Impact investing has gradually become a common practice over the past decade. Many people have grown wary of investing in companies that provide products or services that are detrimental to society. Impact investing seeks to allay their concerns.
Through impact investing, you’re able to put your money toward helping companies that do some form of social good. Whether it’s through creating new and sustainable food sources, producing clean and accessible water, or developing alternative sources of energy, impact investing can offer great benefits to society and investors. What is impact investing?
Impact investments seek to generate positive social or environmental effects, in addition to providing a financial return to the investor. The point of impact investing is to divert money to causes that have been deemed societally or environmentally beneficial.
In recent years, impact investing has gained significant notoriety and popularity. Many investors — especially young investors — have voiced concern about investing in funds (such as broad market index funds) that hold shares in companies that may be harmful to society at large. For instance, total market funds generally will hold some investments in oil companies or other companies that contribute to climate change. Understanding the elements of impact investing
While impact investing can have a number of far-reaching effects, much of it can be reduced to four core elements: Intentionality . When you’re intentional about something, you do it on purpose. Fixing society’s ailments is not something that will happen by accident. Impact investing must be something we do consciously. Intentionality involves setting goals and creating an action plan. Impact investing typically includes companies that have made a commitment to societal good and have a plan to reach their goals.
Evidence-based investing . Companies that appear to be socially or environmentally conscious must use empirical research and data to prove their social and financial worth to investors. Impact investors go where the data takes them rather than their own preconceived notions or assumptions. Companies included in impact investing funds should adhere to a data-driven approach.
Impact management . In the impact investing space, many iterations are often required before a final — or even acceptable — product or service is viable. Companies experience “feedback loops” that require consistent measurement and evaluation both to amplify positive results and mitigate unintended or negative consequences.
Contribute to industry growth . Impact investors are certainly in it to make money over the long term, but there is often a greater sense of community impact through sharing non-proprietary information. This can mean sharing research results or other positive and negative lessons that save time for future investors.
Image source: Getty Images. 3 different types of impact investments
Three of the major types of impact investments include:
Within the education realm , investments typically attempt to reduce inequities in teaching and learning outcomes.
Agriculture-focused investments are made in companies seeking to enhance food security, provide clean water to hard-to-reach areas, or increase food production in climate-affected regions. Agricultural technology , for example, can play an important role in delivering societal and environmental benefits.
Healthcare is another sector where impact investing is extremely relevant. Given the backdrop of a global pandemic, the usefulness of healthcare impact investments cannot be overstated. Socially responsible healthcare companies work on problems such as pandemic readiness and medication and treatment delivery, as well as on researching emerging diseases. Socially responsible, ESG, and impact investing
Socially responsible investing (also known as SRI) and ESG investing (also known as environmental, social, and corporate governance investing) are quite similar to impact investing, but there are some subtle differences between them.
SRI can involve excluding investments that conflict with the investor’s values. This is a simple way to screen for investments since an investor primarily interested in preserving the environment might exclude any company that makes money by promoting fossil fuel consumption. Conversely, SRI also can promote the inclusion of companies that match the investor’s values — for example, renewable energy companies .
ESG investing involves analyzing companies to figure out if they adhere to specific metrics. These can include environmental data (greenhouse gas emissions), social data (employee turnover), and governance issues (total executive compensation). A deep dive into a company’s balance sheet , as well as its underlying culture, is often required when it comes to ESG investing.
Impact investing is closely related to, but slightly different than, SRI and ESG investing. Impact investing focuses specifically on the relationship between the investor’s capital and the positive, measurable impact that certain […]