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Making a difference goes beyond volunteering and donating money: It can also extend to your investments. Impact investing is a way to put your investment dollars to work, promoting good in the world and in your portfolio.
What is impact investing?
Impact investing is the practice of investing in companies that create both positive and measurable change in the world, as well as a financial return on your investment. Depending on the impact you want to make, you can invest in companies that help advance women and minorities, promote sustainable business practices or have animal cruelty-free initiatives.
Capitalism and compassion are unlikely bedfellows, but making money doesn’t have to come at anyone’s expense. Impact investors see opportunity in having a proverbial seat at the table. By investing with the goal of having your voice heard, your money can have a broader impact, says Tim Smith, director of ESG shareowner engagement at Boston Trust Walden, a portfolio management firm for socially responsible investors.
“When you’re investing for a double bottom line, the goal is to have profits for yourself but also to have an impact on the planet and our society,” Smith says.
How to build an impact portfolio
1. Determine your impact area. What are the issues you care about? If you’re passionate about sustainable energy, you’ll want to ensure you invest in assets that cater to that. Deciding where you want to create an impact can help you narrow down your broker and investment choices later.
2. Decide if you want a DIY portfolio or to get help. You can pick your investments yourself, but understand it requires a lot of research. Some robo-advisors (digital services that choose and manage investments for you) offer impact portfolios — no research required.
If you want complete control over your investments, or you’d like to customize your impact, you can pick funds that have strong ESG scores (which are determined by how well a fund or company performs in terms of environmental, social and corporate governance factors) or buy stock in individual companies that have a mission you want to support.
» Want to know more? Read about building a socially responsible investment portfolio
3. Use your shareholder voting rights. If you decide to purchase individual stocks, you likely have the right to help that company decide on its policies. As a shareholder, you can use your voice through your “proxy,” which is just the ballot that shows what resolutions or policies are up for a vote.
If you decide to purchase individual stocks, you likely have the right to help that company decide on its policies.”
To vote your shares, start by reading the proxy materials you receive, and fill out your ballot before the company’s annual general meeting. If you don’t receive a ballot, you can contact the company yourself or through your financial advisor.
If you think voting on company resolutions won’t have any impact, think again. After the school shooting at Stoneman Douglas High School in Parkland, Florida, several shareholder initiatives targeted gun sales. In May of 2018, a majority of shareholders of firearms maker Sturm Ruger approved a resolution asking it to report what activities, if any, it is taking to promote gun safety. Sturm Ruger published its first report the following year.
Frequently asked questions about impact investing
Can I make money with impact investing?
In short, yes. According to the Global Impact Investing Network’s 2020 Annual Impact Investor Survey, 68% of respondents reported that in 2019 their investments met their financial expectations; 20% said they outperformed them. In addition, a 2020 research analysis from asset-management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices can positively influence investment performance.
Is impact investing risky?
As with all forms of investing, impact investing does pose some risk. However, sustainable funds may offer lower risk than traditional funds. The risks impact investors care about also may vary from those in traditional funds, such as the risk that the impact of their investment will be different than expected.
What’s the difference between socially responsible investing, ESG investing and impact investing?
“Socially responsible investing” and “impact investing” are often used synonymously. ESG factors — environmental, social and government — can be used as a set of guiding principles for any type of ethical investor. For example, if you’re creating an impact portfolio focused on the environment, you may look for investments that receive a high ESG score in the environmental category.
Whatever term you use, all forms of ethical investing center around creating a better world by investing your money with intention.