Impact Investing—A Viable Option for EAs?

A look into the util­ity curve be­tween so­cial util­ity vs fi­nan­cial re­turn. A macro view of the im­pact in­vest­ing space. Ex­am­ple in­vest­ment op­tions for EAs look­ing to do good while earn­ing a re­turn. This is my first post for the EA Fo­rum, on a topic that I’ve been quite in­ter­ested in. I’ve stud­ied ra­tio­nal­ity on­line for the last 3 years, honed my in­vest­ment strate­gies for the last 10 years, and last May I joined the EA Toronto com­mu­nity. Feed­back and crit­i­cism is wel­come, would love to hear your thoughts on this topic!

Intro

There is an old ques­tion in Effec­tive Altru­ism ask­ing if it is bet­ter to donate to­day or donate in the fu­ture1. The an­swer de­pends partly on:

  1. The im­pact of money on your con­sid­ered cause now vs in the future

  2. The rate of re­turn you ex­pect to make on your cap­i­tal (money)

In this post, I’ll be in­ves­ti­gat­ing how im­pact in­vest­ing can con­found this con­cept—by gen­er­at­ing a re­turn on cap­i­tal and cre­at­ing philan­thropic util­ity.

Im­pact Investing

Ac­cord­ing to the Global Im­pact In­vest­ing Net­work (GIIN), im­pact in­vest­ments are “In­vest­ments made into com­pa­nies, or­ga­ni­za­tions, and funds with the in­ten­tion to gen­er­ate so­cial and en­vi­ron­men­tal im­pact alongside a fi­nan­cial re­turn.”2

In 2016, sur­veyed in­vestors con­tributed an ad­di­tional $22B to­wards im­pact in­vest­ments3, while an­nual char­i­ta­ble dona­tions summed $410B. The in­vest­ment in im­pact in­vest­ments is pro­jected to grow about 17% an­nu­ally, while char­i­ta­ble giv­ing rises at un­der 5% an­nu­ally. From a pure ‘ac­cess to cap­i­tal’ per­spec­tive, im­pact in­vest­ments should be a ma­te­rial con­sid­er­a­tion.

Com­pared to tra­di­tional in­vest­ing, im­pact in­vest­ments to­talled >$114B in 2016, just 0.16% of the $69.1T to­tal global as­sets un­der man­age­ment4 that year. So we’ve got a grow­ing seg­ment of cap­i­tal di­rected to­wards ‘good’, with mas­sive room for growth. I’m in­ter­ested.

Let’s com­pare three op­tions for our dol­lars:

  1. Tra­di­tional in­vest­ments. Earn 1-2% in money mar­kets, 4-5% in bonds, ~7% in equities. Un­known so­cial utility

  2. Char­i­ta­ble giv­ing: Lose 100% of your money. Plus gen­er­ate some kind of so­cial utility

  3. Im­pact in­vest­ing: Earn some kind of mar­ket rate, plus some kind of so­cial utility

Financial Return vs Social Utility

*Not to scale

Is it pos­si­ble that im­pact in­vest­ing could earn com­pa­rable mar­ket re­turns while cre­at­ing so­cial util­ity high enough to en­tice EAs?

A Ra­tional Take on Investing

First off, let’s level set on two con­cepts around in­vest­ing:

  • In­vestors trade off risk and re­ward. You’ll have to pay me more to in­vest in your as­set if I think there is a higher prob­a­bil­ity of los­ing money. Yes, this is ex­pected value. At its most effi­cient, the mar­ket offers in­vest­ment op­tions along this risk/​re­ward fron­tier. In­di­vi­d­u­als try to find in­vest­ments offer­ing greater re­wards given risks

  • The ‘re­ward’ as­pect of an in­vest­ment, is ac­tu­ally an ex­pense on the as­set it­self. The as­set is pay­ing you to use your money. There is plenty of nu­ance as you con­sider deriva­tive value, but I’m pretty sure this is a fun­da­men­tal truth

Ap­ply these two con­cepts to im­pact in­vest­ing. Give an in­vestor a choice be­tween a tra­di­tional in­vest­ment and an im­pact in­vest­ment, with ex­actly the same risk and re­ward. In this ex­am­ple, let’s talk about bonds.

Coal com­pany ($1000): 5% in­ter­est * 1% risk of de­fault = $49.50 ex­pected return

So­lar com­pany ($1000): 5% in­ter­est * 1% risk of de­fault = $49.50 ex­pected return

To an in­vestor who doesn’t care about non-mon­e­tary util­ities, these in­vest­ments are in­ter­change­able. To an EA, it looks more like this:

Coal com­pany ($1000): 5% in­ter­est * 1% risk of de­fault - $10 en­vi­ron­men­tal dam­age = $39.50 ex­pected return

So­lar com­pany ($1000): 5% in­ter­est * 1% risk of de­fault + $5 util­ity of clean en­ergy ca­pa­bil­ities = $54.50 ex­pected return

I’m still new to EA, so those es­ti­mates of en­ergy util­ity are based off of noth­ing, but serve to illus­trate the point. Any in­vestor com­par­ing the to­tal benefits from ei­ther in­vest­ment, should pre­fer to buy the so­lar bonds over the coal bonds.

