Can high impact investing yield returns?

In 2005, John Fleetwood founded Ethical Money. He had already developed an impressive track record in ethical investments, but this new move was to see him focus more on investments with a particularly high impact.

He spoke to us about a ground breaking social investment initiative and why he believes social funds should increase their focus on financial returns.

Tell us about the Cochabamba Project

It started eight years ago as a pilot project run by the UN Food & Agriculture Organisation to see if a community reforestation project could work. It began very small. Funds were used to help one small farmer with one plot of land plant a native species of tropical hardwood tree. It would not only provide extra income, but also is extremely good from an environmental point of view.

After the success of that pilot the project has grown quickly. It was commercialised a few years ago and now covers 1,500 hectares, with the intention of expanding this to 5,000 hectares. We are now looking for more finance to take the project forward.

A real indicator of success is that it is now one of only three forestry projects in the world to be credited by the Clean Development Mechanism (CDM).

This is quite something because red tape has prohibited many forestry projects from attaining CDM certification. People have criticised this process as being overly bureaucratic, but from our point of view it is useful as we can see just how much good the project does.

What kind of return might investors expect?

Any investment is a very long-term option. Some trees do not mature for around 30 years. The current break-even point for the existing project is around 2015-2016. However, the final returns can be very good.

Some people are only interested in the philanthropic aspect of the investment. For example, someone might be happy to spend £1,000 with little thought to return. However, people who are investing greater sums are much more interested in financial value.

That’s unsurprising. If you spend £20,000 then you want to know you will at least get your money back, preferably with a decent return.

How can investors take part?

Investors can invest up to £20,000 with a minimum investment of £1,000. They cannot take any money out for the first five years and any withdrawals thereafter are dependent on there being enough funds. Income from the first thinnings should allow this from 2016 and we also intend to attract new members to replace members who need to be repaid. They also get a declared interest payment based on the valuation of the timber.

What sets this project apart from other forestry schemes?

This is not a traditional forestry project. Most cover a single large area of land and plant just one type of tree. I’ve been to these and they can be very dull – straight identikit trees as far as the eye can see. From a biodiversity point of view it is also far from ideal.

We take a very different approach. We have lots of farmers with many different plots of land. Some people have said we must be crazy – it’s much more difficult to administer. However on the plus side this leaves the project less exposed to disease and disaster plus is much better from a biodiversity point of view. We have 19 different tree species and farmers can take their pick. It’s much better for wildlife and for biodiversity.

The project offers much more engagement with the farmers. We share proceeds. Half goes to the farmers and half to the investor. From a philanthropic point of view this really makes it a partnership between the member and the farmer. It is possible to buy the rights to 50% of the timber profits from a hectare and relate directly back to the owner. That isn’t actually too difficult to achieve.

However, most projects do not do this.

For those that are interested we also organise trips out to the farms so our members can see their money at work for themselves.

What kind of person does this investment appeal to?

We have around 150 investors currently.

While there are many wealthy individuals who are interested in making large investments, we do have others who are not so well off. People with relatively modest assets have shown a remarkable willingness to invest. Some are looking to put the money aside for their children.

Are you seeing more interest in high impact investment projects such as this?

There is greater interest in high impact ethical investing. We have seen a proliferation of these kinds of organisations in the past. However, there isn’t always much due diligence and they don’t provide the kind of information investors want.

I was surprised, for example, when I saw the prospectus for the Café Direct share offer that there was no indication of likely returns. As a consequence, investors hadn’t got a clue how much it would yield. Even so, the offer was very successful which shows many people are interested in the social return only.

To raise awareness I’m working on a website called MadInvesting, which will offer more information. It can challenge assumptions. In particular it will demonstrate how ethical investment can offer reasonable financial return.