- Impact investing focuses on companies that "do well by doing good"
- Socially responsible investing commands a $228.1 billion market
- Evidence of competitive returns is still incomplete
Have you ever felt there was a conflict between making money and being a good global citizen -- and hoped you could find a way to align the two?
What is impact investing?
Increasingly, investors are seeking to earn good returns and do the right thing ethically by pursuing what is commonly termed "impact investing." It's a strategy designed to focus on companies that do positive things for the world like providing renewable energy, finding solutions to global health problems or reducing pollution.
If you find that intriguing, you should learn more about impact investing before deciding whether there is a place for it in your portfolio.
How does impact investing work?
Socially responsible investing has been around for decades, but traditionally it has focused more on exclusion than on inclusion. In the past, socially responsible investing involved constructing portfolios that excluded stocks that were deemed to represent unethical practices. For some, that might mean companies located in repressive countries; for others, it might mean weapons manufacturers or so-called "sin stocks" such as those profiting from gambling or alcohol.
Impact investing differs in that investors actively seek companies that are having a positive impact on the world for their portfolios. This might include anything from the industry they are in to a company's corporate policies.
The approach is catching on.
According to the Global Impact Investing Network (GIIN), which advocates for impact investing, there is now $228.1 billion invested in companies that fit the strategy. Roughly half of those surveyed by the GIIN made their first impact investment within the past decade, so it is a fast-growing field.
While the ethical appeal is part of the reason impact investing has grown, investors are also attracted by the notion that you can earn competitive investment returns while staying true to your principles. Impact-investing advocates champion the idea that this investment approach succeeds financially because "good" companies succeed in the long run, whether because they solve important problems or stay out of trouble by pursuing responsible practices.
However, the approach is so new and the scale has grown so rapidly that evidence that impact investing can earn competitive returns is incomplete. This is certainly information that bears close monitoring as the impact-investing field matures.
Is impact investing right for your portfolio?
If you are interested in impact investing, there are services that recommend portfolios of specific stocks according to various social-investing goals, as well as mutual funds and private equity managers that do the same. This means the strategy is available to both large and small investors.
Whatever type of impact-investing vehicle you are considering, here are some steps you should take:
- Define your socially responsible investing guidelines
Impact investing is not one size fits all. Deciding what social issues you want your investments to impact is the first step to matching investments with those goals.
- Define your investment goals and benchmarks
Along with your ethical goals, there is still an investment dimension to this. Are you seeking growth, value or broadly diversified investments? Are you pursuing domestic or international opportunities? These goals will help you both identify investments and choose appropriate benchmarks for measuring their performance.
- Ask your broker/financial adviser about products that meet your parameters
If you are working with an investment professional, explain your impact-investing goals and ask them to identify investments that might fit with those goals. Online brokers are also increasingly catering to impact investors, so this is another way you might identify potential opportunities.
- Scrutinize fees, track record, qualifications and practices
Whether it is an individual company or a mutual fund, kick the tires thoroughly before you commit your money.
- Find out if the cost structure is right.
- Look at the performance history of either earnings for individual companies or total returns for funds.
- See if there is a deep and well-qualified management team in place.
- Finally, look at whether they practice what they preach in terms of ethical standards.
(With the rapid growth of impact investing, expect some entrants to the field to use the label to attract business without really having the social commitment you're looking for.)
Impact investments are most likely to be stocks, so make sure this fits within your current equity allocation and make adjustments so that allocation stays in line with your risk profile.
For all the feel-good aspects of impact investing, it is still important to scrutinize opportunities as you would any investment, to make sure they are viable and appropriate for your portfolio.
More on investing strategies:
Starting to invest? Read: 8 costly investment mistakes to avoid
Best practices for rational investing - Investing: from fear to greed
Ready to learn more? Read: Why you need to rebalance your investments - today