Impact Investing
January 31, 2022
The term “Impact investing” was created by the Rockefeller Foundation in 2008 to define the way people and corporations were beginning to focus their investment choices to pressure areas of public policy, the goal being to create social change. In 2020, impact investments received close to a 50% increase in funds moving from traditional allocations of mutual funds and exchange-traded funds (ETFs) towards funds that had a specific focus of inclusion or divestment from a particular investment category.
Impact investing is moving investment money to companies and industries that you believe in, using your personal capital for social good, and to make money in what you value.
Impact investing can be done in many different ways and have varying implications to an overall investment portfolio. Things that need to be addressed in any individual investment plan are:
1) Will the returns of the investment get what they need?
This is often the first piece of pushback when an advisor hears that a client wants to look at impact investing. For the most part, it is unfounded. In the twenty years that impact investing has been getting a stronghold in investment culture, returns are not significantly different when comparing a broad allocation within an index to a smaller selection of an index screening out for a value set.
2) Are the underlying expenses of the fund worth the price?
When your objective is impact, you will want to continue reviewing if the cost of ownership is meeting your needs. Investors have been encouraged to be leery of high-cost funds. There is, however, something to be said for a company that screens for your particular interests and will continue to rank companies as leaders and offenders within a particular value space. Paying a price for a service you are not independently able to monitor regularly for efficient use of a strategy can be worth it, especially if the price allows you to invest in a way that is in alignment with your values.
Tax efficiency should also be considered in a personal investment strategy as well. Mutual funds by their design are required to pay out their gains to the investors annually, which can create taxable income to the investor when in a taxable account. ETFs do not have this requirement and are taxed on the sale of the investment.
3) Is the fund doing what it advertises?
“Greenwashing” is a term used to describe companies using value investing advertising to promote a product that may not live up to the hype. Well-respected companies are guilty as are companies just trying to make a profit.
Are you still diversified?
Diversification within investing is when your investments are diverse across small, medium, and small companies, in the United States, developed world and developing countries and holding onto debt obligations through different length bonds.
How do you insure your investments are what they say they are?
Use a tool such as a non-profit like As You Sow. As You Sow is a research company that provides information on issues such as climate change, gender inclusion, racial justice, and corporate ethics in a way that promotes corporate accountability and a third-party whistleblower. Read their resources to educate yourself on the issues you care about or use their tools to find a fund that you may be able to invest in on your own replacing elements of your investment portfolio with something that is more in line with your personal philosophy. Go to https://www.asyousow.org/invest-your-values to use the tool that is set up to save you time and energy of watching the news for companies doing good or destructive things and build your investment portfolio with your heart at the heart.
We are not providing investment advice but recommending that you investigate ways to live your values and to research ways you can do that through your investments. Investing is a very personal process and one that takes your whole financial life and goals into consideration. What will be the right fit for some will not be the right fit for all. Speak to an investment professional who supports impact investing for more information on how you might be able to use your investments to live more fully into your personal mission.