06 Jun 12 Will investing in ‘Our Common Future’ become mainstream?

Morgan Stanley Smith Barney has launched Impact Platform – an investment product offering retail investors an opportunity to participate in impact investing. Impact investing [1] was until very recently a domain pursued mainly by multilateral development finance institutions (IFC, ADB, AfDB, etc), unilateral government sponsored funding institutions (CDC, FMO, Norfund, Finnfund, etc) and niche development focused impact funds / fund of funds (Aureous Capital, Acumen Fund, Actis, Root Capital, etc). Moreover, investing was hitherto open to and done by sophisticated high net worth investors, philanthropists, foundations and institutional investors. Opening this segment to the retail investors is a welcome initiative.

So will this drive other mainstream investment houses to offer similar and/or hybrid retail products? Whether retail products and investments gain traction or not, only time will tell. But overall, impact investing will continue to grow. In fact , impact investing is already regarded as an emerging asset class in itself, and according to a JP Morgan and Rockerfeller Foundation 2010 study, the segment provides “potential over the next 10 years for invested capital of $400bn-$1tr”. Directing policies will play a crucial role in promoting this asset class and there is high likelihood that regulations will incentivise such investments. Moreover, environment will influence business and economic decision making. So investments into creating a positive socio-environmental impact will become an imperative going forward.

It will be interesting to see how Indian financial institutions react to the retail investing development. The potential opportunities for investment in India are huge and Indian financial firms can take advantage if they act proactively. Given the relative underdevelopment of the country, with many small and big development programmes/segments in need of capital, investment managers can manufacture innovative products to invest in social enterprises while ensuring financial return at market rates. These could be in areas including solar electrification (especially in rural areas), water delivery, environment friendly housing, waste-to-energy projects, health and education. Indian investment houses could not capitalize on the earlier interest-wave for alternative investment themes including socially responsible investing and faith-based investing. And there are only a few asset managers offering products in this space currently.

The Indian government has an important role to play in creating an enabling environment. Tax reliefs  (rebates on investments and exemptions on investment returns) will spur retail interest. Also, the government can facilitate the creation of a special platform (stock exchange) for social enterprises thereby creating easier access to capital  for the enterprises and liquidity for retail investors. To generate mass interest and attain the critical scale, investor education is of essence and should be driven by the industry association or a quasi-regulatory authority.

‘Our common future’ [2] depends on how rapidly investments get channelized in addressing our common concerns to ensure common good. It will depend on our realizations of the severity of environmental problems and the sense of urgency to protect the planet for future generations.

[1] Impact investing is different from Socially Responsible Investing (SRI). SRI adopts a negative screening approach to investing –  minimize negative impact rather than proactively create positive socio-environmental impact.

[2] The 1987 report of the World Commission on Environment and Development is titled Our Common Future.

Ribhu Ranjan Baruah

Ribhu was a project manager at ValueNotes, managing a team that met the research needs of a global investment management firm. He has since moved on to pursue opportunities in impact investing.

  • Namrata
    Posted at 20:55h, 19 June Reply

    nice article 🙂
    only concern is that if Impact Investing is being regarded as an emerging asset class – then it needs preemptive regulatory infrastructure in place (as an investment safeguard)- else, financial engineers/wizards may soon convert this into another exotic asset bubble!

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