What is Impact Investing?
Impact investing is a way of making your money work not just for profit, but also for good causes. It's about investing in companies or funds that aim to make a positive difference in the world, whether for social or environmental reasons.
Impact Investing Explained
Impact investing means buying shares of companies or funds that aim to create a measurable social or environmental benefit. It's also about avoiding or selling shares of companies that don't meet certain moral or ethical standards.
A lot of investors today are interested in investments that deliver both financial returns and positive social or environmental impact. However, it's still unclear how effective this strategy is in changing harmful practices of big companies. For instance, a study by Stanford University showed that divesting (selling investments) from harmful companies has little impact because conscious investors are just a small part of the overall market.
Unlike traditional giving (philanthropy), where you don't expect anything in return for your donation, impact investors expect to make money. Their individual values drive their investment goals. For example, some invest based on their religious beliefs, while others focus on current events or environmental issues.
Types of Impact Investing
Several terms overlap when it comes to impact investing, but they all aim to use investments to drive positive change:
ESG Investing (Environmental, Social, and Governance)
ESG investing takes into account how a company performs in three areas:
- Environmental: How the company impacts nature (like its energy use or waste management).
- Social: How the company treats its employees, customers, and communities (like labor practices and diversity).
- Governance: How the company is managed (like board composition and shareholder rights).
Example: An ESG investor might avoid investing in a company that has poor labor practices or a negative environmental record.
Socially Responsible Investing (SRI)
SRI is similar to ESG but often focuses on negative screening. This means not investing in companies involved in certain industries or practices like tobacco, alcohol, or weapons manufacturing.
Many financial institutions now offer investment funds specifically for socially responsible investing. Some even use robo-advisors to automate portfolios that align with social responsibility goals.
Example: An SRI fund might exclude companies that produce alcohol or tobacco.
Benefits of Impact Investing
Impact investing offers benefits for both investors and society:
- For Investors: It allows them to make money while contributing to good causes. It can also diversify portfolios and manage risks by investing in growing sectors.
- For Society: It can lead to job creation, innovation, and better access to essential services, contributing to a more sustainable world.
Financial Performance of Impact Investments
Many people think impact investing means sacrificing financial returns. However, studies show that impact investments can achieve competitive financial returns. In fact, portfolios that incorporate ESG factors often perform as well or better than traditional investments.
Examples of Impact Investing Strategies
There are several ways to get into impact investing:
- Invest in Companies: Choose companies with a strong social or environmental mission.
- Invest in Impact Funds: These funds pool money from different investors to invest in a diversified portfolio of ESG or SRI companies.
- Community Investing: Invest in local businesses and projects that contribute to community development.
- Impact Bonds: Finance social programs with the expectation of a return if the program succeeds.
How to Practice Impact Investing in 4 Steps
Getting started with impact investing is simple. Here are some steps:
- Define Your Impact Goals: What issues matter most to you socially or environmentally?
- Decide How You Want to Invest: Do you want to do it yourself or let professionals handle it?
- Do Your Research: If you're building your own impact investing portfolio, research is crucial.
- Select Your Impact Investments: If you choose the DIY route, consider mutual funds or ETFs with high ESG scores.
Bottom Line
Impact investing is about using your money to make a difference in the world while also earning a profit. There are many ways to implement this strategy. Stay informed about the companies you're invested in and remain diversified for the best results.
