Impact investing is an extension of socially responsible investing (SRI) but instead of adopting a ‘first do no harm’ approach to choosing stocks, it favours investments that make (or have the potential to make) a clear positive impact on society or on the environment.
Many successful investments have positive effects in terms of putting money into a local economy, increasing employment rates and so on.
But impact investment is about more than just the indirect benefits of investing and is effectively based just as much on the balance of benefits vs harm as it is on the balance of risk vs reward.
Impact investing and SRI
Socially responsible investment has been on the increase for a good number of years now and becomes increasingly significant in light of concerns surrounding climate change and carbon emissions, as well as social issues like workers’ rights.
These issues are grouped together under a general heading of ESG (Environmental, Social and Governance) and are among the risks investors must consider when deciding whether to buy into a specific stock or sector.
It is not always altruism that drives this consideration – there can be financial impacts due to negative perceptions of a particular industry, such as energy-intensive sectors with high carbon emissions, or products like tobacco that are associated with health hazards.
When a sense of altruism – of actually wanting to do some good outside of the direct financial return on investment – is brought into the decision making, investors go from SRI and ESG to full positive impact investing.
What’s the difference?
From an investor’s point of view, impact investing can make it more difficult to choose what to buy.
You still need to do all of the usual due diligence to make sure it’s a sensible investment in financial terms, but on top of that, you also need to be confident in the social or environmental benefit of the relevant business, service or product.
Calculating the balance between all of these things can be very personal, and you may have to sacrifice some of the biggest potential capital gains if a stock doesn’t stack up in terms of its positive impact.
Some of the same rules apply as with any ordinary portfolio though – such as the need to consider each opportunity in the wider context of your portfolio as a whole.
In this way, you can strike a broader balance and may find that multiple different investments can add up to achieve your overall objectives, even if no one stock is a perfect match for what you want to achieve.
The future of philanthropy
Not all impact investments will mean a loss of value. Increasingly, consumers’ expectations align with SRI, ESG and positive impact businesses.
Many older high net worth investors choose to put more of their life savings into philanthropic ventures, but again the positive impact is not always purely altruistic.
An increasing number of for-profit organisations, including large multinational corporations, are attempting to ‘give something back’ by investing in positive impact ventures.
For individual investors, this increases the availability of dividend stocks and capital gains while also improving conditions in different economies and environments around the world.
One famous example of this is Google’s unofficial motto “Don’t be evil.” which has appeared in many of the company’s publications over the years and was echoed in parent corporation Alphabet Inc’s corporate code of conduct in 2015 as “Do the right thing.”
How to find impact investment opportunities
If you want to incorporate impact investing in your portfolio, there’s no specific way to do so.
As mentioned above, your individual values and priorities may differ from those of others, along with your desire to maximise return on investment or your willingness to compromise if doing so achieves a greater positive impact.
Some asset managers offer impact investment products, for example, the BNP Paribas Climate Impact Fund or RobecoSAM Global Gender Equality Impact Equities – two funds with very different and clearly defined impact priorities.
But you don’t have to buy into an investment product that explicitly identifies as an impact investment, as there may be others whose ESG policy is a good fit for your own ambitions.
The rise of impact investing
Despite increasing awareness of SRI and ESG, impact investing still accounts for only a small percentage of the $100 trillion of global assets under management – as little as 0.25% by some estimates.
But growth in recent years has been fast and a much larger proportion of the market upholds broader ESG and SRI principles, just without a stated aim of making a positive impact.
As much as a quarter of global assets under management are held in socially responsible investments governed by ESG policies – a clear indication of the extent to which impact investing could scale up in the very near future.
This is good news for impact-driven businesses, as it should mean more investors’ funds are available to put towards achieving their vision.
It’s also good news for investors, as a more mature mainstream impact investment market could make more lucrative opportunities available and provide more historical data to judge future investments against.
Finally, impact investment is inherently good for society, the environment and other such causes that benefit from the actions of the relevant business or corporation.
As consumer demand shifts attention increasingly to ethical and impact-driven organisations, this emerging opportunity is one that should prove mutually beneficial for companies, their investors and society as a whole.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.