What is Impact Investing?
What is Impact Investing?
Impact Investing 101
Impact investing has intent: to create positive and measurable social and environmental impact along with financial return. Renewable energy, animal conservation, education, affordable housing, human rights, diversity, peace—investors can choose how they want to make a difference and put their money where it counts, in the private market or with mutual or ETF funds that focus on impact investing.
Socially conscious investors look at meeting their financial goals through this strategy of “doing good” and social impact investing with the expectation that there will be some gains or at least a return of capital. This allows has many similarities with ESG investing so there are many synonymous terms for it, like ESG impact investing.
More traditional investments might yield higher returns - the average impact fund had a 6.4 percent return, compared to 7.4 percent of non-impact seeking funds (1). However, the Global Impact Investing Network (GIIN) showed that nearly 90 percent of investment clients feel that their “doing good” helped them do well: their financial plans are matched or were exceeded by the impact strategy they followed (2). And today, investors who invest with a mission are not alone—the GIIN’s estimate of the impact investing market topped $1.164 trillion in 2022 (3).
Impact investing has given birth to firms with the primary focus of driving investment in socially impactful investments around the world. These impact investing firms drive change through the assets they manage, here are few examples of firms pursuing impact investing (4).
The goal is by directing more money to these various causes, real change can be effectuated by providing the funding indicatives such as those developing alternative energy solutions, like nuclear energy (5).
Now, investors can be more a part of the change they wish to see in the world, simply by being more mindful of where they put their investment dollars. To top it off, these investments can actually have pretty nice returns, as well. Investors don't have to sacrifice any of their portfolio growth while representing the causes that matter most to them.
Let's find out how even you can have a larger impact than you thought possible by exploring impact investing in more detail...
How Can You Make an Impact as an Investor?
With a nod to Morgan Stanley’s “Three I’s,” here is advice for impact investors (6):
- Intention: Prefer not to support tobacco companies or big oil? You can stop investing in certain companies whose values you do not share (divest), or invest in companies who are committed to a positive social or environmental impact.
- Influence: Your principal can have principles. Actively engage with companies to influence their culture and behavior.
- Inclusion: Diversity matters. Look at the diversity of management of your funds as well as stakeholders that the companies include in their decision making.
Bottom line: Look for investments that will make the greatest impact in whatever industry, community, or sector you want to change. These investments can make a profit—or at the very least they should be financially sustainable. For impact investors, research is important. Does the company state a commitment to corporate social responsibility (CSR)? Does it commit to positively serve a community? ESG benchmarks are useful to help guide investing, or if you are investing with an AI investing app, search for “impact investing.”
Why Investors Choose Impact Investing
For socially conscious investors, investing with impact helps make success stories real and much more personal. Entrepreneurs find the funding to create innovative products or services that change people’s lives. Small businesses in emerging countries, often owned by women, can get started with micro-loans. Fueled by impact investing, lower-cost clean energy projects, better schools, food programs, and more have transformed communities.
The numbers answer the question, “why invest with impact”: The world is just a few years away from the 2030 milestone in achieving the Sustainable Development Goals (SDGs), a roadmap to a sustainable future. Yet a $4.2 trillion funding gap has widened. If banks and institutional asset owners provided only 1.1 percent of their assets (7), the gap would be closed. Putting money where it counts has never been more critical.
Impact investors are a growing driver of change, from sustainable climate goals and social and racial equity to women’s rights and beyond. As a socially conscious investor, it’s possible to invest according to your values and still build wealth, generate income, and preserve your principal.
- Climate Goals: Look for companies and funds that develop renewable and alternative energy sources or the technologies that make this happen.
- Social and Racial Equity: Support companies that address needs of disadvantaged communities or have a good diversity, equity, and inclusion (DEI) track record.
- Women’s Rights: Seek out businesses that are looking to make a difference in the lives of women and girls, or who have gender diversity in the boardroom.
- LGBTQ+ Rights and Inclusion: Support businesses with positive lesbian, gay, bisexual, transgender, and queer-inclusive policies.
- Biodiversity: Environmental issues are no longer limited to carbon emissions and climate change. Look for companies whose goals are to protect the biodiversity of the planet.
Impact investing is the way of the future, which is encouraging for environmental and social change initiatives—and proven to pay off for both investors and companies.
How You Can Invest with Impact
Investors can invest with impact in the private market or with mutual or ETF funds that aim to make a difference in the world. There are plenty of impact investing examples and impact investing funds to help you get started and Magnifi can help you figure it all out.
On Magnifi, you can search for funds that make a difference, and focus your search to match your interests:
For those interested in making an impact with their investment dollars, check out all the possibilities on Magnifi today!
References:
- Schulz, Abby, “Future Returns: How Impact Investors Balance Objectives,” January 19, 2021, Penta, Barron’s, link
- Bloomberg, “Impact funds grow 40% over last two years, hitting $1 trillion,” October 10, 2022, Pensions & Investments, link
- Hand, Dean, Ben Ringel, and Alexander Danel, 2022: Sizing the Impact Investing Market, 2022, Global Impact Investing Network (GIIN), link
- "The Top 5 Impact Investing Firms," January 19, 2022, investopedia.com, link
- "Invest in Nuclear Energy," January 23, 2023, magnifi.com, link
- Thomas, Emily, “10 Ways Investors Can Drive Positive Change,” April 25, 2022, MorganStanley.com, link
- 2022: Sizing the Impact Investing Market, 2022, Global Impact Investing Network (GIIN)