If the so­lar com­pany needed to raise $40M, they will be pay­ing out $2M in in­ter­est, same as the coal com­pany. Do they need to? In an effi­cient mar­ket (that con­sid­ers all util­ity), they could the­o­ret­i­cally lower their in­ter­est rate un­til the ex­pected to­tal re­turn equaled that of the mar­ket.

  • The in­vestor re­ceives less fi­nan­cial benefit, but the same so­cial utility

  • The com­pany is able to fund it­self for less

This re­la­tion­ship im­plies that im­pact in­vest­ments should always offer a lower fi­nan­cial ex­pected value in­verse to the so­cial util­ity it pro­vides. An in­vestor could always in­vest in the coal com­pany, then donate their earn­ings to their favourite AI safety pro­ject. Is there any benefit to com­bin­ing fi­nan­cial with so­cial out­comes in the cap­i­tal mar­kets?

The Ineffi­cient Real World

The real world is filled with un­cer­tainty, and true risks, re­wards, and ex­ter­nal util­ities are all difficult to mea­sure. Nei­ther com­pa­nies nor in­vestors will as­sess these in­fluences the same, which cre­ates op­por­tu­ni­ties.

Since val­u­a­tion of so­cial util­ity is some­thing that EAs do re­ally well, I sus­pect we should be able to iden­tify some out­stand­ing op­por­tu­ni­ties to earn a greater re­turn rel­a­tive to an un­der-val­ued so­cial util­ity, while avoid­ing sec­tors that have already dis­counted the fi­nan­cial re­turn rel­a­tive to an over-val­ued so­cial util­ity.

In my ini­tial ex­plo­ra­tion of this space, there seem to be huge dis­par­i­ties be­tween in­vest­ment op­por­tu­ni­ties. It seems that most in­vestors don’t count the so­cial good side of the equa­tion, lead­ing to great in­vest­ments offer­ing the same re­turns as tra­di­tional in­vest­ments, while also gen­er­at­ing great so­cial util­ity. Is the over­all util­ity high enough to com­pete with other EA causes? If you’ve got cap­i­tal sit­ting around, are im­pact in­vest­ments bet­ter than in­dex funds?

Lets zoom in.

The Im­pact In­vest­ing Space

Al­most all ac­tivity in the im­pact space is done by large in­sti­tu­tional in­vestors (fund man­agers, 67%), and foun­da­tions (11%). 37 of the 208 in­vestors sur­veyed by GIIN had over a half billion dol­lars in­vested. Many of the pri­vate debt or equity offer­ings are available to ac­cred­ited in­vestors too, which means you are wel­come to play if you’ve got $1M in the bank, or a salary of $200k plus.

Sadly, that crite­ria dis­qual­ifies me, but didn’t stop me from check­ing out the op­tions available to these larger fish. Im­pactBase.org has a great list­ing of 446 im­pact funds that in­vest in par­tic­u­lar ar­eas. In­vestors here have to de­cide be­tween:

  • Risk-ad­justed mar­ket re­turns (371 funds) or Below-mar­ket re­turns (83)

  • Im­pact area: eg: Ba­sic ser­vices, En­vi­ron­men­tal, Ac­cess to Fi­nance, etc

  • As­set class: Pri­vate Equity (288), Fixed In­come (130), Real As­sets (97) or others

  • Geo­graphic region

Most in­vest­ment op­tions here have min­i­mum in­vest­ment re­quire­ments with 5 or 6 ze­ros. Con­sider the ThirdWay Africa Im­pact Fund, seek­ing to raise 150M to­wards fund­ing the cre­ation of self sus­tain­ing busi­nesses in Afri­can com­mu­ni­ties. The min­i­mum buy-in is $2M, and the av­er­age in­vestor has put in $15M. This fund tar­gets the same rate of re­turn as similar-risk as­sets in the mar­ket.

Small Fish In­vest­ment Options

Let’s ig­nore the big kids for a minute. What kind of in­vest­ments are available to some­one who isn’t a mil­lion­aire?

A quick google search re­veals many pub­lic funds for ‘so­cial re­spon­si­bil­ity’. You can in­vest in com­pa­nies or funds with lower than av­er­age car­bon emis­sions, good track records with hu­man rights, or even only fe­male CEOs. Many large fi­nan­cial in­sti­tu­tions offer these prod­ucts, in­clud­ing RBC, Wealth­sim­ple, and Van­guard. The prob­lem is, they aren’t im­pact in­vest­ments. There isn’t re­ally a mea­surable so­cial good cre­ated, just an as­surance that they aren’t do­ing bad to the world.

