Impact investing: what is it, and how profitable can it be?

I am always open to new investment ideas, and here is one I haven’t come across before. Have you heard of impact investing? I hadn’t, embarrassingly, because the phrase was coined in 2007. My bad.

Sudden impact

For newbies like me, here’s the definition: impact investing aims to deliver social and environmental benefits, in addition to financial gain. Now I can see at once why the phrase doesn’t resonate. It doesn’t do a great job of explaining what it actually does. 

Here’s another reason. It sounds like something that I already knew existed, and went by other names, say, ethical, green or socially responsible investing. Although, while socially responsible investing usually aims to avoid harm, impact investing aims to make a positive impact – hence the name.

Ethical question

No, wait, don’t go. I know many of you will have looked at this kind of thing before, and shied away. Fairly or unfairly, most investors see ethical investing as good for their conscience, bad for their portfolio. Could this subset have a more positive, ahem, impact?

At least the definition appears to prioritise financial gain, with the social and environmental benefits ‘in addition’. And I am not cynical enough to suggest you cannot have both. In some circumstances, impact investors may be willing to accept a lower financial payback in return for delivering a certain social outcome, but this does not mean they will always generate below-market returns.

GIIN and tonic

Impact investing now covers assets totalling nearly $114bn, according to the 2017 Annual Impact Investor Survey, carried out by non-profit organisation the Global Impact Investing Network (GIIN). This analyses 209 of the world’s leading impact investing organisations, including fund managers, foundations, banks, development finance institutions, family offices, pension funds and insurers.

Some 40% of impact funds are invested in the US, followed by 14% in Europe, with the majority going into sectors meeting basic needs such as housing, energy, financial services, food and healthcare. Investors seem a happy bunch, with 98% of GIIN respondents saying their investments either met or exceeded their expectations for impact, and 91% for financial performance. Hard performance data is thin on the ground as yet.

Going green

Naturally, they are not just in it for the money. The vast majority accept that certain impact investment strategies may never lend themselves to risk-adjusted market rates of return but are happy if it has other benefits, such as fighting AIDS in Africa.

If you are interested, one option is investment trust Menhaden Capital (LSE: MHN), launched in July 2015 by Ben Goldsmith, brother of environmental campaigner Zac, which aims to channel investment into green businesses that specialise in saving resources such as energy and water, or cutting waste. High-profile investors included Deborah Meaden of BBC’s Dragons’ Den, New Look founder Tom Singh and hedge fund billionaire Louis Bacon.

Value trap

It set out to raise £150m at launch but two years later its net asset value (NAV) stands at just £89m after plunging alarmingly in the first year, although it has flattened out lately. The fact that it trades at a frightening discount of -25% suggests it is currently making the wrong kind of impact. Let’s hope that changes.

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Harvey Jones does not have a stake in any company mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.