In the age of climate change, social and economic inequity, and global crises such as Covid-19, decisions about where we invest and spend our money are powerful.
Publicly-traded companies are accountable to customers, investors, and shareholders, including through shareholder resolutions and criteria that companies must meet to be included in some large investment portfolios (such as Blackrock's). Making informed decisions about your purchases and investments can be a powerful way to help accelerate the reshaping of our economy and planet.
So how can you get started investing for impact? First let's look at what impact investing is.
What is impact investing?
Impact investing means investing "with the intention to generate positive, measurable social and environmental impact alongside a financial return."
Impact investing provides capital to address pressing challenges --
and more -- while also generating a financial return.
For example, an impact investment might invest in a company that develops new sources of clean energy, expands internet service to under-served rural areas, or reduces plastic use with reusable containers. Either directly or indirectly, all impact investments seek to have a positive effect on at least one cause.
Many investors use the
United Nations Sustainable Development Goals
(SDGs) as a framework for understanding and measuring the impact of their investments. Impact investments seek to contribute to one or more of the 17 inter-linked goals:
The SDGs include measurable outcomes that investments contribute towards, such as building affordable housing or making healthcare more accessible.
Impact investing has grown rapidly over the past few decades. In the US, $1 out of every $4 under professional management is in an investment considered socially responsible. This amounts to ~$12 trillion in assets under management yearly. Globally the number is close to $30 trillion.
Investing for positive impact does not necessarily mean trading off financial performance. A
2015 study examined 2,200 pieces of research and found that about 90 percent showed no negative relationship between concern for social factors and corporate financial performance. A large majority, in fact, showed positive findings that were stable over time.
More recent studies have produced similar findings, such as this report from Morningstar.
How you can get started: ESG investing
There are a few variations of impact investing that you can get started on, including Environmental, Social and Governance (ESG) investing.
ESG investing rates companies' performance on environmental, social and governance criteria, such as carbon emissions or percent of women on the board. Companies that perform poorly are excluded (for example, an ESG fund may screen out tobacco, weapons, or fossil fuel companies), or only companies that score above a threshold are included.
When you invest in an ESG fund or use ESG criteria to select stocks, you're investing in companies that are deemed more ethical across a variety of criteria.
There are many ways for retail investors to invest with ESG criteria. Some example funds available through many online brokerages and financial advisors are:
Passive strategy that tracks the FTSE4Good US Select Index, a market-capitalization-weighted index that screens constituents for ESG criteria.
Invests in large- and mid-cap American companies, excluding firms in the tobacco or civilian weapons industries as well as firms that have suffered through "very severe business controversies."
Seeks to replicate the performance of the Russell 3000 index, without companies that don't live up to its ESG standards related to climate change, natural resource use, human capital, business ethics and corporate governance. TICRX requires a minimum investment of $2,500 for retail investors.
There are many more that you can find through your online brokerage or with your advisor. ESG funds have traditionally been slightly more expensive than non-ESG funds, but the cost has come down significantly over the past few years.
There are also online brokerages that specialize in ESG investing, such as Earthfolio.
How you can get started: "direct" impact investing
"Direct" impact investing takes the most active approach to selecting specific projects, organizations or companies that are working to do something positive to benefit society.
An example is
an investment bringing eye care
to a population that previously did not have access to quality eye care through a mix of hospitals, vision centers, and mobile eye clinics.
This type of investing includes specific, measurable outcomes, often in a local community. For example, number of affordable housing units built in a community, or minority-owned businesses supported.
There are many options for retail investors to get involved in direct impact investing. A few examples include:
How you can get started: 401k or employee retirement plans
If you have a 401k or other retirement account through your employer, do you know what it's invested in?
Just 2.9% of 401k plans have at least one fund dedicated to environmental, social and governance issues, according to
the Plan Sponsor Council of America's
most recent member survey. You are probably invested in companies that extract or refine pollutants, mow down rainforests or mistreat people in some way.
SPDR S&P 500 ETF (SPY)
as an example. The highly-traded ETF tracks the S&P 500 Index and holds 500+ stocks. If you own SPY, you are invested in:
2 tobacco companies
14 weapons companies
159 companies that have received customer or product fines in the last 3 years
227 companies that have received worker-related fines in the last 3 years
91 companies that have received environmental fines in the last 3 years
24 oil companies
So how can you influence what's in your 401k? Here are a few steps
from the NY Times:
- Someone (or a committee of people) at your employer likely picks or approves the lineup of funds for your 401k. Ask a human resources person (or the president or another leader at a smaller organization)
- Ask if you can see details about what the retirement plan is investing in
- Consider starting small with a single request, such as adding a socially responsible fund focused on large American companies. If that’s successful, work on adding more over time
- Consider requesting a brokerage window (or "self-directed option") with your 401k. This is an option for employees to effectively have their own investment account within their 401k (buy and sell securities through a brokerage platform)
- If there is a sustainability committee, show them how some of the stocks in the retirement plan's funds may not be consistent with the company’s efforts elsewhere
How you can get started: financial advisors
There are a lot of options to start investing for impact. Most financial advisors offer some options to help (such as ESG or socially-responsible funds), and some specialize in impact investing.
If you're thinking about working with an advisor, here are a few questions to ask potential advisors:
How do you evaluate the social and environmental impact of investments?
What ESG or socially-responsible funds could you help me invest in?
How would you tailor my portfolio to achieve impact on the causes I care about?
Some example advisors that could help include:
Financial advisor offering sustainable investments. Donates 20% of revenue to non-profits.
Woman-owned asset manager. Mission is to deliver long term capital appreciation to investors by Investing in Innovation that drives Sustainability.
Ethos is a first-of-its-kind FinTech platform for consumers and investors to align their spending with the causes they care about, including racial justice, workplace safety, climate change, LGBTQ equality, and more.
Ethos lets you select the causes you care about and get personalized ratings of companies, brands, employers and investments, based on hundreds of credible sources.