For true im­pact in­vest­ment op­tions, I found two sources for Cana­di­ans:

1. The SVX So­cial Ven­ture Con­nec­tion, a stock mar­ket of sorts that lets you in­vest di­rectly into Cana­dian com­pa­nies with a so­cial im­pact. This was cre­ated in 2013 by the MaRS Cen­ter for Im­pact In­vest­ing, the TSX (Toronto Stock Ex­change), and the Cana­dian gov­ern­ment among oth­ers. As of this writ­ing, there are 3 op­tions on it:

  • A 5%, 5 year so­lar bond, putting re­new­able en­ergy into the elec­tri­cal grid

  • A bond to start a so­cial com­mu­nity in Guelph, ON

  • World Tree, a com­pany with a po­ten­tial 23% an­nual re­turn that offsets a life­time car­bon foot­print with a $2,500 investment

2. OpenIm­pact, a web­site that lists im­pact in­vest­ment op­tions, but doesn’t help fa­cil­i­tate the in­vest­ment. Of the 46 open in­vest­ments, just 17 are open to re­tail in­vestors (an av­er­age per­son). Of those op­tions, none looked par­tic­u­larly en­tic­ing to me

I think it’s also worth men­tion­ing that there is an im­pact in­vest­ing con­sul­tancy in Toronto called GoodIn­vest­ing, that offers to help find the right im­pact in­vest­ments for you (for a price). I’ve got a con­sul­ta­tion with them next week to learn more.

An in­ter­est­ing in­vest­ment option

I posted in an ear­lier thread about my cur­rent favourite op­tion—World Tree. I think it is sim­ply a very cool, im­pact­ful in­vest­ment, offer­ing a high enough re­turn to find a niche in my port­fo­lio.

World Tree plants acres of Em­press Splen­dens (non-in­va­sive trees of the Paulow­nia fam­ily) to se­quester car­bon and later sell the wood for a profit.

  • Buy in is $2,500 per acre

  • You see no re­turn un­til the trees reach ma­tu­rity and are har­vested 10 years later

  • The farmer keeps 50% of the profit, and you split the re­main­ing profit with World Tree 5050

  • The trees re­grow up to seven times, con­tin­u­ing to se­quester car­bon, provide sus­tain­able lum­ber, and sup­port farm­ers (they keep 100% of prof­its af­ter the first har­vest)

  • I’ve calcu­lated the re­turn to be 23% based of a $3/​board foot lum­ber price. The cur­rent price is about $7, and the trend is rising

  • This is a risky in­vest­ment with no proven busi­ness model, no ex­ist­ing North Amer­i­can mar­ket for the wood, and one could to­tally lose their en­tire in­vest­ment. Dis­count the ex­pected value accordingly

How­ever, from an ecolog­i­cal per­spec­tive, it seems very promis­ing too:

  • Aver­age car­bon offset pro­grams cost about $10/​tonne of CO2 removed

  • Cool Earth is one of the best pro­grams, and was es­ti­mated to op­er­ate at $1.34/​tonne5

  • World Tree ap­pears to op­er­ate at $1.76/​tonne—this is us­ing num­bers from their website

  • One acre of 140 trees should se­quester enough car­bon to offset one’s life­time car­bon footprint

Dis­claimer: I’m not recom­mend­ing this as an in­vest­ment, but if it is le­git, it seems like a very in­ter­est­ing model for im­pact in­vest­ing.

I’d love to see a world with lots of high im­pact in­vest­ment op­tions, ac­cessible by the masses. When com­par­ing the cur­rent offer­ing of im­pact in­vest­ments against some of the best char­i­ties, they seem to fall short. But when com­par­ing them against cur­rent fi­nan­cial op­tions, there are more than a few that look like wor­thy ad­di­tions to a port­fo­lio. This brings me back to the ini­tial ques­tion of donate now or in­vest now, donate later. What do you think?

Please share your thoughts in the com­ments—es­pe­cially if you found some cool in­vest­ments, or are in­ter­ested in in­vest­ing in gen­eral!

Foot­notes:

  1. https://​​con­cepts.effec­tivealtru­ism.org/​​con­cepts/​​timing-of-philan­thropy/​​

  2. GIIN: https://​​thegiin.org/​​im­pact-in­vest­ing/​​need-to-know/​​#what-is-im­pact-investing

  3. GIIN 2017 An­nual Sur­vey:. https://​​thegiin.org/​​as­sets/​​2017%20Sur­vey%201%20Pager.pdf

  4. https://​​www.statista.com/​​statis­tics/​​323928/​​global-as­sets-un­der-man­age­ment/​​

  5. Giv­ing What We Can on CoolEarth: https://​​www.giv­ing­whatwe­can.org/​​re­port/​​cool-earth/​​