Putting your money where your heart is not a new concept. But making competitive profits in the process has proven to be a bit more complicated.
In the last 15 years, socially responsible investing or SRI, has become an increasingly visible option for investors who seek to blend social concerns such as environmental stewardship or human rights with their investing strategies. Those SRI funds are both feel-good and do-good by comparison to regular funds, but they’ve faced criticism on two fronts: They have had lower returns, and their missions can be hard to define, which can lead to “greenwashing” — the attempt to cover ordinary profit-seeking behavior with a thin patina of socially or environmentally positive PR.
However, top business schools — along with a new breed of venture capitalists — are trying to change that and prove that investing with the goal of creating a meaningful, positive social impact can generate financial returns equal to traditional methods. A new genre has evolved from SRI: impact investing, which proactively uses invested funds to solve social or environmental goals and achieve competitive financial returns at the same time.
Competing to Make the World Better
In early April, 12 teams of business-school students from top American and British schools gathered in New York City for the first International Impact Investing Challenge.
Taking the podium in a wood-paneled conference room in J.P. Morgan’s headquarters (formerly the Bear Sterns building), students presented ideas that showcased how those investing opportunities might look. The buzzwords bandied about included emerging markets, mobile platforms, micro health insurance, and clean energy.
The first-place portfolio, won by Kellogg MBA students Sachpreet Chandhoke and Puneet Gupta, outlined the Grain Depot Fund, a plan to improve grain storage and distribution in India. They predict an initial investment of $17 million to build storage silos in India’s bread belt could deliver a return rate of 19% for investors over a 15-year period, improve revenues for local farmers, generate new employment, and provide more grain for food. That’s a lot of bread.
“The beauty of this is that it is simple,” said Chandhoke. “We’ve gotten to the heart of what impact investing is all about.”
Financial Innovation and Long-Term Strategies
Mark Milstein, director of the Center for Sustainable Global Enterprise at Cornell’s Johnson Graduate School of Management, says the recent financial crisis showed that traditional investment vehicles were fallible, and underscored the importance of the sort of long-term strategies that are central to impact investing. The sector is predicted to grow to $500 billion by 2014, according to the nonprofit Global Impact Investing Network.
“In the bad economy, greenwashing went out the window,” Milstein said. “But long-term investments have continued to grow and have value.”
David Chen of Equilibrium Capital Group, who was key in organizing the competition, says he’s impressed with the passion for social change he sees in today’s business-school students. “It’s not just students coming from the nonprofit world anymore,” he said. “It cuts across all students.”
As the competition wrapped up, students mingled with the judges — managing directors, fund managers and partners at top capital firms responsible for directing billions of dollars.
“Finance can be a source of innovation if we can harness creativity in the next generation,” Chen said.