Understanding impact investing
Impact investing is gaining more attention among investors today, especially with the Millennials and Generation Z.
The growing popularity of impact investing is not anecdotal, as a rising number of asset owners and managers have turned to impact investing in pursuit of meaningful financial and social gains.
In a nutshell, impact investing focuses on generating positive returns for investors and society in general.
What is Impact Investing?
Impact investing is a strategy where you put your money to work not only to acquire solid returns, but also for positive environmental and social reasons. With impact investing, you can be more proactive with your investment money and help facilitate real change around the world.
Investing in organizations supporting the United Nation's (UN) Sustainable Development Goals (SDGs) is one popular form of impact investing.
Keep in mind that impact investing is not charity, as impact investors are always expecting to make excellent profits and outperform the market. They just have goals that involve more than achieving max income on an investment.
What Assets are Considered Impact Investments?
Impact investments consist of various assets and investment strategies. They can be any investment that is both trying to turn a solid profit and create a positive impact on the environment and society.
For example, you can invest in the stock of a solar company because of its positive contribution to the environment, or you can buy mortgage-supported securities that aim to back affordable housing for low-income communities.
Those investments aim to make the world a better place, but they also have the potential to generate your expected returns.
Impact Investing is Not the Only Way
There are other ways for you to invest in pursuit of making a positive environmental and social impact. That includes investing strategies such as SRI investing and ESG investing.
Social responsible investing or SRI involves investing in companies compatible with your moral standards or investor values while avoiding those that do not.
This approach is more focused on investing in assets that cause no harm and doesn't usually include companies that proactively try to be positive contributors to society.
For example, an SRI strategy may not target companies in the oil, tobacco, or gun industry, depending on the investor's principles or ethical guidelines.
ESG investing stands for environmental, social, and governance investing. This approach aims to find investments based on impacts organizations have on the environment, society, and how the business is managed on the inside.
The goal here is to make investments that ESG rating agencies labeled as high performers in each of the three criteria while avoiding those that performed poorly. Simply put, ESG investing focuses on avoiding investments that scored low in performance.
Are There Fewer Returns in Impact Investing?
Research has found that impact investing has not negatively affected investors' returns. A few studies showed that impact/ESG investing can beat standard investment portfolios, which is something that SRI/ESG portfolio managers would like to promote.
Still, as with all investments, your choice of
assets will ultimately help determine your returns.