Impact Investing Done Right: No Shortcuts to Social Change

By Patrick McVeigh

The widely recognized challenge of socially progressive investing is ensuring that financial results are not sacrificed in favor of social impact, and vice versa.  When it comes to impact investing, too often the financial goals are forgotten as investors focus primarily on putting money into a cause without considering the real social value of a modest return.  Earned capital can be recycled back into the cause or taken for profit, making a greater long term impact while benefiting the investor.

Impact investing has been in the spotlight more of late, as a new generation of investors embraces the idea of directing capital to social change.   The movement is enjoying a window of opportunity driven largely by these investors and current market conditions – returns on traditional fixed income investments are so low that putting money into qualified impact investments can bring a better result.

Despite the increase in popularity and demand, there remains a perception that financial considerations should be secondary.  That should never be the case.  Without the right controls and due diligence, impact investing will bear little to no financial gain, resulting in a counterproductive cycle that limits the long term effect of capital. In order to prevent this limitation, small pieces of investment portfolios can prioritize the social return while leaning on the strength of the investment as well, resulting in a dependable flow of recycled capital that continues to support social change.

Impact on global education

Educational initiatives have the potential for significant global impact within a socially driven portfolio. MacGillivray Freeman Films (MFF), for example, has made a financial mark by producing IMAX films that spotlight the environment, especially water and climate change issues. Over the lifetime of MFF, films have been nominated for Academy Awards and translated into as many as 18 languages.  Each venture has reached more than 15 million people directly in theatres associated with cultural centers across the world.

On the social side, not only do the films have educational value, a significant portion of revenue goes back to the hosting institutions.  On the financial side, the IMAX distribution channel makes the investment extremely reliable; whereas traditional movies often never make it out of the studio, MFF films that are funded and made enjoy built-in viewership.

MFF’s recently released film To The Arctic 3D, which follows the plight of polar bears facing dramatic climate changes in the Arctic, serves as a powerful case study for the investment model.  The project advanced beyond the customary cultural venues through a partnership with Warner Brothers and Coca-Cola that brought the movie into the mainstream.  Warner Brothers expanded distribution, and Coca-Cola incorporated images from the film into its “Arctic Home” fundraising campaign for the World Wildlife Fund – even using To The Arctic’s cast of polar bears on a special edition Coke can.

This film (and those that led to it over the decades) typifies the potential for projects that play a supporting role in socially progressive investment portfolios.  The project supports climate change education, lends itself to global reach, and captures modest returns without losing sight of its mission.

Impact on developing markets and the environment

Emerging markets can also serve as a viable platform for impact investing – especially those that call for greater emphasis on structured, ethical initiatives in order to create sustainable ventures. China, India, and Asia Pacific are premiere examples of regions that have the potential to produce strong companies due to the proliferation of technology and the growth of the middle class. As these sectors continue to grow, the countries simultaneously face urgent environmental challenges.

Aloe Private Equity sees sizeable opportunities for companies that can directly transfer and implement Western technologies to tackle these challenges.  Aloe deploys capital to grow environmental and socially responsible companies that address these environmental challenges with high growth in Asia.  Investing in this effort provides the laser focus on impact investing alongside the potential to drive significant change.

Carbon emissions, for example, are on the rise in China due to the increase of population, causing a startling spike in premature deaths. 2012 statistics showed that “while China has made gains on some other airborne toxins, the PM 2.5 data is far from reassuring in a country that annually has hundreds of thousands of premature deaths related to air pollution. In an unreleased December report relying on government data, the World Bank said average annual PM 2.5 concentrations in northern Chinese cities exceeded American limits by five to six times as much, and two to four times as much in southern Chinese cities.” (Activists Crack China’s Wall of Denial About Air Pollution, Sharon LaFraniere, The New York Times, January 27, 2012)

China has no choice but to improve their environmental impact profiles through the development of clean energy, recycling and energy efficiency. Aloe balances its social goals with its business acumen and is making its mark as a pioneer of sustainable investments in Asia without losing sight of its fiscal responsibility.

Impact investing is an admiral complement to a complete investment portfolio, but there are no shortcuts to long term social improvement.  Intensive due diligence is required to find those investments that create sustainable action and behavior change. By focusing on specific entities and their individual missions, investors can better gauge their partner’s reliability, develop a complete understanding of the industries in question, and ensure that the deal structure prioritizes meaningful capital returns while delivering lasting social impact.

By Patrick McVeigh, President, Reynders, McVeigh Capital Management

image: Steven Depolo via Flickr cc (some rights reserved)

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