Impact investing has gained a great deal of attention, as of late, as a way for investors to pursue investment returns while supporting an array of social and environmental missions. Impact investors pursue the “double bottom line” of investment performance in tandem with tangible, quantifiable mission-aligned benefits.
The field of impact investing is rich with creativity and enthusiasm. However, it can also strike institutional investors as too abstract and cumbersome to implement in a portfolio.
In a survey taken early in 2014 by J.P. Morgan and the Global Impact Investing Network, impact investors identified a number of difficulties. The greatest challenge to the growth of impact investing, according to the survey, was the “shortage of high-quality investment opportunities with track record,” with “difficulty exiting investments” cited as another key problem. As investors found in the financial crisis of 2008-'09, it can be easy and expensive to underrate liquidity.
Impact investments are available across a spectrum, with illiquid, unique private transactions at one end and liquid, transparent, publicly traded high-quality transactions at the other. Investors would benefit from looking more closely at the latter end of the spectrum.
Within impact investments, some security types have high credit ratings, long track records, liquid markets and availability without entrance and exit restrictions. These security types can help investors make a measurable impact in affordable housing, health care, education and other areas. These security types can be a way for institutional investors new to the impact space to try it out with familiar securities. For seasoned investors, these security types might be an additional way to make an impact and might fit operating accounts, bond proceed accounts and other accounts that are not commonly associated with impact investing.
Financial theory maintains that limiting the size of an investment opportunity set requires a sacrifice in returns. However, if an investor is creative and opportunistic, there is not necessarily a trade-off between investment performance and mission-aligned results.
Some impact security types provide stability in times of financial duress and demonstrate advantageous convexity characteristics relative to their non-impact counterparts. For example, impact mission-aligned agency commercial mortgage-backed securities have a track record of performance that is competitive and substantially less volatile than generic CMBS.