How Young Millionaires Invest Their Money
Many Millennials strive to make a statement, influence society and help the environment through their financial investments. This practice has already received the name of “impact investing” and is becoming increasingly popular.
The overwhelming majority of these so-called impact investors (which may be up to 93% of Millennials) believe that their investments should be made based on the social and environmental impact they might have. It is hard to find something new in this trend, however, as protesting students are no big news. Last year, for example, Columbia University abandoned the idea of investing in prison stocks due to student protests. The same thing happened at the University of Southern California the same year. These Millennial investors are not simply satisfied with sponsoring some enterprise with their money; they want to make sure that their money is used for a good cause.
Impact investing is not just for young folks, though. The older generation of investors believes in the same principles now. In fact, in recent years, all age groups have become more accepting of the idea of making positive change through investing. One of the most notable current impact investors is former Vice President Al Gore and his company, Generation. According to Mr. Gore, “Sustainability values should be completely integrated into the investing process” (Catalyzing Global Leadership To Solve Climate Change).
There are, however, some notable challenges in dealing with impact investing.
- It is not simple to define the term “impact investing” as it consists of a variety of different elements, from environmental problems to gender inequality. Not everybody can invest to resolve all of the issues.
- There is not much information on how the investors gain from impact investing.
- Impact investing is still often mistaken for philanthropy, which is inconvenient for many investors for mostly legal and tax-related reasons.
In any case, companies are becoming more transparent in recent history. More than 7,000 firms and corporations published reports of corporate responsibility for third parties to view during the last year. Some of them, nevertheless, still try to avoid impact investors.
According to the records of Madeira Global—a New York firm that analyzes data about environmental, social, and governance (ESG) factors—one of the most socially responsible companies is Starbucks, as it always tries to buy coffee produced legally and ethically. The company is also unique in that it provides employees with money for college tuition. As the CEO of Madeira Global, Christina Alfonso believes that “non-financial factors can play a significant role in a company’s financial performance” because investors’ and consumers’ preferences shift towards the businesses that concentrate not only on making profits but also on pursuing the goal to have a positive social influence.
No matter how many prominent traits impact investing may have, it still can cause problems in some countries. In general, already-profitable enterprises are better at raising money through impact investing, while their less fortunate counterparts that do not have proven business models or that are concentrated on supporting the poorest regions of the world are simply not able to earn this kind of income. Usually, they are underfinanced social businesses “with strong growth prospects but little chance of producing market-rate returns anytime soon” (Etzel par. 3). Social enterprises may gain some capital at the expense of “repayable capital”—it is profitable for a company, it is profitable for a funder, and it does not demand market-rate returns.
India is a good example of how impact investing combined with below-market rates of return could work. The majority of the country lives in unsanitary conditions and lacks clean water and a reliable energy source; however, impact investing creates an opening for social enterprises that can help provide solutions to these social problems, even though their level of competitive value and potential for market-rate returns usually do not look too bright.
Speaking of brightness, another good example of social enterprise is the solar lantern company D.light. Established in 2008, this company set out to create and manufacture safe light sources that are affordable for consumers of all income levels, including the poorest. Financed by such impact investors as Gray Ghost and Acumen and with the support of more traditional companies like Nexus India, D.light distributed more than 10 million low-cost light sources in India and across the rest of South Asia. Without the presence of impact investing at the early stage of its formation, the company could never have achieved even half of its current success. These impact investors took a chance and ended up receiving their market-rate returns. Unfortunately, D.light is an exception to the rule, as many other social enterprises do not achieve market-rate returns at all.
“Catalyzing Global Leadership To Solve Climate Change”. DealBook Conference 2015. The New York Times Conferences, New York, 2015. Web.
Gillespie, Patrick. “How Young Millionaires Are Growing Their Money.” CNNMoney. 2016. Web.
Etzel, Michael. “Philanthropy’s New Frontier—Impact Investing.” Stanford Social Innovation Review. 2016. Web.