Interest in making an impact with one’s investments has grown in recent years, which means many investors may have an increased interest in environmentally or socially focused investments as well. In fact, impact investments account for approximately $500 billion of managed investments worldwide, mostly held in North America.
What Are Impact Investments?
Impact investments are made with a measurable or tangible goal for social change in mind. From there, the criteria may differ depending on your own values and focuses. For example, you may choose to invest in a company that commits to planting a certain amount of trees per year or another organization that provides resources to school districts in low-income communities.
You may hear other phrases used in conjunction with impact investing, such as socially responsible investing (SRI) or environmental, social, and governance investing (ESG). These investment models follow more specific criteria and guidelines such as ethical business practices, environmental conservation, and local community impact.
Impact Investments, SRI and ESG investments have certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
Setting Expectations
Making a difference in the world is only one consideration with impact investing. In a 2020 survey of impact investors, nearly 90% indicated that the financial performance of their investments needed to be in line with or outperformed their expectations. This is not always the case.
Be aware that as Impact Investing has gained popularity and is now solidly a trend, that brings in big marketing and investment packages – that are not always the best vehicles and come with considerable fees.
Tips For Impact Investing
Here are a few concepts to keep in mind with Impact Investing:
- Your values: What specific areas of impact are you hoping to make with your investments? Are you focused on sustainability, social justice, your religion, or another area? Deciding what you’re looking to accomplish can help narrow your focus.
- Types of investments: There are a variety of investments that are structured to help pursue your goals when it comes to Impact Investing. As you define your values, the types of investments may become more clear.
- Impact reports: Impact reports are designed to provide information that breaks down how the company is making a difference and what measurable goals they’re following. Impact reports are one factor to consider as you evaluate opportunities.
Impact investing can help keep your investment aligned with your personal beliefs. Just be careful that you truly understand the investment – and that it truly is “doing good” – and not just jumping on a trend.
Kevin Theissen, HWC Financial
