What is impact investing and why is it important?
Impact investing is defined as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”2 Stated simply, it’s “putting your money to work in a manner that reflects your personal values,” says Chad Burlingame, CFA, CAIA, Head of Impact Investing at U.S. Bank.
Everyone has different beliefs, so no two investors will have the same approach to impact investing. Whether you want to support companies or funds that are dedicated to promoting diversity or addressing climate change, you can now find investment opportunities aligned with your values.
The universe of options within the impact investing framework has expanded in recent years. Many mutual funds and exchange-traded funds (ETFs) offer a variety of ways for individuals to participate in this marketplace. Impact investing can also be directed toward private market equity or debt. In fact, it’s now possible to broadly diversify your entire portfolio, across a range of asset classes, through impact investing.
“In the real world, the definition of ‘impact investing’ is very much unique to each person,” says Burlingame. “Once you’ve identified what values you want to be aligned with your money, we can identify the most effective ways to incorporate impact investing into your portfolio strategy.”
Impact investing, ESG investing and socially responsible investing (SRI)
Impact investing includes environmental, social and governance (ESG) considerations. ESG investing looks at three dimensions of a company:
- Environmental – broad areas of impact related to climate change, energy efficiency, pollution, water scarcity and biodiversity.
- Social – factors that impact the work environment and community such as human rights, gender and racial diversity, educational opportunities, labor standards and employee engagement.
- Governance – factors that impact company performance such as the diverse makeup of corporate boards, levels of executive compensation, auditing practices, lobbying activities and political contributions.
Impact investing also seeks to support the efforts of businesses and organizations to complete projects aimed at having a positive benefit on society. A precursor to ESG and impact investing was socially responsible investing (SRI). This approach primarily focused on eliminating certain investments that did not match the investor’s ethical guidelines. A common example would be the avoidance of investing in stocks of tobacco companies.
Generating a financial return with impact investing
When determining your own objectives for impact investing, it may be helpful to choose your approach. There are generally two options:
- “Concessionary” investing" – the primary focus is that the investment make a significant impact, with less emphasis placed on generating a positive return. This tends to lean toward a philanthropic intent, with investment results a secondary consideration.
- “Non-concessionary” investing – while seeking to still have a positive impact, greater emphasis is placed on assuring that attractive financial returns are generated. The investor proceeds with a belief that profitable opportunities can be found by investing with specific purposes in mind.
The lack of performance history makes it difficult to definitively state that a focus on impact outperforms other investment styles. Yet according to a survey by the Global Impact Investing Network, 79% of respondents reported that their financial expectations were met or exceeded. More than two-thirds of them indicated their expectation was to earn risk-adjusted, market-rate returns.3