRI) was started by faith-based institutions that wanted to invest their capital consistently with their values. They typically employed negative screens to avoid so-called “sin stocks” – e.g., firearms, alcohol, tobacco, and others. In the 1980s, a more proactive way to invest in the public markets was established – Environmental Social Governance (ESG) investing, which uses positive screens such as sustainable supply chains, progressive employment practices, and business ethics. Some investors contend and research indicates that public companies creating ESG value and mitigating ESG risk may (and often do) outperform their cohorts.2 Actively managed mutual and index funds with positive ESG screens include offerings from Calvert Investments, Pax World, Parnassus, Domini, TIAA-CREF, MSCI, Vanguard, and others.
As mentioned earlier, debt and equity investing in privately held impact ventures has traditionally been restricted to accredited investors and institutions. However, there are a handful of high-impact private debt offerings with low minimum investment requirements available to retail investors. Calvert Foundation’s Community Investment Note invests in impact enterprises in the US and the developing world across a range of impact themes, from microfinance to education, from Fair Trade to women’s empowerment. These one-to-ten-year notes have interest rates ranging from 0.5 percent to 3 percent and may be purchased by retail investors online through Vested.org for as low as $20 and through a broker at a minimum of $1,000. RSF Social Finance’s Social Investment Fund offers exposure to a range of for-profit and nonprofit impact ventures in food, agriculture, education, environment, and the arts for as little as $1,000. Retail investors may also engage in zero-interest peer-to-peer lending through Kiva.org. Lastly, ImpactAssets, where I serve as Chief Investment Officer, has developed and will be offering products focused on microfinance and sustainable agriculture designed to democratize access to impact investing.
As for equity investing in private companies, a specific crowdfunding provision (Title III) of President Obama’s JOBS Act of 2012 would allow retail investors to purchase shares in private companies. While the SEC is still deliberating on Title III, a number of states have issued their own equity crowdfunding provisions that allow intrastate retail equity participation (see “The State of Crowdfunding” by Amy Cortese in Issue 1). Also, Direct Public Offerings (DPOs), an alternative method of fundraising from the public, enable unaccredited investors to purchase private company shares. Ben & Jerry’s and Annie’s Homegrown both conducted DPOs early in their fundraising histories. A word of caution: retail investors should carefully assess their financial risk tolerance before making any private market investment.
Disclaimer: Investments cited in this article are neither endorsements nor investment recommendations. This article is intended only to provide information and analysis about the range and types of impact investments in the marketplace. Please seek the advice of a wealth advisor before making any investment.