A growing number of investors are considering their social impact and how they can make a change while driving profit. Impact investing allows them to do just that. This emerging approach reflects investors’ desire to align their portfolios with their values. In this post, we’ll dive into impact investing and explain how you can invest to foster meaningful change.
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The Key Principles of Impact Investing
U.S. Bank defines impact investing as investments made to generate social and environmental impact in addition to financial returns. This dual-purpose approach demands a complete evaluation of potential investments, looking at both their financial performance and impact potential. Impact investing is built on a few key pillars.
Intentionality
Investors must make a conscious choice to invest for impact. That means actively targeting and structuring their investments to address societal challenges like renewable energy and economic development in underserved communities. Impact should be among the primary goals, not just an unintended “side effect.”
Investment with Return Expectations
With impact investing, there’s something in it for everyone. While investing for societal change can be rewarding enough for some, they still aim to see financial gain. Unlike traditional philanthropy, impact investing seeks to generate a positive return. This is key to attracting investors who typically only invest for profit, underscoring the fact that social good and financial returns are not mutually exclusive.
Impact Measurement
Accountability and transparency are paramount to impact investing. Investors are encouraged to track, assess, and report on the outcomes of their investments. Effective impact measurement helps investors understand whether or not their capital is truly making a difference, providing insight into areas for improvement. It also fosters trust with stakeholders by demonstrating a commitment to measurable change.
Aligning Values With Financial Goals
As an investor, you have the ultimate say over where your money goes. Whether you are passionate about the environment, helping the less fortunate, or something else entirely, you get to decide how to best align your values with your portfolio. For instance, those concerned about climate change can invest in renewable energy companies, while others might focus on sustainable agriculture or affordable housing initiatives.
Strategies for Effective Impact Investing
Transforming your investment portfolio into a tool for social change requires strategic planning and execution. Here are some strategies to consider.
Diversification
Diversification is a tried and true strategy that spreads investments across different asset classes so as to minimize the fallout of any one investment failing. Diversified investment strategies can help broaden the scope of environmental and/or social impact because it allows investors to invest in different areas––such as education and healthcare. This ensures a steady flow of capital to a wide range of sectors with significant need and impact potential.
Engagement
Engagement goes beyond mere capital allocation. It involves actively working with invested companies to improve their impact. Investors leverage their position to encourage sustainable practices, improved governance, and alignment with impact goals. For example, they might engage with a portfolio company in the renewable energy sector to reduce their carbon footprint or increase transparency about labor practices.
Partnering with Experts in Impact Investing
Like most types of investing, impact investing requires specialized knowledge, especially in sectors that demand a deep understanding of complex issues. By partnering with experts, investors can tap into industry-specific expertise and make sure their investments are both impactful and sustainable.
Blended Finance
A less conventional but effective strategy for impact investing is blended finance, where investors use a mix of concessional (below-market rate) and commercial capital to fund projects that might otherwise be too risky or low-return to attract traditional investors. Blending different types of capital makes it possible for investors to mobilize additional funding from other sources, potentially achieving greater scale and impact.
Thematic Investing
Thematic investing focuses on specific impact themes that align with the investor’s mission, whether it be climate change, social equity, or health and wellness. While it may seem obvious to only invest in causes you’re passionate about, many investors try to spread themselves too thin, detracting resources from the most important causes. This is not to be confused with diversification, where investments are spread across asset classes. The key is to include a mix of investment classes in your portfolio that all center around one or two themes.
Be Part of the Future of Impact Investing
The global impact investing market is expected to reach $7.78 trillion USD by 2033. This is hardly surprising, as more and more investors aim to drive social impact alongside financial returns. If you’re looking to broaden your social or environmental influence while growing your investments, consider implementing the strategies discussed here, or speak with a financial advisor to better understand how to align your financial goals with your personal values. They can help you develop a tailored plan to fit your vision, no matter how big or small.
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk, including the loss of principal.