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Saturday
Feb132010

Financial innovation that is necessary -- impact investing

Achieving a double bottom line - making financial gains while also contributing to social or environmental progress - is increasingly the objective of many institutions. Individuals are also interested in putting their money to good use financially in ways that they can feel good about morally, as evidenced in part by the rise of practices like peer to peer lending and microfinance.

But while institutions can make meaningful contributions, individuals are constrained by regulations that limit their impact. One such regulation is the "accredited investor" requirement, which requires an income above $200,000. P2P lending, which is small enough to avoid such a requirement, is a powerful platform, but it's hard to see an individual investment really scale when you are looking at loans in $25 and $50 increments.

The truth is that even for large institutions, many of the tools and infrastructure are not there to efficiently move into this new space. The weak traditional framework of credit agencies, market clearinghouses is insufficent to account for this new value, which requires standards for measuring and benchmarking performance. Depression-era regulations meant to protect investors further restrict the move of individuals into this emerging market space.

For a market that allowed all kinds of innovative and creative practices to invent the instruments that led to the recent financial crisis, it is a disgrace that regulations are now preventing the emergence of a genuinely good and transparent new investment framework. This past fall, however, a network of powerful players launched the Global Impact Investing Network (GIIN) dedicated to creating the conditions to achieve a thriving climate of impact investing. The network's members include a variety of institutions including banks (Citigroup, Deutsche Bank, JPMorgan), philanthropic institutions (Bill & Melinda Gates Foundation, Rockefeller Foundation), and the Acumen Fund (which we wrote favorably about a while ago for their free market approach to international development).

From their website,

The GIIN supports collaboration, develops industry infrastructure, and undertakes research and advocacy to foster a coherent impact investing industry. The GIIN's programmatic agenda is rooted in the challenges investors face. It serves as a forum for identifying and addressing the systemic barriers that hinder the impact investing industry's efficiency and effectiveness.

If enabled, impact investments have the potential to scale to provide a genuine complement to non-profit and government efforts to solve world problems. Individuals and institutions are interested in investing in socially good efforts - they just need the legal and regulatory framework that lets them. I hope the GINN helps us get there.

Flickr Creative Commons credit: 10b travelling

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