Investors can use their money to try to make a difference on causes that are important to them.
People are increasingly recognizing they can use their savings and investments to do good in the world. They have embraced ethical investing and are letting their morals and principles guide their decisions about where to put their money. Impact investing is a way to refine your ethical investing approach. You can invest in companies that are making a positive impact on an environmental or a social issue, like supporting clean energy or reducing wealth inequality around the globe.
What exactly is impact investing?
Impact investments target a specific issue and focus on companies that are working to bring about significant improvements on that issue. You can find impact investments that address a range of environmental and societal challenges, including:
- Renewable energy
- Sustainable food and agriculture
- Reduced wealth inequality
- Health care
- Gender equality
How does impact investing work?
Today, there are many companies that are making an effort to improve the environment or social conditions around the world. For example, there are companies addressing wealth inequality by working to reduce poverty, provide access to needed infrastructure like telecommunications, make housing more affordable, foster entrepreneurship and provide people with access to the financing they need to start new businesses.
Whatever cause is important to you, you will likely be able to find companies that are working to address it.
What are examples of impact investments?
The range of impact investments available today is considerable. You can find individual companies that are trying to make a difference. Sometimes the impact they’re making may not be immediately apparent. You may think of the car-sharing services like Zipcar, Flexshare or Turo, for example, as simply a convenient way to get access to transportation without having the responsibility of owning a car. But they are also making an impact on the environment by reducing the need for car ownership.
You can also consider thematic exchange traded funds (ETFs) that invest in a number of companies delivering an impact on a specific issue. For example, there are funds that focus on gender equality, and they will invest only in companies that have gender balance on their leadership teams, boards and in their workforce, provide equal compensation for all genders, and have policies that promote gender equality.
Investors concerned about global warming could consider an investment in a clean energy ETF, which focuses on the sustainable energy sector. That sector includes companies providing renewable energy sources – such as solar, wind, hydropower and biofuels – and those engaged with clean technologies, including electric vehicles, battery technology, fuel cells, and smart electric grids.
Water management is a complex issue that addresses many concerns for impact-minded investors, including climate change, food sustainability and expanded access to clean water for a significant portion of the world population that doesn’t have that access now.
Does impact investing make a difference?
Investor and consumer focus on environmental and social issues have certainly changed the business landscape. The changes reshaping the automobile industry provide a dramatic example of this. Today, the stock market capitalization of electric car company Tesla1 far exceeds that of any other car company.
Investors know the automobile industry is changing, in large part because of the environmental issues associated with traditional, combustion-engine vehicles. The demand for cleaner cars is transforming the industry.
Even if companies are not entirely motivated by humanitarian concerns, the simple fact of the matter today is that they have to operate ethically and with an awareness of their environmental and social impact. If they do not, they will suffer severe reputational damage and may not be sustainable in the long term.
The Forum for Sustainable and Responsible Investment reported that the amount U.S. investors put in sustainable investments increased by 42% from 2018 to 2020, rising from $12 trillion to $17.1 trillion.2
In simple terms, investors have put their money where their mouth is. They are letting companies know they will not get access to their investments unless they behave as responsible corporate citizens.
How to get started with impact investing
The first step is to decide what cause you want to support. Once you find that, you can talk to a financial advisor who can guide your investments or do an online search for investments focused on your top concerns.
Another innovative way to discover impact investments that are right for you is to learn what your financial personality is. Academic research and investment science has demonstrated that people have distinct financial personalities. Positivly provides a quick online assessment to help you discover yours. Once you take the quiz, you can even receive investment recommendations, including impact investments, that align with your priorities and personality. You can also receive suggestions for financial advisors who share your same perspective on impact investing.
Once you become involved with impact investing, you may never again be tempted to ask the question, “What difference can one person make?” When it comes to your investments and the range of impact investment options available today, it turns out the difference you can make could be quite substantial.
1 Source: As of 10/21.