The new kid

Good Samaritans rejoice. Investment that generates not only financial returns but also social benefits—known as impact investment—is being recognized as the newest asset class on the financial block.

A brick-and-mortar manifestation of this newfound enthusiasm for impact investment, the Centre for Impact Investing opened its doors in September at Toronto’s MaRS Discovery District. Designed to be the hub for all things social finance, the Centre opened with blessings to the tune of $1.3 million from the Rockefeller Foundation and the J.W. McConnell Family Foundation.

MaRS estimates the Canadian impact investment market to be $2 billion (Social Investment Organization, an industry group, offers a much higher figure, upwards of nearly $4.5 billion), with potential to reach $30 billion in the next decade, not to mention a global reach of $1 trillion. (The entire investment market in the U.S. is estimated at $41.7 billion.)

It was only last year the phrase impact investing was first used to distinguish investments intended to create positive impact beyond financial returns from the wider trend of socially responsible investment.

Patti Dolan, senior investment advisor at Mackie Research Capital Corp. in Calgary, sensed something was up when she heard the phrase being mentioned with increasing frequency at breakfast meetings and casual conversations.

“Even Brett Wilson, the Dragons’ Den fellow, was involved in it,” she says. “If someone of his calibre is stepping up to talk about it, I am going to listen.”

In an economy reeling from the aftermath of the financial crisis, many feel they’ve fallen victims to corporate greed. This is driving people into the arms of what Dolan calls feel-good investments.

To meet this increase in demand, she has been learning how best to allow her investors to “fund organizations they believe in.”

This means looking into firms that have trouble securing conventional funding. It also means steeling herself for the “nightmarish hurdles to jump through ahead,” a potential downside for investors interested in impact investing. The government is only now waking up to the opportunities that impact investing has to offer, and no structure exists to give it the institutional support it needs.

“It’s still in its nascent stages. There is a lack of a larger vehicle for investment,” says Ian Bragg, director of research at SIO.

According to Eugene Ellmen, executive director at SIO, “Impact investments are uncorrelated with global equity or bond markets, and through recent economic turmoil, that’s proven to be pretty good.”

But like all asset classes, impact investing is not for everyone, Dolan says.

She recommends advisors educate potential investors on the benefits and risks of impact investment. “The funds fall under private equity, so liquidity is a major risk,” she says. Investors would also be dealing with new companies that haven’t been measured against the tides of the market. But then again, she adds, “that’s the whole point of investing.”

But “it’s certainly not meant for a retiree who’s looking for a stable portfolio,” she adds. Also, there aren’t many funds to choose from at the moment.

Gary Hawton, president of OceanRock Investments, says the appetite for impact investing in Canada is only going to grow.

“Just ten years ago, impact investing was seen as supporting with charitable dollars rather than investment dollars. That’s changed now,” he says. More investors are now positioning themselves as allocating significant portions of investment as opposed to labelling it as a portion of what they plan on giving away as charity.

“It’s also a function of the market maturing. Firms have more competitive rates of return and better risk management now. That’s only going to get better.”

Gena Rotstein, chief executive at Dexterity Consulting, says advisors should start conversations with clients on what a diversified portfolio looks like for them. “It’s not philanthropy. Impact investing is anytime you take your money and put it into an investment where the company’s core value is to drive social change and make profit.” By this measure, figuring out the ROI for them is no different than it is for any other companies: due diligence. “It’s about following the money.”

It turns out you can catch two birds with one stone.

May Jeong is a Toronto-based financial writer.