Investing is no longer just about returns. Investors are increasingly looking for their money to make a positive impact on the world. In fact, as of November 2020, ESG investing represents over 33% of all U.S. assets under professional management, or about $17.12 trillion. This represents a 43% increase since the end of 2018.
What is ESG and How is Impact Investing Different?
Environmental, Social, and Governance (ESG) investing focuses on using ESG factors to enhance traditional financial analysis by identifying potential risks. Common ESG factors are energy consumption, pollution, child labor, executive compensation, and transparency, among others. While there is a sense of social consciousness, the primary objective of ESG valuation is financial performance.
Impact Investing is a sub-set of ESG and takes it at least one step further – social benefits, not financial returns, are of the utmost importance. Investments should help businesses that are engaged in socially-constructive goals meet those goals, at the expense of generating the highest possible returns. Impact Investing, in short, combines the once separate worlds of investing and philanthropy.
How does it Work?
There is a wide variety of problems that need addressing: refugees, climate change, ocean plastics, sustainable food, healthcare, etc. As with all social causes, people don’t agree on which issues should be of the greatest importance while the others take a backseat. Not to worry – with the plethora of options available to invest for a social or an environmental impact, anyone can tailor their portfolio for what they find most important.
- Invest in a mutual fund or exchange-traded fund
By far the most common route taken, these funds invest in companies thematically, based on faith-based, environmental, human rights, or other such criteria. You can buy these in your regular brokerage account or a retirement account.
- Invest in a private company
Although not as simple as buying a fund, investing directly into smaller, private companies (especially local ones) with explicit social missions can have a much more visible effect.
- Make a special charitable donation
This one comes with a twist: make a contribution with a stipulation that it be used on a higher-risk project, with any profits generated to be paid out or reinvested into new projects. Many organizations are adopting this approach to support activities which may not otherwise be financially viable.
- Lend to a nonprofit
Nonprofit loan funds are also becoming more and more popular as organizations borrow money to support current projects, guaranteeing the loans with future donations.
Why Impact Invest?
Although there are many benefits to Impact Investing, the overarching benefit is threefold: 1) To promote behavior and policies that you support, 2) To detract from behavior and policies that you condone, and 3) To do so in a manner that makes your money grow, allowing your impact to grow with it.
As more and more people invest in this manner, companies and organizations will be forced to adopt certain policies in order to receive new investments (or at least avoid policies which will guarantee them no new investments). As more businesses across the globe are run this way, the results have the potential to change the world.
Investors have never been more aware of the power they have over the decision-making of massive corporations. By banding together and committing to do more with their investment dollars, Impact Investors are shaping a safer, greener, and healthier future.
*Tip: When researching specific investments, look for an “Impact Report”. These reports hold companies and fund managers accountable, providing you transparency into how your money is creating change.
Join the thousands of Investors who care about the impact their money can produce. If your advisor isn’t offering you this approach, contact us for an introductory conversation. Let’s make our world better through investing a new way.