Impact investing is much like investing in the stock market or another enterprise. However, the focus of impact investing skews toward investments that leave a positive impact on the world. These investments can impact certain localities, business and production processes, the planet or a specific product.
Impact investing allows investors to straddle the line between philanthropy and investing. Philanthropists focus solely on the greater good, with no expectation of personal gain, whereas investors seek financial return from their investments.
Impact investors, on the other hand, search for opportunities to merge the two goals. They look for opportunities to make a difference while simultaneously earning a return.
How Does Impact Investing Work?
When you impact invest, your investment goes to a business or organization that is actively working to make a significant difference through a project or initiative. Areas investors tend to concentrate on are poverty, social responsibility, sustainable trade, clean energy or drinking water. These are just a few of the world’s needs, and there are many others to consider.
Impact investing is effective because your capital goes to local entrepreneurs or businesses who are more familiar with the problems that need to be solved. For example, Rekha Unnithan, a $1 billion impact investor with Nuveen, told Business Insider in a recent video that low-income housing is a popular impact investment.
According to Unnithan, one in four households in the United States are paying more than 30 percent of their income on housing, which leaves them with less money for education, health care, and other quality-of-life expenses.
By investing in this asset class, impact investors are able to contribute to maintaining affordable housing stock.
How to Start Impact Investing
Becoming an impact investor will take time and work to get started. Set clear goals and objectives so you know what types of investments to make and where to focus your research. Talk with others — particularly a financial advisor — to help you make the best decision for your situation, and start small, building as you go.
Set Your Goals
Without clear goals, you won’t recognize the red flags when doing your research. Whether you decide to focus on making a positive impact on the environment or finding a company that cares about social responsibility, your goals will dictate the type of reports you need and the key points to research. Without a clear objective, you’ll find yourself swimming in a sea of information, unsure of how to use any of it to achieve your goals.
Do Your Research
Once you’ve set your goals, it’s time to do some digging to find companies or organizations that will help you reach them. Review the reports and data that support your investment and impact goals. At this stage, you’ll also want to study the company’s financial status and your potential return on investment.
Talk About It
The role of a financial advisor is to talk you through your investment opportunities and other financial decisions that will align with your values and help you progress toward your goals.
Your advisor can walk you through the modern portfolio theory — a way to maximize a conservative investor’s returns despite a low risk tolerance — and show you how to improve your investment portfolio.
In addition to discussing your financial plans with a financial advisor, make sure you include anyone who will be affected by your decisions. Talk it over with your spouse or partner, and together can make a plan based on the advice you receive from a trusted professional.
Start Small, but Start Now
Like any investment, impact investments need time to yield higher, more impactful returns. For this reason, start your impact investing now rather than later. Even if you have only a small amount of money to invest, it can go a long way. It may even be in your best interest to start small so you can begin to understand your risk tolerance toward impact investments.
By investing in companies and organizations that leave an impact, you’ll not only be making a difference but also earning a return in the process. This return can be seen as a decrease in pollution, third-world countries getting clean water or perhaps a personal financial gain. Ideally, you’ll see returns in multiple areas.
The beauty of impact investing is that you can customize it to fit your goals and what you value. By diversifying your investment portfolio, you’ll be able to maximize your returns, which will provide you with money to put toward retirement or the purchase of an annuity, as well as the ability to say you made a difference in the world.
Impact investing vs. socially responsible investing
The world of impact investing is full of labels, but some mean more than others. Here is what each one actually means and how they are used to create impact portfolios.
General terms for impact investing
Labels such as socially responsible investing and impact investing are often used synonymous, alongside other terms like ethical investing and sustainable investing. They usually refer to a similar idea: Using your investing dollars to make a positive difference in the world.
Environmental, social and governance investing
Impact investors often use environmental, social and governance, or ESG factors, which are a set of guiding principles that focus on environmental, social and corporate governance concerns, when choosing investments.
Many independent research firms use ESG scores to help grade investments along an ethical curve. For example, if you’re creating an impact portfolio focused on the environment, you may look for investments that receive a high ESG score in the environmental category.
Invest in what matters
Support the social and environmental initiatives you believe in, all while building your portfolio.
Impact investing strategy
Regardless of what you call your form of ethical investing, there are generally three strategies for making your portfolio more impactful:
- Exclude investments in what they consider “unethical” companies.
- Include “ethical” investments.
- Include and exclude particular investments.
That’s why it’s important to understand the methodology behind how investments are chosen for a portfolio.
Making a difference goes beyond volunteering and donating money: It can also extend to your investments. Impact investing is a way to put your investment dollars to work, promoting good in the world and in your portfolio.