Simply put, impact investing is the practice of using investment dollars to generate positive social or environmental impacts in addition to offering a competitive financial return. The idea that we can do far more with our money than merely reap monetary dividends is important, and has grown popular recently, steadily gaining traction with investors, whether small or large. As we increasingly wrestle with broad and difficult societal issues like affordable housing and climate change, issues that will impact the lives of millions of people, so too are we learning that impact investing can be an essential part of the solution.
Impact investing does not mean giving up on a good financial return. We’ve long known that what’s good for people and the environment is ultimately good for businesses and economic growth as well. And the competitive returns that investors are getting through impact investing only serves to reinforce this. This reality is highlighted by the fact that every day more institutional investors are committing an ever-growing pool of their funds to impact investing. As an example, one of the largest financial companies in the U.S., Prudential, has an Impact Investment division that should serve as a model of impact investing at the institutional level.
Catalytic and creative
In their Impact division, Prudential Financial has built a distinct portfolio of investments with the goal of both making money and having a social impact through each of those investments. The focus of this portfolio is specifically on projects that can lead to catalytic change. These investments can be higher risk and are often declined by their traditional portfolios.
Prudential has invested about $1 billion dollars into impact investments. Typically, when an institutional investor reaches a milestone like this, they’ll aspire to the goal of growing that portfolio, to say $10 million. Ommeed Sathe, the Vice President of Impact Investing at Prudential and engineer of their impact portfolio, thinks that’s the easy option to take. Instead, he’d like to push the envelope and focus on growing impact by seeking ever more catalytic and creative projects. These might include minority developers, in neighborhoods that have seen little investment or building-types that defy the norm. This is an encouraging and unusual goal for a large investment fund that hopefully will inspire other institutional funds to follow suit.
The portfolio overseen by Ommeed and his team is currently focused on both real estate and business investments, all of which would be considered socially conscious or beneficial. On the business side, companies have a social purpose, are financially inclusive, do work to retrain and reskill our workforce, and are working on sustainability. For example, in Washington D.C., they helped fund improvements to green infrastructure and create the first tradable stormwater credits, not unlike carbon tax and trade mechanisms, but done at the local level. Real estate investments include affordable housing, redevelopment and brand-new development projects that have the potential to transform the communities in which they are based.
While impact is critical, the driving goal for Prudential is to invest to make a return. These investments are meant to be competitive. But still, the focus of their impact investments portfolio is to invest in assets that more traditional portfolios would normally not invest in, not normally take a risk on.
It is groundbreaking for a large company to invest in this way, and further, to want to expand their reach even more. While small investments matter, there is something to be said for the scale of change that institutional dollars can make. If investment funds push more capital into large and necessary projects such as affordable housing and mixed-use developments, especially in communities that need it most, there will be enormous benefit to everyone. And as these funds become more comfortable taking part in catalytic projects, they will discover a wide swath of investment opportunities that they may have previously overlooked. Investing for impact at this scale can have an impact we haven’t imagined before.