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Social Impact Investing – What It Is and How to Get Started

Investing often comes down to weighing your options and finding the right fit. There are many choices available for investing your money, from stocks to bonds to real estate, and a bit part of the decision process involves deciding where you’re most likely to make money while minimizing your risk. But what if there was a way for you to invest your money, earn a profit, and promote social good at the same time?

There’s a new trend emerging in the investment world called impact investing, where the goal of those who pursue it is not just to make money, but to better society in one way or another. If the idea of investing with a purpose is appealing to you, it pays to learn more about impact investing.

What Is Impact Investing?

Impact investing is an investment strategy that focuses on achieving a positive social impact in addition to generating a financial return. Though it’s not the same thing as giving money to charity, impact investing does have strong philanthropic undertones, as the idea behind it is to invest money in a way that contributes or directly leads to a measurable social, economic, or environment improvement. It is similar in nature to socially responsible investing, though the two concepts do have some differences in practice.

Impact investing is a relatively new term; it was coined in 2007. However, the concept of impact investing has existed for decades, with socially conscious investors using their money to promote social good in a private, non-labeled fashion.

Those looking to get involved in impact investing can opt to invest in specific companies or projects that have the potential to improve our ecosystem, foster positive social change, or enrich underserved countries and communities. Another option is investing in funds whose strategies are specifically focused on impact investing.

Those who choose to put their money into impact investing opportunities typically take one of two approaches:

  • Impact First. With an impact first approach, the main goal is to achieve a specific social, economic, or environmental goal. Those who adopt an impact first philosophy are often willing to sacrifice a degree of financial return in order to achieve their chief objectives.
  • Financial First. With a financial first approach, the main goal is to achieve a high monetary return on investment. Those who adopt a financial first approach will still put their money into companies, initiatives, or funds that work to foster positive social change, but their primary goal is to make money.

Both approaches are equally valid when establishing an impact investment strategy. It’s also possible to shift your strategy from year to year depending on the performance of your investments. If, for example, you have a strong return one year under a financial first approach, you may feel comfortable shifting to an impact first focus the following year.

Impact Investing vs. Socially Responsible Investing

Since impact investing and socially responsible investing employ many of the same underlying philosophies, the two terms are sometimes used interchangeably. However, impact investing is not the same thing as socially responsible investing.

Socially responsible investing involves choosing investments that promote social good in addition to financial rewards. Those who adopt a socially responsible investing strategy tend to put their money in companies that are either known to be socially responsible or aren’t blatantly socially irresponsible. This could mean choosing companies that operate in an energy-efficient manner, or ones that are known to offer employment opportunities to minorities or those who are disabled. It could also mean avoiding companies with a history of polluting the environment, or those that produce products such as cigarettes, alcohol, or weapons.

The primary difference between socially responsible investing and impact investing has to do with the approach to the investment itself. Socially responsible investors frequently apply a set of positive or negative screens to determine where companies fall on the spectrum of being socially responsible. Impact investing, by contrast, doesn’t work by including or excluding companies or opportunities based on positive or negative features. Instead, those who pursue impact investing will actively seek out investments that have the potential to produce measurable social, economic, or environmental outcomes.

To put it another way, socially responsible investors operate under the philosophy of “do no harm.” Impact investing tends to take this concept a step further into the realm of actively making a difference for the better.

Furthermore, impact investors are generally more committed than socially responsible investors to track their investments’ social or environmental impact. To this end, impact investors use what’s known as the IRIS metrics, which are a set of industry-recognized standards that measure the social, environmental, and financial performance of investments. Socially responsible investors, by contrast, are not as committed to measuring their impact and don’t use a standard set of metrics to report on their social achievements.

big impact money

Areas of Impact

Impact investing spans a large number of sectors. Here are some common points of concern for impact investors:

  • Health
  • Education
  • Ecofriendliness
  • Small business and microfinance
  • Community development
  • Fair trade
  • Sustainable products and agriculture
  • Conservation and renewable energy

It’s possible for a company to make an impact in more than one area. An eco-friendly building company, for example, might use recycled materials and employ green building practices, but it might also provide affordable housing to low-income families. Or, it might offer low-cost leasing opportunities to emerging small community businesses.

