Supply is beginning to catch up with demand for impact investing products for “retail” investors.
Ample research indicates that everyday investors increasingly care about the impact of the investments they make. But impact investing products – funds, direct deals, social impact bonds and the like – have mostly been geared to high net worth individuals and institutional investors.
Community or cooperative banks have existed for decades, and provide opportunities to support local economies through deposit accounts. Products like community notes have a long track record of supporting local economies in the US or Europe.
But the costs in time and money have limited the set of impact investing products available for retail investors. That is starting to change as several firms have overcome significant hurdles to reach the retail market through traditional channels such as brokerages and financial advisors. Technology innovations and new regulations are opening new channels for retail investors as well.
It’s all about distribution.David Sand, Community Capital Management
“Everyday investors have been left on the sidelines,” says Andrei Cherny, cofounder of Aspiration, based in San Francisco, an online investment platform that offers individual investors sustainable financial products that were previously reserved for the wealthy. Most of Aspiration’s clients are millennials and 60 percent have not previously owned a retail investment product.
A recent Morgan Stanley study showed that 71 percent of individual investors are interested in sustainable investing. That reflects changing preferences, particularly among millennials and women. According to the Global Sustainable Investment Alliance (GSIA), three out of four millennials consider social, environmental, or political factors when they invest compared to just 46 percent of baby boomers. And three-quarters of women consider ethical factors important for investing, compared to 60 percent for men.
The new retail marketers have taken to using a broad or flexible definition of impact investment. The new products include investments in specific businesses with an intention, by the investor or investee, of environmental or social benefits. But many of the products also offer investments in traditional stock or debt securities with an ESG (environmental, social, governance) or SRI (social responsibility) lens. Direct investments in privately held companies, for a host of regulatory reasons, are generally less accessible to retail investors.
US SIF estimates that 89 percent of US SRI investments are in the hands of institutional investors. But there are exceptions: the success of the first World Bank Green Bonds is in part due to retail distribution by Nikko, Daiwa and Nomura in Japan.
Retail investors have more limited investment capital and therefore generally prefer less risky investment options that offer liquidity, long track records or familiar structures. For retail investors who value current yield, capital preservation and modest capital appreciation, microfinance and small business finance fit the bill. These are two of the earliest and mature forms of impact investing and have historically produced stable and predictable returns.
“The simpler the better,” says Ilyas Frenkel, Director of Growth at Wunder Capital in Boulder, Colo., which connects investors with solar projects. Wunder is similar to crowdfunding but is targeting strong financial returns supported by steady cash flows based on repayments of interest on asset-backed loans. For a minimum investment of $1,000, accredited investors can put money to work into one of Wunder's managed funds. With the new Jobs Act III regulation, in the next few months, Wunder will be able to accept investments from non-accredited investors as well.
Trilinc Global, a California-based impact fund manager, has a minimum investment of $2,000, and requires investors to have an annual gross income of at least $70,000 or a liquid net worth of at least $250,000. TriLlinc’s public offerings that provide growth stage loans and trade finance to established SMEs in markets where access to affordable finance is limited. TriLlinc offers an annual yield paid monthly (see “Trilinc: Impact Opportunities for Retail Investors“).
Few SRI or impact investment products enjoy international distribution. Outside the US, two of the better known options are Triodos and Oikocredit. Funded by retail investors in the Netherlands, Triodos Fair Share Fund has invested over €200 million (about $220 million) in microfinance institutions around the world through both debt and equity. Oikocredit invests in fair trade, microfinance and agriculture in over 70 countries. It has €1 billion ($1.1 billion) in assets on behalf of 51,000 investors from over 20 countries and is open to retail investors.
“To increase participation of retail investors, it is essential to create investment opportunities in communities and issues they care about,” according to the Calvert Foundation, a U.S.-based non-profit that offers Calvert Community Investment Notes. As opposed to ultra-high net worth individuals who often seek multi-dimensional high-impact high-risk investment opportunities, retail investors might be more likely to invest in tangible impact opportunities that support their communities.
Retail investors can now access a variety of community investment options and support projects such as small businesses, affordable housing and charter schools.
Calvert Community Investment Notes offers retail investors an opportunity to support impact enterprises in the US and in developing markets across a range of themes, from microfinance to education. These one-to-ten-year notes have interest rates ranging from 0.5 percent to 3 percent and may be purchased by retail investors online through Vested.org at a minimum of $20 and through a broker at a minimum of $1,000. RSF Social Finance‘s Social Investment Fund offers exposure to a range of for-profit and nonprofit impact ventures in the US in food, agriculture, education, environment and the arts for as little as $1,000.
The most common way for retail investors to participate in community investing in the US is through deposits in community development banks such as California-based New Resource Bank and Beneficial State Bank, as well as credit unions, according to “Scaling US Community Investing: The Investor-Product Interface”, a report by the Global Impact Investing Network,
Purpose Capital, based in Canada, offers a comprehensive listing of sustainable and impact investing opportunities.
