Impact investing is a mindset shift in the priorities of those looking to invest their money, with increased interest in the social and environmental impact of their financial decisions.
What is Impact Investing?
Impact investing asks us to evaluate our investments not solely in terms of potential financial gain, but also for the social repercussions of those economic decisions. The idea is to place capital in companies that are doing work you support – and also make some money while doing it. In particular, impact investing emphasizes making capital available to organizations in “sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.” And according to JP Morgan, this emerging asset class “offers the potential over the next 10 years for invested capital of $400 billion – $1 trillion and profit of $183 – $667 billion.”
“Impact investing is an exciting and rapidly growing industry powered by investors who are determined to generate social and environmental impact as well as financial returns. This is taking place all over the world, and across all asset classes.”
Global Impact Investing Network
Impact investing is built on principles that are not brand new. Socially responsible investment (SRI) is that idea of developing a framework for thoughtfully investing based on environmental, social and governance (ESG) criteria. Impact investing places these concepts at the forefront and acts proactively for positive change, rather than simply trying to avoid negative consequences.
According to the Global Impact Investing Network (GIIN), there are four core characteristics of impact investing:
- Intentionality – this field is marked by “an intentional desire to contribute to measurable social or environmental benefit” and the “aim to solve problems and address opportunities.”
- Use Evidence and Impact Data in Investment Design – in order to “be useful in contributing to social and environmental benefits”
- Manage Impact Performance – which could include “having feedback loops in place and communicating performance information to support others in the investment chain to manage towards impact”
- Contribute to the Growth of the Industry – “use shared industry terms, conventions, and indicators for describing their impact strategies, goals, and performance” and “share learning where possible to enable others to learn from their experience”
Taken together, these principles can help guide investors to make financial decisions that will leverage capital to improve societies and their environments. There are critics who argue that impact investing doesn’t work. Unfortunately, there is research that socially responsible assets underperform in comparison to more traditional investments, and some believe that donating effectively is more impactful than this new way of investing one’s money. Yet despite these critiques, trends from studies done by UBS, McKinsey & Co., JP Morgan, and more show that the practice of impact investing is only continuing to increase in popularity.
Who is an Impact Investor?
That’s the beauty of impact investing – anyone can do it. There is no traditional impact investor and the field has brought in a broad array of investors, including: fund managers, development finance institutions, diversified financial institutions and banks, private foundations, pension funds, insurance companies, individuals, nongovernmental organizations, and religious institutions.
In particular, younger investors are reshaping the financial field. Millennials are increasingly realizing the power they wield with their dollars. Almost two-thirds of American millennials are “highly interested” in sustainable investing. As UBS, the largest Swiss banking institution in the world, puts it, “Millennials are intent on making a difference for others.” A study from Spectrum Group found that “more than half of Millennial investors (52%) see the social responsibility of their investments as… important selection criteria, compared with less than 30% of WWII-era investors and 42% of Gen X investors.”
“Think back to the great philanthropists of years past who thought of making money in the first half of their lives and giving it away in the second half. Today, that view is still pretty pervasive, that there’s capitalism and making money on one side, and philanthropy on the other. I think the younger generation is seeing that as a false dichotomy”
Justin Rockefeller, trustee of the Rockefeller Brothers Fund.
So you’re in college or just graduated. What does impact investing look like for you?
We’re not quite Millennials – we’re sitting right on the cusp of that generational divide. Some may be able to jump right into the investing game in a serious way – others may be living paycheck to paycheck after graduating into a workforce rattled by the COVID-19 pandemic.
It’s not surprising that impact investing is taking root in universities and colleges, given the social justice activism and advocacy that has taken place at institutions of higher education around the country. Taking business courses on impact investing or ESG and getting involved in student organizations and clubs is a great way to start. Laying a strong foundation of impact investing can lead young adults to both choose meaningful career paths and pursue investment opportunities with positive impacts.
Before making your first major investment, or building out your already robust portfolio, here are some resources for more information:
- Listen to Causeartist’s podcast, Investing in Impact
- Explore the Global Impact Investing Network’s website
- Read Heream’s article on B Corporations and listen to Alexa’s Handful podcast on “Your Role in the B Movement”
- Check out these tips from Fidelity Charitable on the how to start in four steps
- Read up on the Wall Street Journal’s “How To” on Social-Impact Investing
- For those of us just starting out, look at Forbes’ “How To Start Impact Investing With Just $50 And Five Minutes”
- Read this article from the Stanford Social Innovation Review – it’s filled with helpful tips and thoughtful advice
- Peruse this article about “39 Social Impact Investing Ventures” for ideas on how to best use finance to change the world
