Making profits on your investments is, typically, the main goal of investing. But what if you could make a positive difference in the world at the same time as potentially growing the value of your portfolio? It turns out you can, and this investment strategy is gaining in popularity.
Although there have previously been opportunities to invest in companies and organizations which serve the greater good of society, the traditional focus of investing has mostly been on profits. Recently there has been a rise in impact investing, which has the potential to benefit investors, companies, and create a positive impact on the world.
Profits With a Purpose
Impact investing is defined by the International Finance Corporation (IFC) as “investments made into companies, organizations, vehicles, and funds with the intent to contribute to measurable positive social, economic, and environmental impact alongside financial returns.”
Investors have become increasingly aware of potential negative societal effects to which their investments may contribute.
These can include effects on health, the environment, and human rights. Impact investments can benefit both developed and emerging markets.
Some investors may choose to avoid investments in industries they feel to be damaging, such as gambling, weapons, or tobacco. But in addition to preventing harm, impact investing goes a step further with investors putting money toward causes that create a positive impact.
Some of the most pressing issues being addressed through impact investing are renewable energy, conservation, microfinance, housing, and education.
Although there is a growing demand for socially responsible investing, and many companies are claiming to offer positive investments, there is currently no universal system in place to rank investments in terms of their potential impact.
In order to address this issue, the Global Impact Investing Network (GIIN) released “The Core Characteristics of Impact Investing” in April 2019. This document aims to further clarify and define what makes an impact investment. And the IFC published a document titled “Operating Principles for Impact Management.”
The goal of these documents is to enable the mobilization of more funds and increase the impact of investments by creating a market consensus around what constitutes an impact investment and setting guidelines for how best to manage impact investments.
As impact investing becomes better defined, both investors and companies will hopefully be able to have more confidence in the potential outcomes of their financial and impact goals.
The Core Characteristics of Impact Investments
As outlined in the documents put together by GIIN and the IFC, the following are considered characteristics of credible impact investments:
An investor must intend to make a measurable positive impact with their investment. This requires a certain level of transparency about both financial and impact goals. The investor’s intent is one of the main differentiators between traditional investments and impact investments.
Use Evidence and Impact Data to Structure Investments
Impact investments must use data and evidence to make informed decisions which will lead to measurable benefits.
They must also use a systematic approach to predict the impact of each investment as well as its financial return. This includes identifying a need and designing an investable solution to that need.
Specific goals for both financial returns and impact must be established and managed. This requires communications throughout the investment chain in order to make any adjustments over time. It also includes an assessment of investment and impact risk, and disclosure of performance to investors.
Contribute to the Growth of the Industry
The goal of impact investments is to further social, economic, or environmental causes. Measurement and reporting of the ultimate impact of the investment needs to be carried out. Impact investing must be intentional and measured, not just guesswork.
Impact at Exit
Investors need to consider the timing of their exit from an impact investment. Removal of funds from a project may have long-term effects on its impact. The goal upon exit is both for the funds to have increased in value and for the investment to have had a positive impact on its designated sector.
The level of positive versus negative impact accepted by an investor is still somewhat arbitrary. For example, certain investment funds that label themselves as having a positive impact may invest in controversial companies.
The Increasing Popularity of Impact Investing
Impact investing is not a new concept; it has been done by philanthropic organizations, foundations, and impact fund managers for years. John Wesley, the founder of the Methodist movement, has been credited with first preaching the concept of socially responsible investing.
He urged his religious community not to profit at the expense of their neighbors, so they avoided investing in the alcohol, tobacco, gambling, and weapons industries.
Due to the recent increased demand for impact investment opportunities, as well as new types of investing tools, these investments are now more widely available to the general public.
Many types of investors are now engaged in impact investing, including fund managers, NGOs, pension funds, and individual investors.
More than one in every five U.S. dollars invested under professional management are now invested in responsible, sustainable, and impact investments.
Women and millennials have been shown to be especially interested in impact investing. More than 70% of millennials and Gen Xers have made impact investments, compared to only 30% of baby boomers. 67% of millennials surveyed said they would prioritize making investments which have an impact over those which purely make a profit.
