Like many investors today, you may be looking for a way to instill your personal values into your investment strategy.
Interest in impact investing has grown significantly in recent years. A recent study suggests that 77 percent of investors are looking to incorporate their personal values into their investment decisions, while more than 90 percent of younger investors do.1
What is impact investing?
Stated simply, impact investing is “putting your money to work in a manner that reflects your belief system,” says Chad Burlingame, CFA, CAIA, director of Impact Investing at U.S. Bank. The goal of impact investing is to identify the intersection between the financial benefits of a specific investment and your own values.
Impact investing is sometimes used interchangeably with Environmental, Social and Governance (ESG) investing.
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 diversity policies, 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 began as an exclusions-based approach to avoid investing in certain companies, such as those doing business in South Africa during apartheid. Since that time, the concept has evolved, now with an emphasis on ways to choose investments that promote, for example, sustainable energy initiatives.
Merging your investment decisions and personal values
As you go through your investment selection process, different approaches to impact investing may include:
- Mitigating risks and avoiding harm – emphasizes avoiding investments in companies whose practices may, in the end, result in additional harm on a certain level. For example, you may wish to avoid investments in fossil fuel companies out of environmental concerns.
- Benefitting all stakeholders – investing in firms that seek to diversify their employee base, create educational opportunities that can advance the skills of their employees, and seek a favorable impact on their local communities. Other factors like policies that promote gender pay equity and diverse composition of the firm’s board of directors are also considerations.
- Contributing to results – companies that are specifically creating products and services designed to result in global improvements. Examples are firms focused on delivering renewable energy or advanced technologies to promote education or better healthcare outcomes.
“In the real world, the definition of ‘impact investing’ is very much unique to each person,” says Burlingame. “It’s important to first determine the approaches and values you want to be aligned with your money. Then we can identify the most effective ways to incorporate impact investing into your portfolio strategy.”
The universe of options within the impact investing framework has expanded in recent years. A large number of mutual funds and exchange-traded funds (ETFs) offer a variety of ways for individuals to participate in impact investing. Impact can also be directed toward private market equity or debt. In fact, it’s now possible to broadly diversify your entire portfolio through impact investing.
Ultimately, impact investing is the process of investing your money to do the greatest good as it relates to your own values.
The challenges of screening for impact
While the number of available options claiming to meet the definition of impact investing has ballooned, for impact investing to accomplish your specific objectives, a thorough screening process is required to clearly identify the fund’s intentions as it relates to ESG.
“Funds must have a proven intention and ability to deliver on their impact investing objectives over an extended period of time,” says Burlingame. “Measuring the ‘non-financial’ benefits of an investment (its success in making an impact) can be more complex than measuring the financial return of an investment. Some aspects of ESG performance are easier to measure than others.”
For example, environmental measures, such as the carbon output created by a company, have become more readily available in recent years. Social and governance metrics are regularly reported as well (such as statistics regarding the level of diversity in a company’s workforce and corporate board).
Yet some of the measures can remain tenuous, which further highlights the value of professional guidance in your investment selection. Burlingame notes, “The process for identifying the right impact investments requires the right combination of qualitative and quantitative analysis. As the industry evolves, new investment alternatives arise and the need for careful assessment becomes even more pronounced.”
Building and managing wealth with positive outcomes
The ultimate objective of impact investing is for you to feel comfortable that the money you’re investing is designed to “do good” over the long run. Achieving investment goals does not need to be separate from mitigating risks or seeking to solve today’s environmental, social or governance challenges. Your values can be meaningfully incorporated into your investment strategy.