For decades, the stock and investment markets were strictly considered financial instruments. They had a fairly narrow purpose: to provide companies with funding from investors, who in turn earned profits from successful ventures.
Around 60 years ago, some companies began to think more outwardly about their impact. This brought rise to the idea of socially responsible investing (SRI), which reflected the many societal changes of the 1960s and 1970s. By the 2000s, this idea had solidified into the concept of impact investing.
What Is Impact Investing?
Impact investing is simply the act of coordinating parts of one’s investment portfolio to promote global health and improvement. It involves investing in companies motivated to further social or environmental change. It can also include making direct contributions to nonprofits for large-scale projects.
For many years, impact investing was the exclusive domain of institutional investors like Cyrus Nikou’s Atar Capital. It’s proven to be successful in both financial and social ways. Barron’s reports that four out of five investors surveyed worldwide said their investment performance either met or exceeded their targets.
Now, more private and consumer shareholders are getting in on the impact investment movement.
Who Benefits Most from Impact Investing?
Impact investing is a direct means of improving underserved communities and services dedicated to social change. Causes that receive the benefits from impact investing include:
- Renewable energy
- Sustainable agriculture
- Healthcare
- Education
- Sanitation and clean water
- Affordable housing
- Human rights
- Minority and women-run enterprises
Many other causes can benefit from impact investing as well. The best thing about it is that you can help a humanitarian effort that’s close to your heart.
Ways to Invest
Direct Investment
The simplest way to make an impact investment is to invest in public companies focused on effecting change.
For example, First Solar and Enphase Energy sell products necessary for solar energy installations. Similarly, Heritage Homes focuses on building single-family houses that are environmentally and financially sound, and NextEra Energy Partners concentrates on renewable power and natural gas.
Shares in companies like these and many others are available to both institutional and consumer investors. Investing in them is as easy as visiting your broker’s online marketplace and buying in.
Charitable Donations
Giving to charity has evolved from individual contributions to corporate campaigns. Today, the average corporation donates $20–$26 billion to nonprofits every year. Some general areas investors target include education, healthcare, hunger, culture, the environment, and human rights.
Nonprofit Loan Funds (NLFs)
Nonprofit loan funds are financial institutions that pool resources for businesses that place social issues above profits.
Many NLFs work directly in or for communities or individuals with certain needs, like affordable housing or poverty relief, or may specifically work with minority or women entrepreneurs. Quite a few offer loans with favorable interest rates and terms.
Mutual and Exchange Traded Funds (ETFs)
Mutual funds and ETFs are instruments that group certain companies according to common traits or concepts. They instantly diversify stockholders’ portfolios.
Several such funds are organized around social and environmental themes, including the Parnassus Core Equity Fund, the iShares MSCI KLD 400 Social ETF, and multiple mutual funds organized by Green Century. ETFs are particularly convenient since anyone can buy or sell them on the stock exchange.
Refraining from “Sin Stocks”
Many investors elect not to deal with any company or business that doesn’t align with their values. If a company makes products or conducts business that harms the environment or society, shares in their business are referred to as “sin stocks.” Avoiding them is a loose form of impact investing.
Core Concepts that Drive Impact Investment
The Global Impact Investing Network provides four characteristics that drive impact investing:
Intentionality
The desire to change or improve society should co-exist with (or, better yet, exceed) an investor’s profit motive. Causes that are particularly close to the investor’s heart reflect that intention.
Evidence and Data
No matter how strong the drive to contribute may be, investing strictly based on one’s feelings is never wise. A potential impact investment should be evaluated using all available metrics, past cases, and data, the same as any other investment.
Performance Management
Impact investments usually need a little more attention than passive ones. An impact investor must actively manage how their funds are operating. This involves communicating with beneficiaries to monitor progress.
Industry Growth and Communication
Impact investors tend to care about the general movement toward social and environmental progress. To that end, they often convene and network with others to establish policies, goals, concepts, and even terminology relating to their practices.
Impact Investment for the Improvement of Society
More companies and investors are making it a point to become better citizens. Impact investment is a powerful tool for improving society along with one’s bottom line.