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Investing for Impact

What if the companies you choose to invest in could support your financial goals and help you attempt to make the world a better place? To many, this might sound like a pipe dream or the idealistic wonderings of a new investor. However, "impact investing," or investing with the intention of creating a positive social or environmental change, in addition to a financial return, is not only possible but also on the rise.1

Remember that investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments fluctuate as market conditions change. And investments, when sold, may be worth more or less than their original cost.

What is Impact Investing?

Impact investing is the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns. It’s a broad term that refers to everything from investing in companies with an explicit mission aligned with your values, and to avoiding investing in companies that do not meet those criteria.

You've probably heard of impact investing before, but possibly by a different name. Over the years, investors have used other terms, such as "community investing," "green investing," "socially responsible investing," "sustainable investing," and "values-based investing." 

Just as its designation has changed over time, both the evaluation criteria of potential investments and the basic premise of impact investing itself have evolved as well. Put simply, today's version of impact investing is a discipline that considers environmental, social, and/or corporate governance (ESG) criteria to generate long-term, competitive financial returns and a positive impact on society.

It's important to note that there is no single way to invest for impact since every investor has different social and financial goals. For example, one investor may wish to avoid or divest from companies that manufacture firearms, while another may decide to invest in companies that take an active role in addressing systemic social issues through their business practices. Despite their different goals, these are both examples of impact investing. However, these scenarios are more than hypothetical. In one survey, respondents identified climate change as one of several factors supporting the recent interest in sustainable investing.2

A (Very) Brief History

One of the earliest forms of impact investing in America occurred in the 1950s when investors began to avoid publicly traded companies involved in or associated with alcohol, tobacco, or gambling. Over the decade, as new investors entered U.S. markets, impact investing evolved gradually. By the 1960s, some investors began to shift away from merely avoiding "sin" stocks, focusing instead on the Vietnam War and the politics of the time. For example, some investors chose to divest from companies that provided weapons for the war.

By the 1970s, it was clear that impact investing was here to stay. A growing number of new funds aimed to combine social and environmental considerations with financial objectives in an attempt to attract the socially conscious investors of the time. In the 1980s, some investors were heavily influenced by the Bhopal, Chernobyl, and Exxon Valdez disasters, which led to concerns about the environment and climate change. These events helped launch the Forum for Sustainable and Responsible Investment (SIF), which is now one of the largest educational resources for impact investing.

Fast-forward to today, and impact investing is more popular than ever. Today, with a number of funds available that focus on key issues, investors may be able to have more of an impact than ever.

Investing in mutual funds and exchange-traded funds (ETFs) is subject to risk and potential loss of principal. Both mutual funds and ETFs are subject to the market and the risks of their underlying securities. Both may have a trading price, which may be at a premium or discount to the net asset value of the underlying securities. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Investors should carefully consider the investment objectives, risks, charges, and expenses of the fund before investing. The prospectus contains this and other information about the funds. Contact the fund company directly or your financial professional to obtain a prospectus, which should be read carefully before investing or sending money.

What are the types of impact investing?

There are many different ways to invest for social or environmental impact or both. Here are a few common ones:

  • Invest in mutual funds, exchange-traded funds (ETFs), or bonds that choose companies that align with values that matter to you. Many of these funds select companies according to faith-based criteria, environmental practices, or human rights. 
  • Avoid investing in companies whose practices you disagree with. Some investors, for example, avoid “sin” stocks, like producers of alcohol, tobacco, or weapons.
  • Invest directly in private companies or funds with an explicit social mission. This may be through venture capital investment or share purchases. For example, you could invest in companies that focus on solar power, carbon sequestration or alternative fuels.
  • Make a charitable donation or a charitable grant to organizations or projects that blend charitable support with investment capital to support higher-risk projects that may not otherwise be financially viable.
  • Lend to a nonprofit, whose mission you want to support. One way to accomplish this is through a nonprofit loan fund. Loan funds allow lenders to pool their capital and spread their risk in a diversified portfolio.

What are the benefits of impact investing?

Impact investing offers a variety of benefits—some quantifiable and tangible, others less so but still important. Here’s a sample of the benefits of impact investing:

  • Promote and encourage corporate practices that are important to you, such as fair labor practices or environmental stewardship.
  • Use more of your resources—beyond what you donate to charity—to support issues that matter to you.
  • Support approaches to addressing societal issues that are sustainable and not fully reliant on philanthropic funds.
  • Make your money go further. You can recycle returns on impact investments for further social impact.

It’s also important to note that investing for impact doesn’t necessarily mean you have to compromise financial returns. Numerous studies have looked at the performance of impact investments and found that investing in sustainability has usually met, and sometimes exceeded, the performance of traditional investments.

Ready to Learn More?

These days, you can find impact-friendly funds through most, if not all, of the major investment companies. Wherever you are investing, your investment professional should be able to provide information on each fund. For those who are curious to learn more, the SIF (USSIF.org) provides numerous resources and information for individuals new to impact investing. Additionally, both Morningstar (Morningstar.com) and MSCI (MSCI.com) provide "sustainability ratings" for funds and indices, with the goal of helping to evaluate whether a company or fund aligns with an investor's goals.3

If this investment approach interests you, contact us today. We can offer you personalized guidance on impact investing. We can help you pursue your financial goals and consider the well-being of those in your community and around the world. What could be better than that?

  1. https://www.pionline.com/frontlines/impact-investing-measurement-tools-works
  2. https://www.ussif.org/sribasics
  3. https://www.investopedia.com/terms/i/impact-investing.asp
  4. The companies mentioned are for informational purposes only and should not be considered a substitute for a more comprehensive review of the role impact investing can play in a diversified portfolio. Remember that diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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