Global frameworks such as the Sustainable Development Goals have given the public a roadmap of industries to invest in to create a positive impact. The current market for impact investing is estimated to be $228 billion , and it quintupled between 2013 and 2017.
More than 1,300 organizations are involved in impact investing around the world. Impact investing shows no signs of slowing down.
What Are Some Benefits of Impact Investing?
In the past, environmental and social issues were typically tackled using philanthropic donations. Impact investing creates opportunities for companies working to solve problems to receive additional funds, and enables investors to put their money into causes they believe in.
Motives for engaging in impact investing vary depending on the type of investor. Government investors, for example, can show proof of financial viability for a project by opening it up to private investors.
Some foundations can access significantly greater funding to grow their endowment and create a larger impact. Individual investors may have a personal passion for a specific issue, such as gender equality or land conservation. With impact investing it’s possible to make a positive difference in whatever area you feel most passionate about.
What Are Some Drawbacks of Impact Investing?
Like with any other investments, impact investing has its share of risk. Due to business model execution and management, some investors have found that their investments didn’t perform the way they hoped.
Additionally, investors may find themselves more drawn to the ethical aspect of impact investing than to the financial bottom line. And if the socially-responsible companies they’ve invested in don’t do well, they’re stuck deciding between their ethical and financial goals—a true life version of the rock vs. the hard place.
And although you may sleep better at night, you could be missing out on other great investment opportunities.
And it may be worthwhile to keep in mind that although a number of companies may say they’re socially or environmentally responsible, the fancy marketing campaign they’ve assembled may not reflect their actual business practices.
As with anything else, it’s important for investors to do their research, and really consider what’s important to them individually.
Examples of Impact Investments
Socially responsible investments can be made in any industry. Some of the more popular sectors for impact investing are social justice issues, environmental sustainability, and alternatives to drugs and alcohol. The following are a few examples of recent impact investments:
The rise of impact investing is also influencing business leaders. Companies are recognizing that consumers and investors are interested in supporting impactful products and services.
This is causing some to make changes to ensure they keep their businesses running successfully—for example, Starbucks is phasing out their use of plastic straws.
Does Impact Investing Pay Off Financially?
Just as with any type of investment, each investor has unique goals and tolerance for risk. In a 2018 survey conducted by GIIN, 64% of investors had sought market rate returns through their impact investments. More than 90% of respondents reported that their expectations for both impact and financial performance either met or exceeded their expectations.
The greatest risk reported in the survey was in business model execution and management, although fewer than one-third of respondents reported this as a severe risk.
Impact investments have shown to be resilient through tough times in the market, and have often outperformed other market investments over the past decade.
The bottom line is that you may not have to sacrifice your financial goals to make a positive impact with your investments. In fact, it’s possible that impact investments might be better for both your pocketbook and the world.
Getting Started With Impact Investing
In order to become an impact investor, it’s wise to consider both the financial potential of an investment, as well as its social, environmental, or economic impact.
Some investors have a higher risk tolerance than others, and some might be willing to take a lower profit in order to maximize the positive impact of their investments.
For example, you could either choose individual companies to invest in, or invest through a socially conscious mutual fund or exchange-traded fund (ETF.) These types of funds group together investments by category, such as industry, financial goal, or impact goal.
In the past, it may have taken a lot of time to research and vet impact investing funds. Now, investing tools, such as SoFi’s active investing account and automated investing, do much of the legwork for you.
If you’re interested in impact investing, consider which sectors you’d like to get involved in. Are you interested in having an impact in environmental conservation, gender equality, education, healthcare, or another issue?
Once you decide what type of impact you’d like to have and what your financial goals are, SoFi can work with you to help build your impact investment portfolio.
Modern Tools for the Modern Investor
Making decisions about how to invest your money can be overwhelming, especially when you’re just getting started. Whether you’re interested in traditional investing or growing an impact investment portfolio, SoFi can help.
SoFi Invest® offers a modern range of investment options, from new IPOs to cryptocurrencies to impact investments. SoFi offers one-on-one interactions with financial advisors to help you achieve your financial goals—and there are no management fees.
You can get started with as little as $1 and adjust your risk tolerance as needed. The SoFi investment app is easy to use and access using your mobile device.
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