In the last few years, impact investing has gained a lot of traction. People want to invest and watch their money grow without doing the work. More and more people are growing more conscious of which companies they are buying from and investing with. Many millennials have put their money into investments with a good impact. In doing so, you can support causes that you are passionate about. Hannah Schiff, a research manager for Global Impact Investing Network (GIIN), a nonprofit that works to increase the size and effectiveness of impact investing, said “Impact investing has the unique potential to harness the enormous power of investment capital to address many of the world’s most pressing social and environmental challenges”.
Socially Responsible investments
With all of this being said, one might still be unsure of the various components of “socially responsible investments” (SRL). These investments focus on what kind of business the company does and if their money is being allocated in the right way. For some people, “ethical investing” or “SRL,” could mean not investing in oil or tobacco. Instead, you actively investing in companies that work towards social justice or protecting the environment. One step further is called “ESG investing,” in which companies meet a certain set of criteria in areas of environment, social, and governance. Read our article on ethical investing here.
Many companies have realized the importance and appeal of these kinds of investments. Impact investing, however, is slightly different in that it targets companies actively working towards solving social and environmental problems. One investing firm further explained the differences by stating, “Where socially responsible investing fund managers are generally passive and adopt a ‘do no harm approach, impact investing funds typically not only seek to create a positive impact but measure and report their impact in a transparent way.” The first step is to look at what your personal beliefs are. Then, researching companies that focus on these causes.
Will you get the same kinds of returns?
People might worry about impact investing not producing the same kinds of returns as other investments. If you look at the statistics, this is not the case. Broad SRI investments follow the MSCI KLD 400 Social Index that contains companies with high ESG ratings. It has an annual return of about 9.89 percent. If you look at other funds, a lot of their performance is not reflected in the last few years. Looking at a group of funds that were founded between 1998 and 2001, they outperformed their counterparts at a rate of 15.6a to 5.5%. You don’t have to take into account that these impact funds held $6.4 billion while the funds they were compared to held $293 billion.
With all of this being said and done, you can now start yourself. You can pick out companies yourself and invest in each of them individually, but there are also a lot of resources that make the process easier. There are databases that contain lists of impact companies that can help you make a virtual portfolio.
Tools that can help you
Tools such as MarketWatch’s Mockfolio lets you experiment with possibilities and observe how they do overtime. Wealthfront lets you remove companies in fields such as deforestation, weapons, tobacco, or fossil fuels and Stash has a Do the Right Thing ETF. There are also other options such as OpenInvest and Motif Investing.
OpenInvest lets you invest in causes such as female leadership, opposition to Trump, and LGBTQ rights. Their annual fee is 0.50% of assets and portfolios are highly individualized, but since they only do passive investing, portfolios only perform within 1-2% of the market.
Motif Investing lets you choose an impact portfolio that focuses on fair labor and a sustainable planet. One of the best options right now might be Swell. They have one of the lowest barriers to entry out of the ones listed with a minimum investment of $50 and a yearly service charge of 0.75A%. You can choose what percentage of the money you want to give to green technology, zero waste, renewable energy, clean water, disease eradication, and healthy living. Their green tech portfolio has performed the best over the past year or so with a return of more than 30%. You can see the changes that a fund is making by looking at a firm’s impact report. For example, BlackRock’s iShares MSCI USA ESG Select ETF has 44.06% lower carbon emissions than its reference benchmark.
One last step to consider with impact investing is increasing your impact. In order to ensure that your investments are doing what you want, you can use your shareholder voting rights. If you buy individual stock, you will most likely be able to decide policies for the company. You can do this through your “proxy,” or your ballot that shows what policies and resolutions are being voted on. Make sure to fill out the ballot before the company’s annual general meeting. If you didn’t get a ballot, you can reach out to the company yourself or through your financial advisor. One last thing to do is to request an impact report if you didn’t do so already. This helps to hold companies responsible and you can see how your money is making change.