Opening Access to Impact Investing
This is the first installment of our “Investing for All” series, introduced last month to explore the key shifts we’re seeing in the evolving investment landscape. Read the first post here for an overview of these shifts, and a discussion of topics to come.
by the rabble squad | August 12, 2016
Over the last 10 years, impact investing—or investing that intentionally generates social or environmental benefits alongside financial returns—has exploded, increasing by 300% during this time.
But chances are that you’ve been left out of this boom.
How did we get here?
Despite the interest that many of us have in making a difference with our investments, the opportunity to do so has been strictly limited to large institutions and accredited investors—a small fraction of people, those who earn more than $200,000 annually or whose net worth is $1M+.
The “non-accredited” or “retail” investors who don’t fall into this group include ~98% of U.S. adults over 18; this majority has had almost no access to social impact investing. In a recent survey of 310 impact-investment funds only 20% (1 in 5) were found to be open to retail investors. Further, only 4 of 50 impact-investing firms featured in the annual ImpactAssets 50 list accept capital from retail investors.
Which category you fall into—accredited or not—determines the types of investments you are able to make. A major reason stems from the tendency of public investment vehicles (those open to retail investors—mutual funds, ETFs, municipal bonds, etc.) to include less complex products available in private investment vehicles (those open to accredited investors—equity funds, hedge funds, private debt vehicles). The regulatory limitation placed on retail investors is intended to protect less affluent, less “sophisticated” investors from risk.
So why are the majority of impact investing opportunities private?
We can trace this trend back to the original impact investors; ultra high net worth individuals, foundations, and family offices – all, by definition, accredited investors. These early impact investing pioneers had access to private products from a regulatory standpoint, and deep enough pockets to place individual investments large enough to participate in private equity, venture capital, or debt funds.
Not only could they participate in this space – they preferred to do so, because investing in privately held companies created opportunities for impact difficult to attain in public markets. A young, small social enterprise, for example, might present a real opportunity to create impact, but it is only able to absorb financing from a private equity fund because it is far too small to be listed as a publicly traded company. Impact opportunities began in the private space, flourished there, and largely remain.
It’s also partially due to the relative new-ness of social enterprises and the structure of the US public market. Although the idea that a private enterprise has some social responsibility is not new, the thought that a company can seek financial profits and social good with the same core operations is. Major trends in this movement started in the 1970s with Muhammad Yunus’ Grameen Bank (which began by extending loans to the poorest of the poor in Bangladesh) and gained traction recently in the 2000s with social enterprise certifiers like B Lab and social enterprise focused funders like Omidyar Network.
However, the relative youth of this movement means that very few social enterprises are accessible to investors on the public market. Because of (very sensible) SEC regulations, it takes a significant amount of time and effort to become a publicly listed company—as of 2014 the average was 11 years—which means that only now are most financially successful social enterprises becoming available to public investors. Because public investment vehicles trade mostly in publicly available securities, this limits the proportion of social or environmentally focused firms that most have access to.
What impact products are available to you?
Rabble applauds the growth of impact products available to retail investors, but the disparity in the choice and impact per dollar between accredited and non-accredited investors is real. Accredited investors not only have greater access to impact-investments, but they also have the discretion to create the kind of change they want to see—whether it’s a specific location, demographic, or investment focus.
Impact investment leader BlackRock’s Impact U.S. Equity Fund, publicly available, is described by the company as inclusive of “companies with positive aggregate societal impact outcomes.” Its top 5 holdings are Apple, Microsoft, Alphabet, Johnson & Johnson, and JP Morgan Chase.
While it’s powerful that the fund targets firms with positive aggregate societal outcomes, opportunities available in private markets tend to offer more transformative and targeted impact (more on this in a later discussion). Compare the above to two representative impact-focused private equity funds, Bamboo Finance and Conservation Forestry. Bamboo invests in business models that benefit low-income communities in emerging markets, and Conservation acquires and manages large forest landscapes in the pursuit of conservation. These opportunities, however, are not open to the majority of US residents.
We plan to change that.
We believe that your investment classification shouldn’t prevent you from putting your money where your values are. New regulations now make it possible for investors of all stripes to invest in targeted opportunities. Rabble leverages these new regulations to identify projects that have targeted and real social and environmental outcomes in areas that matter to you.
Whether your interest is in clean energy projects, innovative educational models, affordable housing or urban agriculture—all are welcome to join this financial revolution.