Impact Investing Goes Small-Time

Want to make the world a better place and profit at the same time? Impact investing does just that. It's the new, new thing among Wall Street insiders and the super rich, and it's now being offered to the general public through funds and more accessible investment programs.

Charitable giving has been the traditional way people do good with their money. Meanwhile, socially responsible investing has been the way for investors to put their capital to work at ethical companies. Impact investing bridges these two worlds and forges a new path that seeks a rate of return on investments that aim to solve social or environmental challenges.

This new direction grew from wealthy entrepreneurs who wanted their charitable giving to behave more like venture capital. Pierre Omidyar, the 44-year-old founder of eBay; Bill Gates, the 56-year-old founder of Microsoft; and Steve Case, the 53-year-old founder of AOL, are among the new cadre of impact investors acting with as much zeal in their desire to change the world as they did growing their businesses.

Suzanne Biegel, chief executive of Investors' Circle, a San Francisco-based impact investing network that matches companies with investors, says high-profile deals and benefactors are increasing awareness and coaxing more people into the area.

"There is very early evidence that impact investing is starting to go more to the mainstream," she says. "You could say it's because social entrepreneurship programs have exploded in business schools across the U.S. and Europe, or because success stories like ZipCar, Stonyfield Farm, Method, and Terracycle are considered 'hot' in the mainstream press."

ZipCar is the world's leading car-sharing service, offering an alternative to traditional car ownership and rental, and went public with much fanfare in April. Stonyfield Farm is the organic yogurt company recently sold to French food giant Groupe Danone. Method is the eco-friendly, biodegradable cleaning product company that is one of the fastest-growing private companies in the country. And Terracycle (pictured above) is hugely popular manufacturing company that uses recycled materials for everything from kids' backpacks to shopping bags.

These companies have two things in common: They endeavor to make the world a better place, and investors have profited greatly from them. Early impact investors in these companies can brag that they've profited exponentially and that they've invested in ventures that do good.

Already more than $50 billion has been committed worldwide through impact investments to socially or environmentally conscious businesses. Projections are for impact investments to grow to 10 times that amount over the next decade as Wall Street firms, foundations and mainstream investors commit more capital to burgeoning social enterprises, according to a report on impact investing sponsored by J.P. Morgan and The Rockefeller Foundation. The U.S. Small Business Administration this year announced that it will hand out $1 billion to encourage impact investing domestically.

Okay, so how can you get in on the action? Joining a network such as Investors Circle is one way to do it. You also can educate yourself by browsing Slow Money or another investors' group dedicated to the mission of impact investing. (Meetups and other local groups can be found by searching online.)

Mission Markets offers a matching service for investors and social enterprises. There, you can log on, invest in a company or trade shares, just like a stock exchange. Impact Assets.org is yet another way for investors to act. Impact Assets is a portal for both investors and financial advisers. People can invest in a fund that in turn invests in social enterprises around the world, or they can get investing ideas of their own.

For those who really want to take a gambit, 33needs is a matching service that acts like a dating site: You check out a company's profile, which states its social mission and what is has to offer. If it suits your fancy, you take the risk and invest directly online. The amounts that people invest through this service are typically small (you can invest as little as $10), and it's not something you'd likely find Wall Street veterans utilizing.

But don't count out Wall Street just yet. Major brokerage firms are launching their own impact investing programs to appeal to clients. So a query to your stockbroker or financial adviser might just turn up a fund or a social enterprise that has lots of potential.

According to a study conducted last year by Hope Consulting, nearly 40 percent of affluent investors are interested in impact investing. This didn't escape Wall Street's notice, and firms have been scrambling to put out funds and programs in which people can invest.

The opportunities are trickling down from the ultra-wealthy to the wealthy to average investors.

Indeed, the whole idea behind impact investing is to lead by example. The concept took off after a 2007 Clinton Global Initiative meeting in New York, where a small group of attendees -- who also were sophisticated investors -- gathered to discuss how to solve social and environmental problems with greater efficiency.

The New York City-based Global Impact Investing Network, or the GIIN as it's dubbed, grew out of that get-together. The nonprofit network now includes dozens of wealthy investors, foundations, funds, banks and Wall Street firms.

As it stands, the majority of impact investments are private investments made overseas with a dollop of community-based enterprises operating in the United States. This makes it difficult to find out about -- never mind actually invest in -- many social enterprises under the banner of impact investing.

A big obstacle to impact investing is the "Three Cups of Deceit" problem, a phrase coined in the wake of allegations leveled on 60 Minutes and elsewhere against Greg Mortenson, the bestselling author of Three Cups of Tea, who raises money to fund schools in Afghanistan and Pakistan -- an erstwhile program whose verifiable results and authenticity have come under question. Who knows if a company operating half a world away truly exists and is doing what it claims?

That's why investment groups, Wall Street firms, networks and fund managers are good to lean on for pointers. They can at least relate their own impact investment experiences with companies.

Despite the obstacles, impact investments can turn in tidy returns. The International Finance Corporation's impact investment portfolio, for example, has outperformed its benchmark for the past seven years.

Duncan Goldie-Scot, a former publishing executive who lives in New York City, says he gets great joy out of the impact investments he has made in Africa. "I get my satisfaction from seeing businesses work in that sector," he says. To him, profit is a measure of success. "There does not have to be a serious financial return," Goldie-Scot says, "just enough to enable it [the social enterprise] to survive and grow."

As more people begin to measure business success as something other than financial profit, impact investing is poised to provide good returns -- by any definition.

SecondAct contributor Thomas M. Kostigen is a best-selling author whose books include The Green Blue Book: The Simple Water-Savings Guide to Everything in Your Life and The Big Handout (September 2011). He lives in Los Angeles .