Bard CEP News

In Pursuit of Purpose: The Impact Finance Industry

Ask not what your country can do for you—ask what you can do for your country~John F. Kennedy

The purposes of a person’s heart are deep waters, but one who has insight draws them out~Proverbs 20:5

There is some good in this world…and it’s worth fighting for~Samwise Gamgee

The search for purpose is a prevalent theme throughout the history of humankind. Purpose enriches our lives, giving us something to live for. A lack of purpose has very real (and scientifically proven) consequences on our physical and mental health. We look to our leaders, stories, and belief systems for a sense of purpose that expands beyond us as individuals.

The avenues for purpose are many: community service, volunteerism, public service—the list goes on. Only recently, however, have financial investment and banking options become accessible for the average person as a way to pursue such purpose.

“Greed is good.” This well-known trope reflects another deeply rooted aspect of human nature: a focus on self-enrichment and personal gain. To some extent, it still reflects the lesser elements of America’s capitalistic ethos.

However, this is changing. Whereas traditional finance seeks solely financial return, Impact Finance, which emerged in the 90s, pursues not just economic return, but social and environmental return as well. To better understand the nuance of this emerging industry, I spoke with Kyle Overman who has held roles in commercial finance and financial technology.

What Differentiates Impact Finance

Impact Finance is defined by a broadened perspective, when compared to traditional finance. What impacts will the investment have beyond just economic impact? As Overman remarks, “In other words, is this company ultimately hurting people and the planet, or creating value for them?” Regardless of the type of organization, whether it be commercial banks, financial technology lending platforms, or even Economic Development Institutions – the Impact Finance space differentiates itself through diligence, sense of purpose, and accountability. Without these, it would just be window dressing.

But impact investment and traditional finance actually share a great deal.  For instance, the industry standard for assessing and analyzing potential investments—the Five C’s—applies equally to impact finance and traditional finance. The Five C’s are:

1. Character
2. Capacity/Cash Flow
3. Capital
4. Conditions
5. Collateral

Character is critical because you have to trust the person you are lending to; Capacity/cash flow, which is the borrower’s ability to repay the loan—enough said; Capital already invested by the potential borrower, thus reflecting that they have skin in the game; the conditions under which the borrowed money would be spent; and, lastly, collateral as security for lenders.

According to Overman, “impact investing is not as sexy as people think.” Not in the sense of day-to-day implementation, at least.  “Everything from financial analysis and market research to administration and compliance” are all core process shared by both impact investment and traditional finance.

And at the end of the end of the day, impact investments still need to make smart and sound business sense. Overman: “You could be the most passionate world but be terrible at running a business.”

So if those are the similarities, then what are some key distinctions? Overman answered my question with not just one question, but three questions. “What are we supporting? Who are we supporting? Why are we supporting?”

Importantly, these are all questions of fit, meaning fit between the lender and borrower. What: New Resource Bank (recently acquired by Amalgamated Bank), for example, supported were specific impact goals of community empowerment, clean energy, and health and wellness. Who: Grameen Bank, when it first began in 1983, took a special focus on empowering women in developing nations. Why: would be the broader purpose of the impact organization, such as Grameen’s purpose of banking for the poor.

Traditional finance is less stringent. Mainly, the considerations are “am I going to get paid back? If not, how do I get my money back?”

How to Participate

As consumers, we can support the Impact Finance Industry, and sustainable organizations in general, by voting with our dollars. There are plenty of ways to do this: buying from organizations that hold sustainability certifications, like the B-Corp status; or by purchasing from companies that participate in sustainable business networks, such as 1% for the Planet. Not just any certification will do, though (being certified as gluten free doesn’t mean anything in terms of impact).

Greenwashing—giving the impression of sustainability, without actually being sustainable—is common. Doing some personal research and digging is essential. Options are also available for long-term investing. Investing with impact banks—like Swell Investing, Betterment, Wealthfront, and CNote—is another way to support any number of causes, while getting modest returns.

Well, there you go people. If you believe in something, if you believe in sustainability, put your money where your mouth is, by putting your money into a sustainably oriented low annual percentage yield savings account, or something.