Our Guide to Impact Investing

Want to make the world a better place and still see financial returns? Impact investing can help you do both.

Did you follow the Game Stop stock short squeeze in January of 2021? If you did, then you know that for a short period of time, the market was influenced by a group of eager and determined investors who wanted to show their faith in Game Stop and also stick it to the man. However, while this “meme stock” didn’t necessarily fail, it didn’t deliver the incredible returns that many investors anticipated.

Why didn’t this attempted takeover of the stock market work out as planned? The answer involves a variety of factors, and it’s possible that the short squeeze failed because of its short-term focus. If you’re interested in long-term investing, then it’s time to learn about impact investing.

Impact investing is a financial approach that’s not aimed at personal gain, sticking it to the man, or supporting one specific company. According to financial industry research, 85% of the general population and 95% of the millennial population are interested in sustainable investing. So what exactly is impact investing? Take a look at what it involves and see if you want to start!

What Is Impact Investing?

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You might have heard of impact investing before under a different name. It’s also called socially responsible investing, community investing, mission investing, social investing, values-aligned investing, and more. Each type of investing has its own nuances. SRI means either socially responsible investing or sustainable and responsible impact investing. Environment, social and governance (ESG) is also another term used in the impact investing world. 

While the different types of impact investing vary in their outcomes, they all have the same goal of improving the world. Impact investing is a strategy used to both support the investor’s financial goals and to positively impact the world in an environmental or social way. Both individuals and companies can invest impactfully.

Read More: Bottom-Up Investing Basics for New Investors

Who Can Be an Impact Investor?

Both individuals and companies (or corporations) can engage in impact investing. Sometimes other groups also want to support specific causes or missions and choose to engage in impact investing. Any company, cooperative, or individual with assets can become an impact investor. Religious groups and local councils or organizations (such as nonprofits) may support impact investing. 

Last but perhaps most importantly, financial institutions – such as banks and insurance companies – can also leverage their financial power to support impact investing.

Qualities of an Impact Investment

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To qualify as an impact investment, there are certain criteria that must be met. Impact investments support causes that would otherwise not exist without the impact investors’ funding. This is referred to as the criteria of additionality. These investments also must be purposefully aimed at making a positive impact. This is referred to as the criteria of intentionality. 

The last qualification is that the impact of the investment must be measured and communicated. This is the criteria of measurability. Simply donating money to an organization and never knowing how that money is used is not an impact investment. The projects that the funding supported, and the objectives achieved by those projects, must be clearly measured.

How Can an Individual Become an Impact Investor?

Man staring at chart on computer

If you’re looking into becoming an impact investor, there are several different routes you can take. How you approach this type of investing will depend on how much funding you have as well as the amount of time and energy you want to put into your investment. A great starting point is to find an ethical financial adviser in your area who specializes in impact investing. You can consult with your adviser about funds you may want to contribute to and your potential return.

There are also companies like Betterment that easily allow you to set up your impact investing online. You start by choosing socially responsible investing (the SRI we mentioned above), and then more specifically you can choose a broad impact, climate impact, or social impact portfolio. While these portfolios may have a higher risk than other traditional investment options, of course, they come with the benefit of making a positive impact on the world.

What’s appealing about Betterment is that they aim to allow SRI investors to make a positive impact without the high fees that many financial institutions charge. Betterment protects its investors while empowering them to make an impact.

You could also look into contributing to a Fidelity Charitable-donor advised fund. Fidelity has a solid reputation in the finance world, and they see the need for impact investing. According to a 2018 briefing, “nearly 60 percent of high-net-worth-donors indicate that they have an interest in investing in publicly traded companies with good social or environmental practices.” 

However, it’s not just high-net-worth individuals who want to make the world a better place. Companies like Betterment do not require a large sum of money to start investing. No matter what your income is or how much you have in assets, if you want to positively affect the world through impact investing, you can!

What Do You Invest In Exactly?

Impact investing is very similar to traditional investing. You invest directly in mutual funds, exchange-traded funds (ETFs), or bonds of the companies that are doing work you support. Another area where you have the potential to make a serious impact is by finding and investing in new initiatives with little funding. 

Loans are another way that you can become involved in impact investing. You can lend to a nonprofit or you can invest directly in private companies with clear impact missions. Again, you may want to speak with your current financial adviser or with a trained impact investing advisor, especially before giving out a loan if you need the money back.

If you’d rather tackle impact investing on your own, you can start by researching the causes that you support, finding where funding is needed, and reaching out directly to the organization or company for more information.

What Kind of Returns Does Impact Investing Deliver?

Investor meeting in office

Just because you’re investing in something that will benefit society or the planet doesn’t mean that you shouldn’t expect a small financial return or no return at all. Studies have found that impact investments perform as well as, and sometimes even better than, traditional investments. 

While financial returns are one great benefit of impact investing, you’ll also enjoy the more subtle return of the power of influence. By choosing to support companies that align with your values, you’re also choosing not to support companies that may be using unfair labor practices or unsustainable methods. Withholding funding from these unethical companies is a great way to influence them to change their practices.

It’s also important to know that many ESG companies and organizations rely heavily on direct philanthropy – donations. When you choose to invest (with the expectation of a return), you’re giving that ESG organization more power and helping them to rely less on donations. 

How Can You Tell if the Company Is Legitimately Ethical?

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With so many organizations entering environmental and socially responsible spaces, it can be difficult to know for a fact if they are doing exactly what they promised. Fortunately, there are ways to find out if a company has a history of sticking to its word – or if they aren’t as ethical as they claim to be. 

The Sustainability Accounting Standards Board (SASB) aims to solve this problem. They want to standardize the way that companies report on their ESG criteria. The SASB standards look at the interaction between ESG issues and financial performance in a total of 77 different industries. 

These standards are also helpful because they’re specific to each industry, which makes understanding how a specific company measures up more fair and equitable. They show both the financial implications and the economic, environmental, and social impacts of a company.

Impact Investing for Businesses

If your business is looking to get involved in impact investing, there are plenty of opportunities for you to give back to your community, society, and the planet. Business investments in ESG initiatives are so important because businesses often have more funding to leverage than individual investors. 

It’s helpful to think of investing as a spectrum. On one end is traditional investing – supplying funds with the intention of collecting a large return. On the other end is traditional philanthropy – giving money to support a cause with no expectation of any financial return.

Impact investing is generally in the middle of that spectrum, but depending on your business’ needs and goals, you may want to make an investment that’s closer to traditional investing, or you may want to make a philanthropic donation.

Whatever you choose to do, remember that any impact investment you make in a legitimate organization or company, no matter how small, will make the world a better place. Speak with a financial adviser or reach out directly to the organization you’re considering supporting.

It’s possible to support your financial health while also improving society and the planet. Not everyone can dedicate their life to helping out – but you can definitely dedicate some of your funds.

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