Impact Investing As It Hits

            If you asked me a couple years ago what I thought of “double-bottom line” investing, I might have half-jokingly guessed you meant only considering net income, a reference to the peculiar formatting of that item on it's namesake statement.  Yet since working at Kiva for the past few months, I’ve come to appreciate more the merit of taking ideology and other intangibles into consideration when investing as opposed to merely seeking the highest monetary return.

            At Kiva, we often use terms like “risk-tolerant capital” or “patient capital” in conversation to describe the liquidity that runs through our pipes.  It has been unique, coming from a traditional finance background, where cash rules everything around me, to see the inner workings of a finance firm that facilitates lending money at zero interest.  What inspires people to do this?  Having been part of the organization for some time, I see the return first-hand.  Conscientious citizens given the opportunity to put their money where their mouths are will seize it and give nearly 1.5 million borrowers not a hand out, but a hand up: a chance to build themselves out of poverty. 

            The vast majority of investors, however, do not have the luxury of allocating their money simply based on good feelings.  Happily, impact investing has become an entire field with methodologies and funds that emphasize values without having to compromise financial return.  By looking at how internal and external stakeholders are affected by a business’ operation, an investor can decide whether holding them in a portfolio would be consistent with his or her values.  The commonly used metrics are summarized by a research paradigm called ESG analysis: environmental, social, and governmental measures.  

            According to MSCI and Pax World (providers of research and funds, respectively) environmental measures include carbon emissions, carbon footprint, energy efficiency, water stress, raw material sourcing, toxic emissions and waste, electronic waste, as well as opportunities in clean tech, green building, and renewable energy.  Social measures include labor management, human capital development, opportunities in health and nutrition, chemical safety, privacy and data security, and access to healthcare, among others.  Governance measures include levels of corruption, anti-competitive practices, fraud, etc.  To make an investment decision, the interested party chooses metrics relevant to the company being evaluated and draws a conclusion based on the findings.

            This kind of evaluation is esceedingly difficult for the individual investor who does not have the capacity to do this research independently and would find a subscription to research services prohibitively expensive for his or her needs.  Thankfully a lot of mutual funds and ETFs have sprung up in the past few years that invest according to ESG principles, though finding one that consistently outperforms the S&P 500 benchmark remains a unicorn hunt.  I may have some rebalancing to do ahead of Q3 dividends.  If this internship has taught me anything, it’s that the highest payouts may not be taxable.