A real estate cooperative that just made its fifth land acquisition with the aim of averting gentrification and allowing Oakland, California residents to stay in place. Or a solar energy system for a rural school in coal-rich Appalachia that's struggling with energy costs.
Both initiatives are projects backed by regional funds focused on impact investing on a much smaller scale. While players like BlackRock have over $60 billion assets in ESG-focused funds, smaller ventures are targeting a growing market of wealthy clients looking to create a more socially impactful portfolio. The goal is to invest locally to keep the money within communities and create a more direct measure of the impact.
"Once the investment capital is in the community's hands, they just work to repay it and once that loan matures, then it's back in the portfolio of our clients to do the same thing again," Tiffany Brown, the co-founder of Chordata Capital, a self-titled "anticapitalist wealth management" firm in New York and San Francisco, said. "It's really sustainable."
Impact investing falls into the $2.5 trillion environmental, social and governance market, and focuses on achieving positive social and environmental outcomes in a visible, demonstrable way by putting capital into local communities.
Globally, there were $636 billion investments in impact assets in 2020, up from $505 billion in the previous year, according to a
Chordata Capital saw an uptick in clients after national protests against George Floyd's murder in 2020. With about $130 million assets under management, the firm's investments include funds that lend money to nonprofits that channel investments to communities and direct investments in small businesses focused on racial justice. Its client base is younger millennials in their late 20s and early 30s who have inherited wealth.
"They've identified that they have more than enough money, and they're looking to make an impact, shifting both wealth and power into a community," said Kate Poole, a co-founder of Chordata.
Andres Vinelli, the chief economist at the CFA Institute, said there's a market for investors who want their money to stay within given communities. "That can be an important role for funds and investments that make sure that the money stays and it's engaging in productive capacity in a certain region," he said.
But measuring the impact of impact investing is a challenge. Just as with ESG, there are no standard parameters to assure investors that their investments are actually doing what they're intended to do. Impact measurement takes longer than evaluating an investment's financial gain; it also involves tracking jobs created, business growth and diversity, for example. A Statista
One gauge, the Joint Impact Indicators (JII), created by the International Finance Corporation and Global Impact Investing Network, seeks to provide a common basis for measuring and reporting impact around climate, gender and jobs issues. In 2021, 50 impact investors around the world pledged to endorse and adopt the framework.
With impact investing, the advantage for smaller firms and funds is that they can directly engage with their portfolio companies and measure outcomes.
Integrated Capital Investing, a firm in Aptos, California, that works with funds and foundations to raise capital, found the funds primarily focused on technical assistance, career development and grant support aimed at reducing market and other risks.
The funds also reverse who decides where capital flows, by including members of the community in the decision-making. Integrated publishes annually a
The Invest Appalachia fund partners with local nonprofits and community associations across the Appalachian region to assess which organizations to invest in, offering loans at minimum of $10,000 and up to $4 million.
"It's going to be longer term," Andrew Crosson, the fund's CEO, said. "We are also helping them [business and projects] make those adjustments over time."
The regional fund recently raised $19 million and aims to draw $40 million by the end of the year.
In 2020, 76 impact funds were launched globally that aim to raise more than $21 billion collectively, according to the International Finance Corporation. In total, there were 1001 privately managed impact funds in 2020, compared to 887 in 2019.
Impact investors have diverse financial return expectations. Most of Chordata Capital's clients are interested in higher risk investments, and are willing to accept zero or below-market rate returns. But a 2020
For the Invest Appalachia fund, the solution to attracting investors, even with a below-market rate return, was to diversify its portfolio across industries, from construction and real estate to local business and solar projects.
"It's not for everyone," said Crosson. "It's for the investor who can afford to have their investments sit there for seven years of the fund term."
The financial return of the funds selected by Integrated Capital Investing range in structure and approach and solicit capital from grants, recoverable grants, investments and equity evergreen funds. Some funds offer dividends or royalty payments, while others post returns of 0% to 8%.
Overall, impact investors are seeing returns. Portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, according to the Global Impact Investing Network survey.
"Today we talk about ESG and impact investments," Vinelli said. "But what matters is that it represents a trend of business awareness and investment values, and those are here to stay."
