Foundations are finding that impact investing is more than just a nice idea, it’s actually financially prudent. That’s based on hard data from a $10 million foundation who decided to make the move to 100% impact.
Over a seven-year period from 2006- 2012, KL Felicitas (KLF) Foundation moved to 85%+ of assets allocated to impact from 2%. And they still achieved index-competitive, risk-adjusted returns. Why did it work?
Positive impacts generated by an impact portfolio exist in several forms: in addition to producing positive social or environmental benefits, an impact investment strategy can result in advantages. One is impact alpha. That happens when market inefficiencies create opportunity to capitalize on long-term social and environmental trends.
Another is diversification. By investing to improve social and environmental conditions at local, regional and global levels, impact investments can position investors for less- correlated market exposures.
But is the market big enough? The company’s in KLF’s portfolio represent a whopping $37.2 billion in assets. And efforts to size the industry have resulted in estimates ranging from $400 billion to over $1 trillion.
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Charly Kleissner believes impact investing is ready to move beyond version 1.0. How? By filling in where charity fails. And he thinks impact portfolios are poised to reach $6 billion in impact portfolios in the next 2-3 years.
Kleissner and his wife Lisa co-founded the KL Felicitas Foundation to support social entrepreneurs around the world and to redefine the purpose of investing by working directly with other like-minded investors.
“Lisa and I were some of the first to go to 100% impact investing across all asset classes – as opposed to carving out impact investing as a small and separate asset class, which is what most people do. And the key is that our investments have been competitive compared to industry standard benchmarks within those asset classes.”
At the same time, Kleissner believes in disrupting the status quo and the top-down global approach used at the largest NGOs. “Most big development and big philanthropy fails. I think the best approaches to solving social problems are ones that respect a region’s unique problems and identity and autonomy while intelligently incorporating global resources and technology.”
To that end, he highlights the importance of challenging long-held, personal beliefs. “Social transformation begins with personal transformation. Unless the CEOs of multinational companies change their own consciousness and awareness then we’re not going to get very far.” “It often means you need to step away a bit, including from your normal peer circles.”
For those who think that’s too risky and out-of-the box, he says. “As for the risk, you can turn the question around: what is the risk of not moving in this direction? We have to be thinking long term. And even the least socially concerned investor knows the benefits of hedging – for example toward clean energy – because at some point a collapse in the status quo is inevitable.”
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Ron Cordes used to manage big money, about $9 billion for AssetMark. He sold that business and now big money managers turn to him for advice on impact investing. And there’s a good reason, impact investing might possibly have been the diversification strategy that saved his butt.
In 2008, his foundation had 20 percent of its portfolio in microfinance and other impact-driven debt and equity vehicles. And while mainstream investments in global banks with heavy mortgage investments took a big hit, small borrowers paid off their loans, 100 percent plus accrued interest.
That was his wake-up call, ‘Here’s a totally uncorrelated asset class that in the worst financial crisis in my lifetime was the only thing I had invested in that was immune to the crisis.’”
Today, around 40% of the Cordes Foundation’s approx. $11 million in assets is in impact investments, names like MicroVest Holdings, Bridge International Academies, and Sarona Asset Management.
And what about returns? On the equity side, he’s expecting returns of 10-12 percent. “But I frankly think I’m going to be pleasantly surprised on the upside,” he says.
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