Impact investing! The name sounds exciting. Who wouldn’t want to make an impact with an investment? But, what exactly is impact investing? Are impact investing returns on par with any other investment? And, is it right for you and your retirement?
What is Impact Investing?
Impact investing, related to socially responsible or ethical investing, conscious capitalism, and sustainable investing is defined by the Global Impact Investing Network (GIIN) as investments “Made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside financial return.”
So, impact investing allows you to do well by doing good — earn returns on your money while supporting a social or environmental cause that is important to you. Originally impact investments were focused on helping investors avoid companies involved in things they were against: tobacco or child labor for example. Nowadays it is more common to invest in companies or funds trying specifically to make a positive impact or build something socially responsible.
Impact investing is growing very rapidly which should mean an ever-growing number of choices.
GIIN estimates that in 2022 there was $1.164 trillion in impact investing assets — huge gains over their 2018 estimate.
Are Impact Investing Returns on Par with Other Investments?
If referring to the financial benefit, impact investing returns can sometimes be below market rate and other times beat the market.
So, it is a myth to say that impact investing returns are low across the board. However, some impact investments, especially those into private companies, are speculative so it behooves you to do research carefully and it might be prudent to expect lower than average returns. That being said, GIIN reports that in 2020, 67% of impact investments kept pace with the market.
However, your long-term return might come from investing in the hopes for the cause you care about getting better in the future.
Is Impact Investing Only for the Young and Liberal?
The majority of impact investments are for causes that might be considered “progressive.” However, it is entirely possible to find funds that uphold specific religious or conservative values.
For example, the Eventide Gilead Fund is a religiously grounded fund whose mission statement is to “Honor God.” There is even a MAGA exchange-traded fund.
Environmental, Social, and Governance (ESG) investing, Impact investing, and Socially Responsible Investing (SRI) are similar ways of investing in companies that support a social goal. However, there are subtle differences.
According to Investopedia:
- ESG looks at the company’s environmental, social, and governance practices alongside more traditional financial measures. ESG investments are usually in publicly traded companies.
- SRI involves choosing or disqualifying investments based on specific ethical criteria. (An SRI investment might be careful to avoid companies that have human rights violations.)
- Impact investing aims to help a business or organization produce a social benefit. Impact investments are more often in money going to private entities.
Recently there have been congressional hearings and lawsuits against institutional investors over ESG.
The controversies around ESG fall into a few different categories, including:
Political: Some political factions do not want to support an agenda that is being put forth by ESG funds. They consider the idea of ESG to be anti capitalist because they believe that decisions being made about investments are not purely financial. These political groups want to ban ESG investments from state and local bonds. The tough part about banning the funds is that virtually all major underwriters consider ESG in their decisions, and baring them shrinks the pool of potential underwriters, reducing competition, and increasing the amount of interest they need to pay.
Misleading or deceptive promises: Many believe that the promises of ESG benefits are over stated and that while it is easy for companies to say that they are making progress toward ESG goals, measuring the actual impact is more difficult.
Costs: Sometimes the fees associated with an ESG investment are greater than an index fund. And, it is important to understand if those additional costs are worthwhile.
Does investing in ESG make sense from a financial perspective: An ESG investment may be less profitable in the short term, but maybe it will be more profitable in the long run (or not).
Is Impact Investing Right for You and Your Retirement?
Like the answer to almost ALL retirement planning questions, the answer is that it depends.
There are a few factors to consider to determine if impact or some other values-based investing is right for you:
Different companies or investments will have different ways of charging fees. Some will charge an annual fee based on a percentage of assets under management. Others will charge a flat fee or trading fees.
Impact investing has historically been for the very wealthy, but more options are becoming available to more average investors, and millennials, in particular, are embracing this way of putting money to use.
Many impact investments can be made with $100, especially those in impact ETFs.
Your Investment Goals
You are taking a stand and voicing an opinion with any dollar you spend or investment you make. The question for impact investing is how important is that voice versus your need or desire for returns?
Any investment needs to be evaluated for risk and your time horizon for wanting to sell — but especially for money that you might need to spend to fund retirement, or even give charitably.
Not all impact investments can be made with tax-advantaged retirement funds — money held in an IRA or 401(k).
The ability to make an impact investment with money from an IRA or 401k will depend on how and with whom you invest.
How Do You Tell if Your Investment is Having the Impact You Want?
Knowing your rate of return on an investment is easy. Understanding the impact — if your cause is being furthered in a meaningful way — can be more difficult to measure.
Ideally, the fund or company you are investing in has published their goals with regards to your cause and they update investors regularly as to their progress.
However, this self-reported information can oftentimes be misleading.
One thing to look for is if companies engage in Environmental, Social, and Corporate Governance criteria (ESG). This is a set of standards to help figure out a company’s positive impact on society.
How to Participate in Impact Investments?
The majority of impact investments are made by institutional investors — organizations that trade securities in large quantities. However, there are a growing number of ways that individuals can participate in impact investing.
Here are 4 options:
1. Research Individual Stocks
A growing number of public companies regularly issue social impact or corporate responsibility statements.
These reports detail social and environmental factors influenced by the company. They might also list charitable giving, volunteer activities, energy consumption, worker benefits, and more. You can review these statements and look for companies that are interesting in forwarding a cause that interests you.
2. Invest with an Impact Investing Platform
Here are a handful of companies that are very focused on impact investments:
Earthfolio: Earthfolio is an automated investing service dedicated to sustainable investing.
Wealthsimple: Wealthsimple is a RoboAdvisor from Canada that helps you invest in different types of funds. They offer six different impact investments, each with a different focus: Low carbon, gender diversity, clean technology, local initiatives, social responsibility, and affordable housing.
OpenInvest: OpenInvest is a largely progressive investment platform that allows you to mix and match companies representing different values to create a portfolio that represents what is important to you. Choose from investments in healthy hearts, women’s rights in the workplace, ethical supply chains, or companies supporting refugees. Or, find investments that keep your money away from investments in dark money, carbon emissions, the Dakota Access Pipeline, deforestation, fossil fuels, gun violence, the prison industrial complex, or big tobacco.
WeFunder: WeFunder allows investors to put small amounts of money directly into start-up companies. You can think of them as the “Kickstarter for investing.” These are typically high-risk investments, but you can find a wide range of interesting companies — many of who are trying to improve the world.
Find a Fund Focused on Sustainability
There are many mutual and exchange-traded funds traded on the regular exchanges with a focus on sustainability.
Here are two lists of mutual and exchange-traded funds that would be considered impact investments:
What Impact Will You Have with Retirement?
Retirement is a wonderful time to take a step back and consider what is important to you.
Start by creating a detailed retirement plan with the comprehensive and easy-to-use NewRetirement Retirement Planner. As part of this exercise, get really serious about your priorities in life and make sure that both your money and your time support what you think is important.