Measuring Financial Returns

Some might assume that impact investing doesn’t offer as high a return as other types of investing. However, this isn’t necessarily the case. It’s difficult to pinpoint an average return for impact investments on a whole because they vary widely and cover a wide range of sectors and types. Also, since many impact investments are made privately (as opposed to stocks, for example, that trade publicly and whose purchase and sale prices are always disclosed), it’s not always possible to obtain data on financial returns.

On the other hand, there is some data that suggests that impact investing can be profitable. According to a 2015 report by Morgan Stanley, sustainable investing funds – ones that create a positive social or environmental impact – have met or exceeded the median returns of traditional funds. Furthermore, based a report by J.P. Morgan and the Global Impact Investing Network that surveyed a large group of impact investors, 68% reported that their portfolios’ performance was in line with their financial expectations, and 65% of respondents expected their portfolios to yield returns similar to those of the average market rate.

Measuring Impact

Calculating your personal financial return from impact investing is a fairly simple prospect. Measuring impact, by contrast, is more complicated. When dealing with individual companies, impact is typically measured in one of two ways:

  • Product Impact. Product impact is the impact of the goods or services produced by the company in question. For example, a company might produce portable water purification systems that provide clean water to 10,000 global villages. A real-world example of product impact is Sungevity, a company that helps the environment by leasing solar energy systems to customers rather than compelling them to purchase their own systems, which can be prohibitively expensive.
  • Operational Impact. Operational impact is the impact of the company’s operations and practices on its employees, its customers, its community, and the environment. For example, a company might have a policy of recycling parts and supplies to better the planet, or it might have a policy of donating products to those in need. A real-world example of operational impact is Greyston Bakery, which provides employment and training to locals to help them emerge from poverty. Though its products – baked goods – don’t necessarily better society, its practices have made a significant impact on the bakery’s local community. Another example of operational impact is Warby Parker, which donates a pair of eyeglasses to someone in need for every pair sold.

When dealing with impact investment funds, investors must typically rely on the fund’s reporting to see what type of an impact their investment dollars are making. For example, the W.K. Kellogg Foundation‘s mission is to support underserved children, families, and communities and offer them tools to achieve success. To this end, the foundation provides grants for education, health services, and workforce development programs. Each year, it releases a report that not only discloses its financials, but also lists every social action initiative in which it participates. This way, investors can see where their money is going and what results their investment dollars are producing.

Ways to Get Started With Impact Investing

Joining the impact investment movement takes a bit more due diligence than a regular investment. With most investments, you need to evaluate the risks and potential returns at hand. With impact investing, you need to not only analyze the risks and rewards of your investment, but you also need to ensure that it aligns with your social goals. Furthermore, you’ll probably want to invest in companies or funds that give you the greatest opportunity to actually measure your impact.

Here are a few steps to take to get started:

  • Define Your Primary Goal. The first thing you’ll need to decide is whether your primary goal is to make an impact or generate a financial return. There’s no shame in identifying as a financial first investor, but it is important to be honest with yourself about where your priorities lie.
  • Set an Impact-Related Goal. Whether or not making an impact is your chief goal, you’ll need to figure out what constitutes a successful impact in your mind. Remember that unlike financial returns, impact-related goals are much harder to measure. Therefore, you’ll need to set your own criteria for success and then find investment opportunities that are likely to align with your goals. You may, for example, decide that your goal is to see better educational resources offered in low-income school districts. To this end, you might choose to invest in a fund that finances educational programs and facilities for underserved neighborhoods. If you then see that a particular school’s graduation rate increases by 10% as a result of investor support, that might constitute a significant impact in your mind.
  • Set a Financial Goal. Whether earning money through your investments is your primary concern or a secondary goal, you’ll need to think about how much you’re comfortable investing, how much risk you’re willing to take on, and how much of a return you’ll need to meet your overall investment goals. It also helps to decide what the proceeds of your investment will be used for, be it to pad your short-savings account or fund your retirement, as these factors might shape the financial component of your impact investment strategy.

impact investing progress

Finding Funds or Companies That Meet Your Criteria

Once you’ve established your personal investment goals, your next step entails finding investment opportunities that align with your objectives.

