In the May issue, I introduced the concept of impact investments. They are designed both to deliver a financial return and address a key social or economic problem by investing in social enterprises. I also made a case for why advisors should be introducing this concept to their clients as a way to deepen their client relationships and create a first-mover advantage in their practices. In response to the calls and emails I received from advisors, this article offers an overview of the impact investment landscape and discusses specific types of impact investments that advisors can review and potentially begin offering to their clients.

The social enterprise movement that impact investing seeks to support has emerged over the past two decades and encompasses a wide range of organizations with various missions and areas of focus. The chart "People and Planet," on page 56, while by no means exhaustive, includes several of the most prominent areas in which social entrepreneurs are developing solutions. These areas are typically divided based on social (people) and environmental (planet) issues.

A PLACE TO START

Advisors who are thinking about dipping their toes into the impact investing pool may want to start with microfinance. Microfinance is easily the most established social enterprise category (its creator, Muhammad Yunus, received the 2006 Nobel Peace Prize) and, as a result, the one where many impact investors are focused these days.

There are roughly 4,000 registered microfinance institutions, or microbanks, making small loans to local entrepreneurs in developing nations (often women in rural villages who can't access capital through traditional banks) so that they can create new businesses or expand existing ones. These businesses might range from sewing clothing to raising chickens or selling food at a local village marketplace.

Microbanks typically charge borrowers interest rates of around 30% to 40%, due to the extremely high costs of servicing these extraordinarily small loans. Although these rates may seem high by developed world standards, they are only a small fraction of the rates charged by the black market loan sharks who typically are the only other sources of capital for these borrowers.

As those loans are repaid-and they are, indeed, repaid-the microbanks are able to put more new loans to work and pay their investors a reasonable rate of return. Repayment rates on microfinance loans have typically exceeded 95%, and debt investors in microbanks, for example, have traditionally earned yields in the mid- to high single-digits.

As with many impact investors, microfinance debt was my introduction to impact investing. My wife and I established the Cordes Foundation in 2006, with the goal of funding sustainable solutions for poverty reduction. A year later we invested in our first impact investment-a five-year note paying 6% interest through a fund managed by MicroVest, an organization creating global investment portfolios of loans issued to microfinance institutions across 20 countries.

Our foundation's $500,000 investment now earns $30,000 a year, paid semiannually. It's also secured by a significant loan loss reserve provided by the fund's sponsor, and any currency exposure is hedged.

Despite the chaos in global markets in recent years, the investment has delivered exactly what it promised. In addition, our investment alone has provided enough capital for the microbanks in the fund's portfolio to provide loans to over 1,000 local entrepreneurs.

PEOPLE INVESTMENTS

Since then, we've also made investments in other people-focused social enterprises. These include a pool of collateralized loan obligations-a senior tranche paying 7.5% annually for seven years-issued through FINCA, a large network of microfinance institutions around the globe, and sponsored by Deutsche Bank.

We also have investments in the Sarona Fund, one of the first market-rate private equity fund-of-funds focused on the developing world. It provides expansion capital in the form of equity to social enterprises in Mexico, East Africa and elsewhere. Another one of our investments is Root Capital, which offers secured bridge loans to Fair Trade coffee farmer co-ops that enable them to access the global markets and receive significantly higher prices for their crops.

Closer to home, our investments include the Northern California Community Loan Fund, which loans money to groups that build affordable housing in 46 low-income communities in California. We also invest in an FDIC-insured CD in the Self-Help Federal Credit Union, a community-based credit union providing basic, low-cost banking services to "unbanked" consumers in low-income areas.

PLANET INVESTMENTS

On the planet side of the impact investment space, there are opportunities such as E+Co., a firm that issues notes to raise capital for investments in sustainable energy businesses in developing countries. Those investments allow for the growth of clean energy enterprises, reducing the dependency of rural villagers on fossil fuels for energy, increasing their energy supply and self-sufficiency and contributing to a cleaner environment. The notes, which pay 3% per year and are issued with an eight-year maturity, have to date funded over $30 million in debt and equity investments in over 200 energy enterprises in Africa, Asia and Latin America.