Your Aunt Cynthia has died unexpectedly. Our condolences. In her will, she’s left you $25,000. Now you want to invest it wisely, as in–not just leave it in a checking account that pays next to no interest. Ideally, you want to make a decent return, but you also want to be responsible about it. Cynthia was a good person who cared about animals, the environment, and everyday people. She didn’t like violence, or pollution, or dictators. She distrusted Wall Street, and you’re not crazy about it either. You want to invest the money sustainably, but maybe not in the traditional ways. What are your options?
The good news is there’s a widening array of sustainable and “impact” alternatives these days and they’re not all for accredited investors–that is, people earning more than $200,000 a year, or with a net worth of more than $1 million. Through screened mutual funds, “robo-advisers,” various forms of crowd investing, community investing, and even direct investing, you can hope to make money and make a difference at the same time. Exactly what risk and level of returns you can handle will depend on your stomach, your other income, and how you define “responsible,” “sustainable,” and “impact” (the terms are notoriously slippery, so watch out). But the options below, gathered from half a dozen experts, should give you the ability to diversify and accumulate, if, again, you’re lucky enough–RIP, Cynthia–to have extra cash to invest.
Publicly listed companies are the easiest type of companies in which to invest. They’re set up to accept money from strangers, and, as an unaccredited investor, your interests are legally protected. By contrast, investing in private companies with a social purpose is generally more difficult (though, these days, it’s getting easier).
There are lots of mutual funds that screen out activities you don’t want to support with your money, like companies that sell arms and tobacco, or that make money from gambling (the traditional no-nos). And some have track records of offering very good returns, known as “non-concessionary”–as in, you’re not making financial concessions to your ethics. “In the past, people said if I invest in a socially responsible way, I’m going to give up returns,” says Jane King, of Fairfield Financial Advisors, which finds impact investments for family clients, in an interview. “But I don’t think you have to give up returns to be socially responsible.”
King recommends funds like Parnassus Endeavor, which avoids fossil fuel-related stocks and targets employers with “outstanding workplaces.” Its portfolio includes Whole Foods and pharmaceutical firms like Gilead Sciences, and it posted an average return of 16.5% over five years by March 31 this year, and more than 25% in the last financial year. Another fund from the same stable, called Parnassus Core Equity, steers clear of weapons, nuclear power, and firms with financial ties to the genocidal regime in Sudan. Its portfolio features blue chip stocks like Apple, Intel, and Allergan and posted a 13.5% return over five years (12% last year). Both funds outperformed the S&P 500 over the same periods (in investment-speak, they delivered “alpha” returns above market index funds). The five-year average for standard mutual funds was about 12%.
For other mutual fund options, take a look at this comprehensive list from the Forum for Sustainable and Responsible Investment (US SIF). It includes information like assets under management, fund age, and performance to date. If you want to hire an investment adviser for impact investing, Amit Bouri, CEO of the Global Impact Investing Network (GIIN), a member association of foundations and investment firms, recommends asking the following six questions:
1. How familiar are you with impact investing, and what types of impact investments have you recommended for other clients? (Inquire about the track record of the adviser in making impact investments.)
2. Can you give me an example of how you build portfolios around social and environmental issues your clients care about? (Ask to see an example portfolio.)
3. How do you assess impact performance of funds you recommend, both at the time of investment and over the life of the investment? (Ask to see evidence that social impact is being assessed along with financial performance.)
4. Can you give me some evidence your recommendations go beyond negative screening into investment in positive solutions? (Are the portfolio companies avoiding harmful impacts, or are they looking to make actively positive contributions through their activities?)
5. How do you avoid investing with funds or companies that may be “greenwashing” and are not actually impact investments? (Ask advisers what they consider as greenwashing and how they seek to expunge it from your portfolio.)
6. Can you give me some examples of “close calls” you’ve made on whether or not to include something in an impact portfolio? (Asking about decision-making illuminates whether advisers have considered impact investing’s complexity.)
It’s important, says Bouri, to tease out those advisers with real experience and understanding of what impact investing is, and those who just claim experience and understanding. Also, there’s a difference between screening corporate activities you don’t agree with (like selling arms) and those actions that make a positive difference. GIIN defines impact investing as addressing challenges like sustainable agriculture, renewable energy, conservation, micro-finance, and affordable access to housing, health care, and education. It’s questionable therefore whether a fund that invests in Gilead and Apple, however well meaning, really meets the test of “impact” because they’re doing more to avoid harm than create solutions.
Meanwhile, a new generation of “robo-advisers” do a similar job as actual human advisers (or at least claim to). And, by employing algorithms to pick securities, they generally offer lower fees: 0.2% or 0.5% of your funds instead of a typical 1%. Impact-focused services include Aspiration, Impact Labs, Earthfolio, Motif, Grow, and OpenInvest. They have minimum starting investments ranging from $1 to $25,000 and either build their own portfolios, or have a fund-of-funds approach mixing other providers’ offerings. OpenInvest, which has a minimum of $3,000, offers the most customizability, letting you choose stocks and bonds based on what non-financial issues you think are important.
