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Impact Investment

Impact investment, also known as the “double bottom line,” is a business strategy in which investors direct funds to for-profit companies which will further some social good, the second bottom line. ((Sarah Max, Venture Capital Firm Invests in Start-Ups With a Social Mission, N.Y. Times (Oct. 27, 2014), http://dealbook.nytimes.com/2014/10/27/a-track-record-for-making-money-and-making-a-difference/?_r=1.)) Though this seems antithetical to traditional investment models, comprehensive studies have shown that at the least impact investments are currently performing as well as the general investing public, which has allayed some of the traditional investment community’s concerns. Successes like Tesla’s IPO and the emerging presence of impact investment, which now holds 46 billion in accounts under management, an increase of 20% from last year, show that the alternative investment strategy holds promise. ((Private Capital Public Good: How Smart Federal Policy Can Galvanize Impact Investing–and Why It’s Urgent, (US National Advisory Board on Impact Investing),  June 2014, at 4, http://static.squarespace.com/static/539e71d9e4b0ccf778116f69/t/53aa1681e4b04a6c515fac31/1403655809489/Private_Capital_Public_Good.pdf.))

Impact investing isn’t the first instance of investors demanding that their money be used in a way explicitly designed to further some social goal. The social responsibility model restricts the ways in which a company seeking capital can operate, by imposing, for example, minimum labor standards or sustainability goals, but impact investing goes beyond negative control. ((Priyanka Sangani, Impact investing won’t replace philanthropy but will push firms towards CSR: Rockefeller Foundation Chief, The Economic Times (quoting Judith Rodin, president of the Rockefeller Foundation).)) The social goal is an integral part of the business plan, in some cases coequal with the bottom line and even predominant in others. ((Max supra note 1.))

Conventional, big-money investors have eyed impact investing warily. ((See Aaron Timms Impact Investing Gains Traction with Institutional Investors, Institutional Investor (Mar. 6, 2014), http://www.institutionalinvestor.com/Article/3316296/Impact-Investing-Gains-Traction-With-Big-Institutions.html#.VF0AZoemClg.)) A chief concern among them was the lack of a successful example to confirm the model’s viability. ((See Id.)) The revolutionary car-maker Tesla clearly indicates that financial and social returns can be complementary. In 2006, Tesla’s founders specifically sought out an impact investment fund which shared Tesla’s social philosophy. ((Max supra note 1.)). The fund provided guidance and expertise in fine-tuning Tesla’s business model to further those goals. ((See Id.)). Tesla had a successful IPO in 2010 and now is poised to expand its operations to offer the first long-range, electric car affordable to the average consumer. ((See Id.)).

A recent survey indicates that pension funds and insurance companies have entered the market, accounting for 22% of impact investment in North America. ((Spotlight on the Market: The Impact Investment Survey, (JP Morgan & Global Impact Investment Network), May 2014, at 9.)) But broader changes in the public’s motivations for investing may hold the true opportunity for impact investment to go mainstream. Nearly half of wealthy millennials want to use their money to help others and consider social impact a factor when investing. ((Jed Emerson & Lindsay Norcott, Millennials Will Bring Impact Investing Mainstream, Stanford Social Innovation Review (Apr. 24, 2014), http://www.ssireview.org/blog/entry/millennials_will_bring_impact_investing_mainstream.)) Millennials’ investment preferences are even more important because the wealth transferred from baby boomers to this generation will be the largest in history. ((Lindsay Norcott & Jed Emerson, The Millennial Perspective: Understanding Preferences of the New Asset Owners, IMPACTASSETS Issue Brief 13, at 4-5 (2014).)) With both the general public and the traditional investment community interested in impact investing, the model is sure to continue to grow in the future.

 

 

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Jim Thurman

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