What is “Impact Investing”?

Most of us want to make an impact in this world. Yet, with limited time and resources, it may feel like there isn’t much we can do. It is good to invest your money where your heart is, but still, be aware of whether it’s impact investing or merely making money.

Enter impact investing. The overall goal of impact investing is to direct capital to businesses producing environmental or societal benefits. This form of investing can be quite broad, ranging from renewable energy technology to redressing some of the inequalities caused by conventional capitalism and globalization.

The point is that as an investor, you really do have a way of shaping our world by how you decide to put your capital to work. Here is everything you need to know about impact investing.

Impact Investing Defined

Impact investing is injecting capital into a company or fund with the intent not only to make money for the investor but also to make positive changes in the world. In a nutshell, impact investing is the act of making investments in which the investor believes the payoff will produce a positive return and social or environmental benefits.

For the impact investor, the benefits must be measurable. This leads most investors to dig deep into a company’s or investment fund’s ESG; or environmental, social, and corporate governance. It is within these documents investors find opportunities to make an impact in areas aligned with their own values.

Examples of Impact Investing

Impact investing can go by several labels, such as ethical, sustainable, and socially responsible. But in the end, the goal is the same – using your investment dollars to positively impact this world.

Understanding impact investing comes in many different forms. First, there are funds designed solely to make an impact without expecting a return, such as:

• Social – The Rockefeller Foundation’s Disability Opportunity Fund provides financing designed to increase access to housing for the disabled.
• Climate – Betterment’s climate impact portfolio invests in organizations dedicated to lowering carbon emissions.
• Community – The Reinvestment Fund focuses on housing projects, access to health care, educational programs, and job initiatives.
• Government – The Ghana Venture Capital Trust was established to promote the growth of small and mid-sized businesses in emerging countries.

The above examples carry out very specific instructions on how invested funds may be deployed. They are mission-driven and not clouded by the pursuit of profit.

But there are opportunities to have your cake and eat it too when it comes to impact investing. When of the simplest ways to accomplish this is by selecting low-fee exchange-traded funds, also known as ETFs. Here are just a few:

• iShares MSCI KLD 400 Social ETF – Currently the largest socially responsible fund, the ETF includes more than 400 ESG-friendly companies from the U.S.
• First Trust Water ETF – If clean water is important to you, this focuses on companies helping to keep our waters clean.
• NuShares ESG Emerging Markets Equity ETF – Looking for a global impact? This fund targets green companies in emerging countries.
• SPDR S&P 500 Fossil Fuel Reserves Free ETF – Take the S&P 500 and eliminate those with fossil fuel reserves and you have this SPDR energy ETF.

Is Impact Investing Really Impactful?

Impact investing comes in many shapes and sizes. The most popular way investors try to make an impact is by investing their capital into stocks, mutual funds, or ETFs like those mentioned above. But are those dollars really making an impact?

Surely holding a portfolio of ethical and impactful companies helps in some ways. However, the stock market is mostly a game among fellow investors. This means your investment mostly supports the share price for other investors who share similar values as your dollars don’t go directly to the individual companies. In essence, buying impact stocks, mutual funds, or ETFs is more like placing a vote for companies that align with your desire to make a positive impact.
For your dollar to really make an impact requires putting money onto the impact company’s balance sheet. To accomplish this, one may consider alternative means of investment such as trusts, individual startups, and joining angel investment groups. But doing so means playing a much riskier game than the stock market.

Direct investments usually mean entering a pool that is extremely illiquid and carries a higher chance of loss or complete failure. On the other hand, the willingness to exchange potential profits in favor of making a positive impact can provide a reward much greater than financial benefit of simply owning stocks of ethical and socially responsible companies.

How Do Impact Investments Perform?

While socially responsible investing as a concept has existed since the 1800s, ETFs and mutual funds are relatively young. Further, these financial tools are difficult to compare as their peer groups are small.

In general, however, socially responsible funds have performed better than their broader-ranged counterparts. Yet their performance may be attributed as much to the underlying assets as to the billions of dollars today’s younger generation is plowing into them.

The popularity of impact investment opportunities is exploding. And as our collective social consciousness grows, firms will continue to develop new and exciting financial vehicles to meet the market’s demands. While earning a positive return is certainly desired, knowing your dollars are making an impact may be the best reward of all.