Robo-advisers claim to be democratizing responsible investing, and tend to target millennials, who, research shows, are more likely than previous generations to be interested in such investments. Aspiration, based in Southern California, has the most radical anti-Wall Street message. It lets you pay-what-you-want in terms of fees and gives 10% of its revenue away to charity. It currently has three products: two funds and a checking account. The Aspiration Redwood Fund offers fossil fuel-free investing and a screening for environmental, social, and governance factors (like whether firms have women on their boards, and whether they do public sustainability reporting). The fund includes stocks like Eli Lily, Ford, and American Express.
The options so far have all involved public companies, and public companies may not always be the best vehicles for progressive values. While Apple is a fantastic business that makes lovely computers, does well by its employees (most of them anyway), and uses renewable energy to run its data centers, it may fall down in other areas that you care about. Personally, it bothers me that it avoids paying taxes (while I have to) and that it produces tons of products that end up in landfills.
Having to meet the short-term needs of shareholders, public companies—perhaps inevitably–have to compromise on how much attention they can give other stakeholders, including the communities where they operate, their workers, the environment, and their customers. Witness, for example, how Wall Street reacted recently when American Airlines announced it was giving a raise to its pilots and flight attendants. Its stock got battered, and one prominent stock analyst complained: “Labor is being paid first again. Shareholders get leftovers.” Private companies don’t face that sort of pressure. They’re free to reward workers when they see the value of rewarding workers. (American Airlines argued that higher pay equates to better customer service and better long-term profits–which sounds like good business practice, rather than privileging anyone unfairly.)
“I have a lot of my retirement in mutual funds that are supposed to be impact investing, but when you really look at what’s in there, they might be companies that you’re not that proud to support,” says Jenny Kassan, an attorney who’s worked with many mission-driven entrepreneurs to raise capital. “It’s better than a random mutual fund. But if you want to have an impact, you might be better investing in a private company. There are few truly game-changing public companies because their shareholders are so demanding about quarterly performance.”
Partly because managers are tired of Wall Street short-termism, more companies are staying private these days. And some, like Method, Patagonia, and Kickstarter are becoming benefit corporations, a legal designation in 31 states and D.C. where companies agree to take account of a wider range of stakeholders. Others are choosing B Corp status, a third-party accreditation with a higher compliance bar. Unfortunately, though, few such companies are public. Only one benefit corporation is currently listed: the controversial Laureate Education, which runs for-profit colleges around the world.
Crowdfunding offers one way of investing in mission-driven companies. Last year, Wefunder, an equity crowdfunding platform, ran a campaign for the Force for Good Fund, which in turn invested in several B Corps owned by women or people of color. Wefunder cofounder Mike Norman points to several impactful projects currently on the platform, including Urban Juncture, which is remaking neglected areas of Chicago into hubs for “Black food and culture.” It offers a promissory note that pays 5% per year over 10 years (plus several perks, like a free meal for two at the Bronzeville Jerk Shack).
Small Change, founded by Eve Picker in Pittsburgh, funds “transformational” real estate projects. That means projects that promote walking and biking, sustainability, that revitalize neighborhoods, or that refurbish buildings of historical importance. You can invest as little as $500. This nice-looking odd-lot starter home in New Orleans, for instance, offers an annual 8% return (paid by the developer).
Wefunder is regulated under Title III of the JOBS Act, which came into force last year. It allows companies to raise up to $1 million from any number of unaccredited investors. Other crowdfunding sites are regulated under Title II, which is only for accredited investors (sites like AngelList for instance) or Regulation A+, which allows offerings of up to $50 million, but comes with a higher compliance burden for issuers (sites like StartEngine).
Wunder Capital, which funds midsize commercial solar projects, is currently open only to accredited investors. But Ilyas Frenkel, the company’s head of growth, says it should be open to all-comers by the end of 2017 (it’s currently exploring filing its application with the S.E.C.). “The majority of solar deals are still financed by Wall Street investment banks, and average investors don’t get a chance to invest. Our goal is to open up these investments to everybody so they can put their money into a cause they believe in,” he tells me. Its projects include charter schools, a Salvation Army building, a Boys & Girls Club, and municipal buildings in Minnesota–deals offering projected returns of 6% to 11% a year.
Meanwhile, there are plenty of options to invest in compelling local businesses, though sometimes you have to be willing to suffer no financial returns and take your rewards in other forms. Investibule lists hundreds of opportunities, bringing together offerings across 20-plus funding sites. Those include Kiva, where you can make no-interest loans in small businesses, and Credibles, where you can invest in food businesses and get repaid in the form of food (the loans are pre-payments on cheeses, eggs, and fruit juices you will probably buy anyway).
