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

Wednesday, July 15, 2015

In places where electricity is scarce or unreliable, kerosene lamps are a standard lighting source—but the fumes from burning kerosene pollute the air and kill 1.6 million people each year. D.Light Design, a private company based in San Francisco, manufactures inexpensive solar-powered lamps and sells them cheaply around the world. It is safe, reliable, and renewable energy available for about the same cost as a few candles. D.Light believes that it’s not only reducing pollution, but also improving health, safety, and performance—in school, productivity, and income.

This is a perfect example of an impact investment: the company is turning a profit while meeting a social need in an environmentally-sustainable way. And with support from firms like BlackRock, Merrill Lynch, and Bain, impact investing is no longer a fringe movement.

Yet it also sits on the cusp of mainstream wealth management, because we haven’t done a good enough job of demonstrating impact. D.Light, for example, can easily report how many lamps were sold (over 9 million), but capturing the wider impacts on health, education, and the economy is more challenging. Without hard numbers to offer investors and their advisors, impact investing is a tougher sell. Better tools exist; if we used them, impact investing could, well, make more of an impact.

Surveys consistently show that Gen Xers and Millennials rank what their investment will do over how much they’ll make. They want to be more involved in their investments than the old charitable giving model of “making money and giving back” (personified by Bill Gates and Warren Buffett) allows. They want their investments and philanthropy to be nearly indistinguishable.

Financial managers are the gatekeepers to impact investments, yet our research shows that they don’t really understand what it is, won’t bring it up to their clients, and don’t place any value on learning more about it.