Social Impact Investing – What It Is and How to Get Started
Investing often comes down to weighing your options and finding the right fit. There are many choices available for investing your money, from stocks to bonds to real estate, and a bit part of the decision process involves deciding where you’re most likely to make money while minimizing your risk. But what if there was a way for you to invest your money, earn a profit, and promote social good at the same time?
There’s a new trend emerging in the investment world called impact investing, where the goal of those who pursue it is not just to make money, but to better society in one way or another. If the idea of investing with a purpose is appealing to you, it pays to learn more about impact investing.
Impact investing is an investment strategy that focuses on achieving a positive social impact in addition to generating a financial return. Though it’s not the same thing as giving money to charity, impact investing does have strong philanthropic undertones, as the idea behind it is to invest money in a way that contributes or directly leads to a measurable social, economic, or environment improvement. It is similar in nature to socially responsible investing, though the two concepts do have some differences in practice.
Impact investing is a relatively new term; it was coined in 2007. However, the concept of impact investing has existed for decades, with socially conscious investors using their money to promote social good in a private, non-labeled fashion.
Those looking to get involved in impact investing can opt to invest in specific companies or projects that have the potential to improve our ecosystem, foster positive social change, or enrich underserved countries and communities. Another option is investing in funds whose strategies are specifically focused on impact investing.
Those who choose to put their money into impact investing opportunities typically take one of two approaches:
Both approaches are equally valid when establishing an impact investment strategy. It’s also possible to shift your strategy from year to year depending on the performance of your investments. If, for example, you have a strong return one year under a financial first approach, you may feel comfortable shifting to an impact first focus the following year.
Since impact investing and socially responsible investing employ many of the same underlying philosophies, the two terms are sometimes used interchangeably. However, impact investing is not the same thing as socially responsible investing.
Socially responsible investing involves choosing investments that promote social good in addition to financial rewards. Those who adopt a socially responsible investing strategy tend to put their money in companies that are either known to be socially responsible or aren’t blatantly socially irresponsible. This could mean choosing companies that operate in an energy-efficient manner, or ones that are known to offer employment opportunities to minorities or those who are disabled. It could also mean avoiding companies with a history of polluting the environment, or those that produce products such as cigarettes, alcohol, or weapons.
The primary difference between socially responsible investing and impact investing has to do with the approach to the investment itself. Socially responsible investors frequently apply a set of positive or negative screens to determine where companies fall on the spectrum of being socially responsible. Impact investing, by contrast, doesn’t work by including or excluding companies or opportunities based on positive or negative features. Instead, those who pursue impact investing will actively seek out investments that have the potential to produce measurable social, economic, or environmental outcomes.
To put it another way, socially responsible investors operate under the philosophy of “do no harm.” Impact investing tends to take this concept a step further into the realm of actively making a difference for the better.
Furthermore, impact investors are generally more committed than socially responsible investors to track their investments’ social or environmental impact. To this end, impact investors use what’s known as the IRIS metrics, which are a set of industry-recognized standards that measure the social, environmental, and financial performance of investments. Socially responsible investors, by contrast, are not as committed to measuring their impact and don’t use a standard set of metrics to report on their social achievements.
Impact investing spans a large number of sectors. Here are some common points of concern for impact investors:
It’s possible for a company to make an impact in more than one area. An eco-friendly building company, for example, might use recycled materials and employ green building practices, but it might also provide affordable housing to low-income families. Or, it might offer low-cost leasing opportunities to emerging small community businesses.
Some might assume that impact investing doesn’t offer as high a return as other types of investing. However, this isn’t necessarily the case. It’s difficult to pinpoint an average return for impact investments on a whole because they vary widely and cover a wide range of sectors and types. Also, since many impact investments are made privately (as opposed to stocks, for example, that trade publicly and whose purchase and sale prices are always disclosed), it’s not always possible to obtain data on financial returns.