While crowdfunding offers new ways to invest locally, there are older, better established options to make a difference in communities. They don’t offer the returns of mutual funds or robo-advisers, but they do offer authentic social impacts. Nonprofits like RSF Social Finance, in San Francisco, and the Calvert Foundation offer community notes with fixed returns over set periods. And instead of the compromises of public companies or crowdfunding, your money goes direct to meaningful projects, and you can get guaranteed, albeit small, returns.
The Calvert Community Investment Note, which dates back to 1995, has a minimum investment of just $20, and you can invest directly online. If you’re willing to lock up your money for 15 years, you’re guaranteed an annual 4% return (interest rates go down the shorter the term). For comparison, a 10-year U.S. Treasury Bond currently pays about 2.4%.
Through intermediary funds and direct investments, Calvert invests in expanding health care access in Africa and affordable housing in the U.S. (to name just two areas). For example, it lent catalytic capital to the Remington Row housing development in Baltimore, helping teachers stay in the city. (Calvert Investments, which offers screened mutual funds, is a related, though separate, company).
RSF’s Social Investment Fund has been operating since 1984 and has made almost $400 million in loans in that time, all to social enterprises. It has currently 137 outstanding loans across food and agriculture, education and the arts, and ecological stewardship, including a grass-fed beef co-op in Arkansas and a successful recycling business in Minnesota. The note offers only 0.75% interest, but your investment is liquid (you can withdraw everything after 90 days) and you’re guaranteed a return: RSF has never failed to pay its investors.
Don Shaffer, CEO of RSF Social Finance, compares the product (minimum investment: $1,000) to a six-month bank certificate of deposit (CD), and points to the community-affirming effects of the fund. Each quarter, its investors meet with the loanee companies to agree the following quarter’s interest rates and return–a unique cooperative financial model. “If you’re someone who wants to participate in the farmer’s market of money, where you actually get to meet the people who are borrowing your money, there’s no one else doing that,” Shaffer tells me.
The Trillinc Global Fund provides trade finance and collateralized loans to small businesses in the developing world, from a chia seed exporter in Chile to a fish processor in Ecuador (it has a minimum investment of $2,000, though it’s currently closed to new investors). Community Capital Management, which offers the CRA Qualified Investment Fund, invests in real estate for social purposes, mostly through the bond markets. After Hurricane Sandy, it distributed Jon Bon Jovi’s investments aimed at rebuilding parts of New Jersey.
Meanwhile, the ImpactUs marketplace, which opened just this April, lists several other community opportunities, including a fund that invests in affordable multifamily rental housing and another in international micro-finance. The four vehicles available (minimums range from $3,000 to $50,000; estimated yields from 0%-5%) are open only to accredited investors so far. But others for unaccredited investors will be on offer soon, says Liz Sessler, VP of client engagement. “There’s a robust pipeline of private impact investments out there, and many of them are looking for this type of technology because it’s costly for them to build it on their own,” she says. ImpactUs, founded by several Community Development Financial Institutions and funded through philanthropy, is aiming to make it easier for retail investors to put their money into impact. It’s unusual in offering online service with the convenience and rigorousness of, say, a Charles Schwab trading account.
Or, you could try investing directly in companies. “If you know a business you love, you can approach them about making an investment,” says Kassan, the attorney. “Pretty much every state has laws that make it pretty easy for a small business to accept an investment from an unaccredited investor with minimal compliance.” You could talk to someone like Kassan who works with small businesses looking for money, but which, for legal reasons, are not allowed to announce their equity availability publicly. Moreover, many states allow direct public offerings that are exempt from federal regulations. They allow companies to solicit funds from their communities, rather than going through a financial institution that takes a hefty cut of the capital raised.
Can You Have It All?
The options above provide a range of returns, investment terms, and impacts, from small social enterprises to very large businesses. Many investors will choose to spread the risk from Fortune 100 companies at one end to something more homely, and concessionary, at the other end. It may be good to be wary of investments that claim you can have all the return and all the impact you like. Probably that’s only possible if you avoid slower-growing, socially important investments, like say RSF’s recycling company or Calvert’s medical loans in Africa.
Jenn Pryce, CEO of the Calvert Foundation, says the vagueness around terms like “responsible,” “sustainable,” and “impact”–some of it deliberate mystery-making by new players entering the space–isn’t a bad thing if it brings more funds and more investors into the industry.
“To engage a full investment portfolio responsibly, rather than carve out 5% or 10% [for impact], is very exciting. If we’re getting to that point by having language confusion about what is impact and responsible investing, that’s okay,” she says in an interview. “Some people are entering impact and responsible investing looking for alpha, and that is not the point. The point is to construct a portfolio with integrity around values that provide appropriate returns. In those returns, there’s a spectrum. It’s about a new way of investing people’s money, not necessarily about seeking alpha in the short term.”
Corrections: This article previous misstated the location of Fairfield Investment Advisors. Additionally, we’ve noted that Wunder Capital’s returns are projected, and it is exploring filing with the S.E.C.