Impact Investing

Financial Advisor magazine has a sister publication called FA Green.  According to the masthead on its home page, it is dedicated to "strategies for sustainable, responsible investing and giving."  This brings to mind two investment themes: Socially responsible investing (SRI) which has enjoyed some economic success, and "targeted" investing intended to attract capital to achieve some societal good.  Examples of the latter include historic preservation, non-traditional energy, and low income housing, Targeted investing typically carries some form of subsidy because it is not projected to be economically successful on its own.

Now I find a blog on the FA Green site called "Tom Kostigen's Impact Investor blog"  It is defining Impact Investing (II) in a way that is attractive to someone who likes the idea of getting away from measuring performance only as the sum of income and growth and comparing it to some benchmark.  While the hype of naming II a new asset class is probably premature and exaggerated, there may be some actual investment merit in some of the ventures.

One example of II that has attracted a lot of attention is microfinance.  Extending small amounts of capital in order to allow entrepreneurs to fund very small businesses is an appealing idea.  The capital allows individuals to boo0tsrtrap themselves out of the depths of poverty.  The returns are high enough to cover the very high fixed costs of servicing the small loans.  At least that is the idea, and I've seen articles in the Wall street Journal and Forbes documenting the success of some of its early practitioners.

Another example are the free trade  businesses that are springing up.  Starbucks gets some advantage from this strategy, and it works because creates value far beyond the commodity that it is buying.  Apparel companies (Nike especially comes to mind) can be seen as participating in this trend, as they pay far above the prevailing wage for assembly workers.

On the other hand, a lot of the other "investments" touted on the websites that Mr. Kostigen links to sound eerily similar to the windmill farms and redevelopment projects that I have seen so many times in the past.  These projects sound good, but they can not compete in the marketplace and provide a competitive return on capital.

It is interesting enough that I will be keeping an eye on the space.  However, there is enough of an echo of pie-in-the-sky opportunities from years ago that I am not getting my hopes up.