Impact investing has come of age. The niche that found its roots taking slow hold in the social upheaval of the 1960s has slowly become mainstream. You can now invest your values without sacrificing your returns.
The field has gone through a series of iterations as it has matured. Earlier iterations were primarily known under narrower monikers of green investing and socially conscious investing.
These earlier iterations were founded on an exclusionary approach, an investing equivalent of the medical field’s “do no harm.”
The approaches and the investments they spawned excluded investments deemed undesirable by some investors, such as weapons, alcohol, and tobacco. This later included regional divestment, such as excluding investment into South Africa late in the apartheid era.
Impact Investing’s ESG Foundation
Having moved past the strictly exclusionary approach from which it grew, impact investing has established a general foundation in the areas of environmental, social, and governance (ESG).
Environmental factors have been traditionally linked to the climate change issue of global warming, but have more recently expanded into many other climate-related issues. Global warming investments primarily focused on alternatives to carbon-based energy sources.
Current trends have broadened this arena to include resource utilization and responsible consumption, clean air and water, and the access to these.
Social factors include issues of diversity and inclusion, equality of opportunity, access to and quality of education, and health care and its accessibility and affordability.
Governance factors include the makeup and composition of boards of directors, workplace practices and opportunity, and shareholder advocacy.
As part of the transformation from being an exclusionary tactic, impact investing has moved to also being inclusionary in these areas. Inclusion has not replaced the exclusionary approach; both can be utilized by investors as appropriate.
For example, an investor might avoid companies that invest in drugs or alcohol, but seek out companies that champion diversity and inclusion, using both exclusionary and inclusionary approaches simultaneously.
Alignment With Values
What does it really mean to “invest your values”?
For an investor to affect the world through the direction of their investments may seem nearly impossible at first. But as with many things, our individual power is limited and our collective power is not.
When a multitude of investors direct their investments for impact, they get impact; collectively there is great power.
The starting point for any investor is identifying what they want to influence, where they want to have an impact. Some people, for example, are passionate about the environment while less so about governance.
Within the realm of environment they may have further narrower issues they wish to address. Knowing where you want to make a difference sets the field for investment options to consider.
Impact Investing and Risk Factors
From a theoretical standpoint, any limitation on investment options, for whatever reason, limits potential returns.
You exclude options, you diminish your potential returns. Practically speaking, this is no longer an issue in impact investing: The field has grown large enough and the choices broad enough that there is no empirical difference; you can invest for impact without suffering lower returns.
This was not always how it was. Early “green” investing with its limited options did not have the breadth or depth to produce the same returns as nonrestricted portfolios. This led many early impact-focused investors to be socially conscious with only a portion of their portfolios.
Currently, following an ESG-based strategy appears to be more of a risk mitigator than a risk creator. Companies that are paying attention to these issues seem to be doing a better job at managing their risks than companies that do not.
From the standpoint of managing risk, investors can participate in pooled investments, such as mutual funds and ETFs, which help mitigate the risk of adverse investment selection.
Individual impact investments, particularly in startups and microfinance, can have great risk — just as they would if they were not impact investment.
The Realm of Impact Investing
Investors have many mainstream options. There is a plethora of different mutual funds and ETFs with impact objectives that can satisfy nearly any taste. Beyond that investors can also look at individual securities or other nontraditional investments.
Individual securities can be a good option for those who want to support a specific company and either its behaviors or its products. An investor may feel that a company exhibits the behaviors other companies should and wishes to support it by owning stock.
Alternatively, an investor may wish to invest directly into a company in which there are fewer pooled options available; not everyone’s idea of what to impact or influence is the same.
Nontraditional investments should be approached with additional caution.
Microfinance investments can have a wonderful impact, but you may be taking on a great deal more risk and should limit your exposure in those cases.
Startups and small closely held businesses also pose additional risk. You can invest with impact within the realm of a normal risk profile, if you stay within the realm of traditional investment.
Delving into nontraditional investments may increase your impact but can also greatly increase your risk of significant loss.
For an individual investor, there is still the option of impact investing with only a portion of their portfolio. It’s an individual choice; you get to do what is right for you.
If you haven’t looked at impact investing in a while, it is not the same as it was in the past; there are many great options.
The Future of Impact Investing
Impact investing has a bright future. Options are available for investing with any size portfolio. Traditionally there were not sufficient choices for someone with a large portfolio to be fully invested in impact investments; that is no longer a restriction.
Millennials as a group, and female investors as a group, have both indicated in surveys that they want to invest with impact. This bodes well for impact’s future, as their investment influence continues to increase.
It may take time for this to take effect; people’s actions frequently lag their intentions, and it’s actions that make the difference.
Organizations, including corporations, seem to be becoming increasingly aware of the potential for their behaviors to influence the public or cause adverse reaction.
This, in turn, helps drive more socially appropriate behaviors as the fear of public backlash continues to increase.
For an investor, the time is ripe to utilize their investing influence to create impact in alignment with their values. Options exist now that didn’t in the not-so-distant past.
There are financial advisors and advisory firms that specialize in impact investing if you want to seek professional guidance. You can vote with your dollars every single day.