A New Kind of Investor is not Just Looking to make a Buck, They Want to Save the Planet
Written by David Paterson
Do well for yourself financially and do good for the rest of the world. That’s the proposition behind impact investing, an ethos that values an investment for its financial performance as well as its ability to tackle social or environmental issues.
Already a nine billion-dollar market in Canada, impact investing is growing fast, but until now has been restricted mainly to the wealthy. That’s starting to change with new services that are openly challenging the public to put their money where their morals are.
“It’s bringing together the one percent and the 99 percent to make the world a better place,” says Adam Spence, director of SVX.ca, Canada’s first online platform for impact investors.
Launched five years ago with the backing of TMX, the site allows investors to browse investment opportunities in companies that it pre-screens and determines are advancing social or environmental causes. The startups that make it onto the platform work in areas such as clean technology, global health, and food security.
One of the first companies to raise money on the site was Lucky Iron Fish, which aims to eliminate iron deficiency in the developing world by providing iron “fish” for cooking pots. The idea is so compelling that it landed the company’s founder on the Forbes 30-under-30 list.
Another startup SVX works with is software company Ulula, which aims to prevent catastrophes like the 2013 Rana Plaza garment factory collapse that killed 1,134 people. Ulula created a platform that uses mobile technology to connect global companies to the people working in their supply chains, so they can monitor and improve conditions in real time.
Growing numbers of people are interested in supporting startups with a conscience, but until recently investment rules barred all but accredited investors (people with more than $1 million in liquid assets) from really diving in. Regulators have now relaxed their grip and this fall SVX will open its digital doors to the public.
Users will be able to make online investments of $500 or more in enterprises or funds that forward the issues they care about. Because these investments can be risky, the site also offers individual decision-making support to ensure that users are investing with their heads as well as their hearts.
“There’s no other marketplace like it,” says Spence.
Venture capital alternative
Platforms like SVX are needed because startups with a social mission often aren’t served well by conventional funding sources. Today’s high-octane venture capitalism demands high-growth and a quick route to an exit via a sale or IPO, which is exactly the opposite approach needed by companies trying to solve the world’s problems. These startups need investors who believe in their mission and are willing to wait for the payoff because they see the bigger picture.
“Impact investors understand that social change doesn’t happen overnight,” says Antoine Heuty, founder of Ulula, who raises money from both traditional venture capitalists and this new breed of impact investors.
Demand for impact investments is driven by the young. In polls, millennials have consistently emerged as the generation most interested in impact investing. According to research by the Responsible Investment Association, 58 percent of millennials are interested in impact investments, while only 25 percent of baby boomers are. They’re almost twice as likely as boomers to believe that companies with good social and environmental practices are better long-term investments.
The clean technology sector has been the quickest off the mark to create products that respond to demand from small investors. Companies like CoPower and SolarShare have been successful in selling “green bonds” to the public, which are used to fund community-scale clean energy projects. Investment minimums start at $1,000 for SolarShare and $5,000 for CoPower. Both companies have seen strong demand: CoPower tested the market with a $300,000 green bond in 2016 that was sold out in three weeks. Now it’s marketing a $20 million bond.
The mantra adopted by Google in the 2000’s – “don’t be evil” – had a ripple effect on the investment community, says Spence. That momentum is growing because of the state of current affairs, and the fact that more universities are offering courses in social entrepreneurship, which he believes is shifting the mindset.
Richard Muller, North American managing director for Toniic, an organization that represents impact investors, believes small investors will be important in making impact investing more common in Canada. “The tipping point will happen when more people can put $5,000 or $10,000 into something they feel aligns with their values, rather than $50,000 or $100,000,” he says.
Mass market or niche?
The attraction of impact investing is clear. The question now is whether it can break into the mainstream, or whether it will fall victim to the Sisyphus syndrome: forever striving, but never reaching the top. To cross over from niche to mass market, Canadian impact investing funds will have to overcome challenges on a number of fronts.
Muller highlights onerous regulation and lack of liquidity as two major hurdles.
Although Ottawa and many provincial governments are supportive of impact investments, financial regulators still tend to regard them as exotic assets and place restrictions on them. In addition, many of the opportunities that are available require investors to lock in their money for a decade. “That’s not realistic for any number of consumers,” says Muller.
He wants to see regulatory changes that make it easier for small investors to enter the market and encourages the creation of more liquid investments, such as income-generating funds instead of vehicles that offer a straight equity return.
More work is also needed to sharpen the blurry line between what is and what isn’t an impact investment. “Doing good” for society or the environment is a concept so open to interpretation that some fear it will be applied to products that aren’t warranted. Academics are feverishly spinning wheels to create reporting standards for social and environmental impact, but small investors will unlikely leaf through reams of statistics. One promising approach is the creation of B Corp, a label similar to the Fairtrade mark that indicates a company meets certain ethical standards.
If the industry can find a way around these issues, it could reshape investing and create a kinder, gentler kind of capitalism.