I have previously tackled the topic of socially responsible investing (SRI) and how young investors love the idea of shunning companies and industries that make harmful products or pollute the environment, among other bad behaviors.
But there’s more to this story of values-based investing. There’s a second component that takes SRI to a whole new level: Impact investing.
What Is the Difference Between SRI and Impact Investing?
With the SRI approach, investors are on red alert to avoid giving their money to companies deemed to be harmful. Investors can tap thousands of investment funds that screen for these companies.
Those on the SRI no-go list are mostly manufacturers (and their suppliers) in the alcohol, coal, firearm, and tobacco industries. SRI investors should keep in mind that they are reacting to a negative by shunning social and environmental bad actors.
Impact investing means taking a proactive approach by targeting companies and organizations making a positive impact both inside and outside their offices while (usually) still making a profit for investors and shareholders.
Impact investors use a vetting system that rates how companies’ plans and operations affect a broad trilogy of environmental, social and governance concerns.
Is Impact Investing Better Than SRI?
Yes, for a few reasons. With SRI, you’re simply avoiding companies that you don’t like. It's negative avoidance. With impact investing, you’re hitching up with companies and organizations (charities, for example) that do good by addressing the world’s most pressing challenges in, say, farming, energy, housing, health care, and education.
Keep in mind that doing good outside the company also applies just to how companies act internally. Do they treat their employees and shareholders with respect or promote diversity in the boardroom? Do they take a keen interest in their workers’ general health and welfare?
But what truly makes impact investing superior is investment analysis.
Remember what I said earlier about being proactive with your investment dollars? The best impact investors have the best data on the companies in which they invest. Aside from creating a positive impact, these companies can track, quantify, and report their impact in an honest and straightforward way.
Investors today can measure the non-financial influence of their money based on factors such as employee wages or greenhouse emissions.
Impact Investing Examples
Here’s a real case I recall from my time at the Wall Street Journal: We had reported on a financial adviser’s wealthy client whose close relative was terminally ill. The client then learned of a new, experimental treatment that could be a lifesaver.
So what happened next? The client bought the firm that made the drug so that he could help aid its further development for both his loved one and other sufferers.
This is an example of hardcore impact investing, and a reminder that it isn’t just about buying stocks and investment funds that support what you believe in.
You, too, can invest in start-up enterprises that are committed to creating products and services to better our world (such as clean drinking water) or invest directly in specific run by charities and nonprofits supporting at-risk communities, neighborhood development, or sustainable energy.
Can Investors Make Money With Impact Investing?
Of course, but that depends on the company, cause, or project you decide to choose. Impact investors are a motley mix. They range from young, idealistic investors to large, amoral Wall-Street wealth-management firms.
And they vary in their financial-return expectations, too. Some want to bank a few dollars while others are willing sacrifice a profit if the data analytics show their investments are making a positive impact.
How Do You Get Started?
Determine your impact goals. That includes your financial goals, as well. Is making a profit your first priority, or is it secondary?
Once you’ve determined that, do a Google search to find companies or investment funds like exchange-traded funds (ETFs) that align with your values and objectives. Or try out ImpactBase, a searchable online database of impact investment funds and products.
You can input your risk and goal expectations to get the best match. Or if you want to be more active in your cause, you can always launch a Kickstarter campaign.