Finding Impact Investment Opportunities

The Internet offers a wealth of information for identifying impact investment opportunities. You can:

  • Search for Companies With a Positive Impact and Buy Their Stocks. If there’s a cause or social outcome you’re particular passionate about, you can try seeking out individual companies that produce results in that arena. For example, if you’re committed to eco-friendliness,  you might put the words “companies that help the environment” into a search engine. Once some results come back, you can further research specific companies that align with your philosophies. If they’re public companies, you can invest by buying their stock through an online trading site or a broker.
  • Use the ImpactBase Database. Powered by the Global Impact Investing Network, the go-to resource for learning about impact investing, ImpactBase is a searchable online database of impact investment funds and products designed to help investors find places to put their money. Once you create a free profile, you’ll be able to search for investment opportunities based on your specific preferences, such as funds or endowments versus corporations. More importantly, you’ll be able to input your results-based criteria to find opportunities that align with your goals. The database lets you choose from a number of impact targets, such as energy, community lending, health, and education. It also allows you to target your geographic preferences, such as North America versus Africa or Asia. Finally, it allows you to indicate what type of financial return you’re looking for – specifically, whether you’re aiming for a standard market rate of return or are willing to accept a return that’s below market rate.

Researching Investment Opportunities

Once you’re able to narrow down your investment options, you’ll want to vet each company, fund, or opportunity you’re interested in.

Finding financial information on individual public companies is easy. Since all public companies are required to file period reports with the Securities and Exchange Commission (SEC), you can use its free EDGAR database to access updates and obtain financial data. You may, in turn, come across information on social impact and initiatives in the process. Additionally, when companies achieve positive social outcomes, they don’t tend to keep that information hidden. If you consult a company’s press releases or do a basic search for it online, you’re likely to come across details on its social doings.

Researching impact investing opportunities via the ImpactBase database is even easier. Once you input your criteria, you can click on each result the database comes up with and access its information directly. Let’s say your search brings up one impact investment fund with an environmental impact. Click on that fund, and you’ll get documentation on its strategy, finances, and impact-related objectives.

Figuring How Much to Invest

Some impact investing funds come with minimum investment requirements. The ImpactBase database is generally targeted toward individuals with a minimum annual income in excess of $200,000, so if you’re looking to invest a considerably lower amount, you may be better off sticking to individual companies that issue stock to the public.

If you’re less concerned with making money and more focused on making an impact, you might consider backing a meaningful project or startup through platforms such as Kickstarter. If you’re passionate about the environment, for example, you could choose to fund an independent study that researches the effect of pollution on a particular body of water. In return, you’ll get periodic updates from the project’s founders so that you can follow their progress and see how your money is helping to uncover critical scientific data.

Many Kickstarter investments are really more like donations, where you’re funding something without the expectation of generating a profit or even getting your initial investment back. However, if your primary goal is to further a particular social or environmental cause and you aren’t looking to invest a lot of money, it may be a good place to start.

Final Word

Adopting an impact investing strategy is a great way to make money while also contributing to the betterment of society. Unlike most investments, impact investments allow you to feel good about where you’re putting your money. The primary disadvantage of impact investing is that it typically requires more legwork than simply choosing a stock or a bond. You have to think about your goals, find companies or funds that align with your objectives, and seek out ways to measure your impact. But if you’re willing to put in the time, impact investing can be quite profitable on both a financial and emotional level.

Have you explored any impact investing opportunities? What social goals are most important to you?

Maurie Backman
Maurie Backman is an experienced writer and editor based in Central NJ who enjoys blogging about everything from parenting to money management and investing. She spends much of her time chasing after her children and chipping away at her never-ending piles of laundry. She also bakes way too often.

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