Impact investing is a strategy that aims to create a positive social or environmental impact while providing competitive financial returns. Impact investors may buy stock in a company that promotes women more often than other companies or avoid buying bonds issued by a weapons manufacturer. Unlike philanthropy, which seeks to further a social or other agenda by donating money with no hope of financial gain, impact investing requires a financial return comparable to other investments. Impact investors often also require some form of measurement of the effect of their investments on their social or environmental goals.
For help with your impact investing decisions, consider working with a financial advisor.
Impact Investing Basics
Impact investing is one of the thematic investing styles. Other thematic investment approaches may focus on a particular industry, such as health care, or a social trend, such as the shift to e-commerce, where superior financial returns are expected to be found. Impact investing is distinguished from other themes by the investor’s desire to bring about or foster a specific change in the world in addition to earning a strong return on investment.
Philanthropic donations are also intended to promote social causes such as gender equality or environmental concerns such as global warming. However, impact investing is different in that it seeks to earn competitive financial returns in addition to promoting positive change. The goal of philanthropy is never to return financial benefits to the donor.
Impact investing is also similar to environmental, social and governance (ESG) investing. ESG investors and impact investors often invest in the same companies, such as those that develop carbon-free energy technologies or provide access to financial services for chronically unbanked communities. However, ESG investing is driven by the idea that companies that do good will fare better financially than those that exploit the environment or make products that harm people. It is more about generating superior returns than creating desirable change.
Impact investing is not a specific asset class and can involve a wide range of asset types. Impact investors can put their money in stocks, bonds, mutual funds, or ETFs. They may lend money to microfinance initiatives or other organizations that aim to help people with inadequate resources.
Impact investors are often individuals, but can also be organizations that aim for social or environmental influence. Foundations, governments, nonprofit organizations, pension funds, religious institutions, banks, family offices, and mutual funds are among those that can act as impact investors.
How Impact Investing Affects Investment Choices
There are two ideas behind impact investing. First, by providing financial resources preferentially to organizations that pursue desirable goals or at least avoid undesirable outcomes, investors will increase the chances that the changes they want to see come to fruition. Second, impact investors want to achieve competitive financial returns.
For example, an impact investor might buy shares in a company that develops food products that can substitute for meat, based on the understanding that animal-derived foods harm the environment more than plant-based foods. Alternatively, the investor could avoid buying bonds issued by a meatpacking company.
Impact investors may seek to further any number of social or environmental objectives, including:
Reduce human carbon emissions through solar or wind power,
Mitigate climate change through carbon sequestration,
reduce water consumption,
Equal opportunity for people of all genders, races, ethnicities, and other groups,
Encourage practices promoted by religious confessions,
Improve access to health, financial or other services in disadvantaged communities.
In addition to providing additional financial resources to activities that they want to strengthen, impact investors can work to avoid supporting industries, companies, or activities that they see as negative. Impact investors often avoid investing in organizations dedicated to:
To execute their investment strategy, investors may purchase shares of individual companies or bonds issued by individual companies. However, many take advantage of the convenience and diversification offered by mutual funds and exchange-traded funds designed to pursue specific impact investing strategies. Funds are available that seek to advance carbon mitigation, gender equity, renewable energy, and many other impact investing topics.
Impact Investing Returns
Impact investing has two goals: positive change and competitive returns. With respect to the former, impact investors have developed a number of methods to measure the effectiveness of their investments in advancing their social and other goals. For example, an investor looking to reduce homelessness by buying stock in an affordable housing developer might look for changes in the measured number of homeless people in communities where the developer is active.
Regarding the requirement of a profitable investment, impact investors use measures familiar to all investors, such as return on investment. Many studies of the financial performance of impact investing portfolios support the idea that impact investing can generate competitive returns with strategies based solely on profit generation.
The bottom line
Impact investing is a style that describes how investors direct their financial resources to the causes they support, while withholding support from unwanted activities. To accomplish this, impact investors may buy shares of companies they believe promote desirable outcomes while avoiding companies engaged in manufacturing or distributing undesirable products and services. Impact investors also want to see a financial return that is competitive with other investment approaches.
tips for investing
A financial advisor can help you identify investments that meet your needs for financial impact and performance. Finding the right financial advisor for your needs doesn’t have to be difficult. Free SmartAsset Tool connects you with up to three financial advisors serving your area, and you can interview their compatible advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goalsstart now.
Although impact investors seek to do good as they perceive it, certain impact investing activities may conflict with impact investors who have different ideas of what is good. Returns remain a necessary part of a good impact investing strategy. You can use SmartAsset’s investment calculator to get a rough estimate of what an impact portfolio would look like.
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