When you invest your money, what typically happens?
You probably first put it into a brokerage account. Then you follow along on your computer screen, as maybe it turns green (Nice! Maybe take a profit occasionally?) or perhaps it goes red. (Oh no. It happens. Hang in there!)
But, what if you could aim to benefit society while making a profit – and make an impact that goes far beyond the profit & loss statements of the companies you invest in?
Are we starting to sound like an informercial? Maybe just a little. But we’re not here to sell you anything specific. We’ll mainly share a little of what we’ve learned.
In this article, we’re going to talk about impact investing – not only what it means, but also how it differs from other values-based investing approaches, and what the future has in store for this method of investing.
What ‘Impact Investing’ Means
Impact investing is seeking to make a measurable positive environmental or social effect – with the operative word being measurable. It can take the form of numerous asset classes, as well as investment strategies, but overall, the point is to use money and investment capital for positive social results.
What’s another effective way to understand it? Think of impact investing as a happy medium between traditional stock/portfolio investing and direct charitable giving – a place where you can align your investing with your personally-held beliefs.
It’s generally agreed to be a commitment to measuring social and environmental performance with the same rigor as that applied to financial performance. So, at least in the eyes of fund managers, it’s where your passion meets financial performance. Or commerce and compassion. Whatever’s catchiest!
Impact investing can be as simple as banking with a community-based financial institution that helps to expand economic opportunities for low-income stakeholders, or only purchasing from companies with a well-defined track record of environmentalism.
By and large, the biggest way to impact invest is through designated funds, managed by professional firms.
Though some “impact funds” are simply pools of concentrated capital which are deployed to solve specific societal problems, many are highly-tailored individual products, which are traded on public stock indexes (just like ETFs), and can be bought and sold as marketable securities.
A simple search will return a ton of options ;)
How To Measure Impact:
Technically, you can measure your own investments for impact.
But do you truly have the time to scour obscure financial reports and stay super-current with all shareholder disclosures of your companies of choosing? If you do, you might be a prime candidate to be a high-powered financial analyst.
Plus, you’d have to benchmark your own investing priorities, and grade them against industry standards. Seems like a lot of work. That given, you might just invest in impact investing-focused mutual funds.
How do these funds track both financial returns and worldly impact? Two key elements should be present: intentionality and measurement. Intentionality means that companies actually pursue the projects, initiatives and measures they promote, in order to achieve positive societal and environmental goals.
The concept tackles the ever-present question in this arena – are these companies doing what they say they’re doing, and are they truly making a difference for the better?
Measurement is, of course, the metrics by which we track the progress of goals. If one of our investing desires is to purchase shares in companies that (broad term) “pollute less”, we may be able to track the carbon output of individual companies – or simply invest in a fund that pre-selects these low-emission companies for you.
The Difference between Impact Investing, ESG & SRI:
If you’ve been following our blog, you probably know a little bit about ESG and SRI. They’re both ways of aligning your personal beliefs with your personal investments. But there’s a difference in the three.
Put simply, SRI is more of a strategy, while ESG is more of a set of metrics. Impact investing, as a concept, can refer to something much broader – encompassing almost anything you can think of. While ESG and SRI involve publicly traded assets.
For investors who seek transparency about the specific ways their capital is being applied to a particular cause, impact investing might be a more attractive vehicle than ESG or SRI.
The Future Of Impact Investing:
According to the Global Impact Investing Network, more than 88% of impact investors reported that their investments met or exceeded their expectations. But then again, by some studies, since their inception, impact investments have averaged returns of a little less than 6%.
Of course, there are many threatening factors facing the broader future of work and economic growth. Looming specters such as automation, fintech and AI threaten to remove humans from jobs. But by and large, a move toward purposeful capitalism is still predicted.
Another development of note is the formation of Sustainable Development Goals (SDGs) developed by the United Nations that target ambitious progress by the year 2030 against a broad range of issues, including poverty, hunger, health, education and more. Meeting these goals will require several trillion dollars each year, and many leading world governments are expected to follow them.
One bright spot is that as the practice of impact investing continues to grow, additional guidance will be developed, more empirical evidence and data will be compiled, and the strategy will continue to mature as an option for socially-minded stock market and investment connoisseurs.
How Signet Can Help:
What’s our main takeaway from this article? That trend-driven and hotly-contested ideas or strategies should always be talked over with a qualified investment professional – one who specializes in impact investing, as well as a wide range of investment specialties. To begin developing and implementing your impact investing strategy, contact us today.
At Signet, it’s our mission to provide investment resources and strategies to clients and financial institutions, helping them develop a greater knowledge and passion for sustainable, responsible and impact investments.
Let us help you find your mark with our experience.
The return may be lower than if the adviser made decisions based solely on investment considerations. All investing involves risk, including loss of principal. No strategy assures success, or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
LPL Tracking #1-05189777
Source 1.) “Roadmap for the Future of Impact Investing” – GIIN
Source 2.) “Impact Investing”— ESG Clarity
Source 3.) “Impact Investing: An Introduction” – Rockefeller Philanthropy Advisors