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Profit with a purpose

As earnings, bonuses and stocks creep back to pre-crisis levels, will markets resume business as usual? A plea for a new kind of investing that blends good sense, good causes and good financial returns. By: Adam Smith, Ode

01-05-2010 | And none would quibble with the chance to do good with cash in the process of making a profit. The result: Impact investments could hit $ 500 billion within the next five to 10 years, according to Monitor Institute, the part of the U.S. management consulting firm Monitor that focuses on social and environmental challenges. “We’re at a very nascent stage” in the industry’s development, says Bouri. “We don’t know how big this could get.”

Versus the trillions of dollars bound up in investments concerned only with profit, that is loose change. While it is clear there is money to be made from impact investing - the original investors in Compartamos Banco, for instance, doubled their money each year by the time the Mexican microfinance firm held its initial public offering in 2007 - the kind of returns on offer can’t be publicized until more specialist funds complete more investment life cycles.

Putting money into socially minded companies “is still a relatively new concept,” says Whitni Thomas, a London-based investment manager at Triodos, a prominent impact investor. “No one’s had a full life cycle of a fund to be able to point to a track record in the space.”

Like many fledgling industries, the challenges for impact investing go beyond a limited trading history. A lack of coordination among investors and insufficient information sharing or collaboration over deals limit the scale of the sector, not to mention its impact. Scant intermediation between investors and firms needing capital - by consultants with detailed knowledge of the industry, say - also hampers progress. And that’s before the global economic deep freeze gave many potential investors cold feet.

The sector’s toughest challenge: measuring the social and environmental impacts of an investment in a reliable, consistent way. As long as investors can find juicier rates of return elsewhere, asking them to give up a portion of those profits in exchange for social or environmental benefits means being clear about the positive impact their investment could have.

Right now, “it’s incredibly opaque,” admits Bouri. Many investments don’t track the real impact of their cash. Those that do often use competing metrics - Is job creation defined as seasonal employment or full-time work with benefits?- while entrepreneurs might spend too long collecting data to pass on.

Underreporting the potential benefits won’t attract fresh investors; overstating them could divert cash from traditional philanthropy. “High-net-worth individuals get it. Charitable trusts understand it. The social side is what they do day in day out,” says Thomas. “If we want to crack the rest of it, we need to show in a tangible way what (impact) this investment is having.”

To that end, progress is at least being made. The Rockefeller Foundation, impact investors the Acumen Fund as well as B Lab, a Pennsylvania-based firm that rates and certifies corporations’ social or environmental impacts, have collaborated over the development of Impact Reporting and Investment Standards (IRIS), piloted by the principals of a group of investment funds in 2009. An updated version should be ready for a wider rollout later this year. Initiatives like that ought to help more investors like Durham office worker Allen put their money to good use. “Without necessarily prospering at the top level,” he says, using savings to help bring about positive change means “enjoying your relationship to your investments.”

Never having owned a home, or even a car, and with a chunk of his nest egg accruing modestly thanks to good causes, Allen hardly fits the profile of the boom time investor. But he may well be a model for the investor to come. As we save and invest, says Triodos’ Blom, we each “become a simple bank unto ourselves,” with one individual’s money meshed with the fortunes of another.

If we don’t want to be left high and dry by the collapse of yet another virtual economy, we need to get back to reality. But first, we have to make that reality ourselves - and that means investments of another kind: in time and attention. “Study the economy,” counsels Mollner. “If you’re going to live in a capitalist society and have savings, you’re going to have a second job: studying the economy.”