On the other hand, there is some data that suggests that impact investing can be profitable. According to a 2015 report by Morgan Stanley, sustainable investing funds – ones that create a positive social or environmental impact – have met or exceeded the median returns of traditional funds. Furthermore, based a report by J.P. Morgan and the Global Impact Investing Network that surveyed a large group of impact investors, 68% reported that their portfolios’ performance was in line with their financial expectations, and 65% of respondents expected their portfolios to yield returns similar to those of the average market rate.
Calculating your personal financial return from impact investing is a fairly simple prospect. Measuring impact, by contrast, is more complicated. When dealing with individual companies, impact is typically measured in one of two ways:
When dealing with impact investment funds, investors must typically rely on the fund’s reporting to see what type of an impact their investment dollars are making. For example, the W.K. Kellogg Foundation‘s mission is to support underserved children, families, and communities and offer them tools to achieve success. To this end, the foundation provides grants for education, health services, and workforce development programs. Each year, it releases a report that not only discloses its financials, but also lists every social action initiative in which it participates. This way, investors can see where their money is going and what results their investment dollars are producing.
Joining the impact investment movement takes a bit more due diligence than a regular investment. With most investments, you need to evaluate the risks and potential returns at hand. With impact investing, you need to not only analyze the risks and rewards of your investment, but you also need to ensure that it aligns with your social goals. Furthermore, you’ll probably want to invest in companies or funds that give you the greatest opportunity to actually measure your impact.
Here are a few steps to take to get started:
Once you’ve established your personal investment goals, your next step entails finding investment opportunities that align with your objectives.
The Internet offers a wealth of information for identifying impact investment opportunities. You can:
Once you’re able to narrow down your investment options, you’ll want to vet each company, fund, or opportunity you’re interested in.
Finding financial information on individual public companies is easy. Since all public companies are required to file period reports with the Securities and Exchange Commission (SEC), you can use its free EDGAR database to access updates and obtain financial data. You may, in turn, come across information on social impact and initiatives in the process. Additionally, when companies achieve positive social outcomes, they don’t tend to keep that information hidden. If you consult a company’s press releases or do a basic search for it online, you’re likely to come across details on its social doings.
Researching impact investing opportunities via the ImpactBase database is even easier. Once you input your criteria, you can click on each result the database comes up with and access its information directly. Let’s say your search brings up one impact investment fund with an environmental impact. Click on that fund, and you’ll get documentation on its strategy, finances, and impact-related objectives.
Some impact investing funds come with minimum investment requirements. The ImpactBase database is generally targeted toward individuals with a minimum annual income in excess of $200,000, so if you’re looking to invest a considerably lower amount, you may be better off sticking to individual companies that issue stock to the public.
If you’re less concerned with making money and more focused on making an impact, you might consider backing a meaningful project or startup through platforms such as Kickstarter. If you’re passionate about the environment, for example, you could choose to fund an independent study that researches the effect of pollution on a particular body of water. In return, you’ll get periodic updates from the project’s founders so that you can follow their progress and see how your money is helping to uncover critical scientific data.
Many Kickstarter investments are really more like donations, where you’re funding something without the expectation of generating a profit or even getting your initial investment back. However, if your primary goal is to further a particular social or environmental cause and you aren’t looking to invest a lot of money, it may be a good place to start.
Adopting an impact investing strategy is a great way to make money while also contributing to the betterment of society. Unlike most investments, impact investments allow you to feel good about where you’re putting your money. The primary disadvantage of impact investing is that it typically requires more legwork than simply choosing a stock or a bond. You have to think about your goals, find companies or funds that align with your objectives, and seek out ways to measure your impact. But if you’re willing to put in the time, impact investing can be quite profitable on both a financial and emotional level.
Have you explored any impact investing opportunities? What social goals are most important to you?
Maurie Backman is an experienced writer and editor based in Central NJ who enjoys blogging about everything from parenting to money management and investing. She spends much of her time chasing after her children and chipping away at her never-ending piles of laundry. She also bakes way too often.
Social Impact Investing – What It Is and How to Get Started
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