NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, April 13, 2015

Socially responsible investing in its basic form doesn’t go far enough for some people. After all, countless mutual funds already avoid shares of companies that produce addictive or dangerous products — like tobacco, alcohol or firearms.

But suppose you want to go beyond investing in things that do no harm and prefer owning shares in companies that have a chance to make a significant difference in the world.

Such an approach is beginning to be known as “impact investing.” The idea is “that capital can be deployed to make a good or provide a service that offers positive social impact, while generating some level of financial return.” That definition comes from the authors Keith A. Allman and Ximena Escobar de Nogales in their book “Impact Investment” (Wiley Finance).

Mr. Allman, who works for Deutsche Bank, and Ms. de Nogales, the head of impact management for Bamboo Finance, a private equity firm that invests in developing markets, have created a how-to handbook for people interested in investing this way.

Parts of the book won’t appeal to many general readers. The authors apparently decided to write it for people who will need to justify these kinds of investments to their boards’ finance committees or for wealthy individuals considering buying a stake in these companies before they go public.

But those of us who are simply interested in potentially buying public shares of such firms can skip the discussion of things like term sheets, payout mechanisms and anti-dilution protections. We can concentrate on the authors’ solid discussion of how to assess the potential impact of companies and the pros and cons of investing in them.