For investors interested in public markets, USSIF provides a comprehensive listing of sustainable and responsible mutual funds. Eurosif and Vigeo Eiris publish regular landscape studies of European SRI funds.
There is a growing array of options for individual investors to access the green bond market either through mutual funds such as Calvert Green Bond Fund and Parnassus Fixed Income Fund or through direct offerings from issuers such as IFC Impact Notes. Notably, Blackrock and some other major asset managers are developing green bond funds and including these products on their sales platforms.
Like other investment products, retail impact products are sold, not bought. A critical part of the sales strategy for retail market is distribution channels, both direct and through intermediaries such as financial advisors.
Calvert, for example, casts a wide net by distributing its Community Investment Note both directly through an online platform Vested.org and through brokerages. The advantage of an online platform is that it automates much of the customer service administrative needs and can provide an engaging platform for investors. This allows for much lower investment minimums compared to brokerage platforms.
“While the brokerage channel brings access to larger dollar amounts, over half of Calvert Foundation’s investors have come online given the ease and low investment minimums,” according to a report from the World Economic Forum, From Ideas to Practice, Pilots to Strategy II.
Wunder also reaches customers directly through their websites, circumventing traditional financial advisors and brokers. To reach their investors, Wunder has sponsored two dozen podcasts with financial and environmental advice. Wunder Capital has approached large financial institutions but the company just doesn’t have a sufficient track record yet to get on their brokerage platforms.
Still, the majority of retail investment dollars for impact investing will come through brokerage accounts. It takes years to build a relationship with distributors and go through the due diligence process with brokerage platforms.
It helps to structure the product as a familiar financial instrument. For example, in the case of Calvert Foundation, the notes resemble corporate bonds. Second, partnerships are key. In 2005, Calvert substantially broadened its reach by gaining access to brokerage firms and financial advisors through a partnership with Incapital, an underwriter and distributor of fixed-income securities. This process took years.
Community Capital Management, a US-based fixed income asset manager, manages a mutual fund (CRATX) with three share classes, enabling investment by retail clients. But David Sand, Chief Impact Strategist, cautions that “it’s all about distribution. Lacking a dedicated salesforce, they rely on brokers, such as Charles Schwab. They are also in the model portfolio at Merrill Lynch, Morgan Stanley and UBS, which will provide exposure if they get clients. “We made the investment in the catcher’s mitt,” says Sand. “If someone throws the ball, we can catch it.”
Community Capital Management is looking at the retirement marketplace such as IRAs and 401k accounts. Accessing these markets is a different ballgame altogether, with different business units – and therefore, interlocutors – within banks and brokerages. Sand is hopeful, seeing impact investing becoming a more visible offering at megafirms such as Blackrock or TIAA-CREF.
Triodos has been able to market its investment products in several European countries through its own network of banks. Facing the scale of global challenges, retail investors might feel like they are just a drop in the sea and have no influence on whether the economy is developing sustainably.
Triodos has tried to address this concern with TV commercials such as “Small. The New Big,” which tries to show that what people do every day matters and how they use their money makes a difference on a global scale. Triodos’ target segment is “cultural creatives,” a group that sounds similar to millennials in terms of characteristics and life aspirations, without age limits.
Distributing retail impact products through intermediaries remains a very time-consuming and costly process requiring financial advisor education, building product and manager track records. The growth in crowdfunding platforms and a trend towards greater automatization of the investment process can make it easier and less costly for retail investors to get engaged.
The advent of robo-advisors can make sustainable and impact investing less costly than going through a human financial advisor by automating the process and using algorithms to invest according to a customer’s preferences. In fact, robo-advisors offering sustainable investment options already exist. For example, low-cost online tools such as Aspiration, Earthfolio, Motif, OpenInvest and Impact Labs provide investors with choices to invest in environmental or social issues. Another recently launched online platform, CNote, aims to offer retail investors a government-backed annual return of 2.5 percent on their savings through investing in CDFIs.
In the U.S., the new Title III of the JOBS Act allows private companies to crowdfund equity investments. According to Bloomberg, “theater, food, production and energy sector entrepreneurs have shown the most interest in the new rules thus far.” For many companies, such as tech start-ups that require larger amounts of capital faster, the potential for funding is too low given the administrative burden of complying with the new rules.
More changes are on the way. Emerging client demand, technology and disintermediation are opening a host of opportunities to the retail market. Track record and the continued appeal of these products may increase the attention of the larger players.
Will retail investors matter? Even small dollar amounts from millions of individual investors can add up to big impact.
Update: ImpactAlpha friend (and investor!) Brian Walsh of Liquidnet has been keeping track of ESG robo-advisors and has identified the following:
- Impact Labs
- Prophecy Impact Investments
Photo credit: http://www.westernjournalism.com/