Investing in companies making a positive social or environmental impact is becoming a popular trend. This impact investing guide walks you through the basics, including the cost and return of impact investments. You’ll also discover how to choose an impact multiple of money that suits your needs.
Investments in companies
As a new investment approach, impact investing is gaining popularity for its potential to address various global issues. While state subsidies and philanthropic donations have a proven track record, the primary goal of a business is to generate profit, which may conflict with social causes such as environmental conservation or responsibly sourced consumer goods. In this scenario, impact investing offers investors an alternative investment vehicle.
When building an impact portfolio, consider the following vital factors: materiality, which means that the company’s core products or operations must solve a problem. This problem must fall under one of the three global impact themes – environment, human empowerment, and social inclusion – and additionality, which means the company provides a product or service that its competitors don’t. This provides a measurable way for investors to validate their investments.
Costs
Compared to traditional investments, impact investing often involves higher short-term costs. This requires a higher level of due diligence, including strict social and environmental reporting. But the long-term benefits of this approach are far more substantial. It also expands the reach of the capital while still providing a financial return. This strategy has its share of challenges but is also one of the most promising.
Institutional investors typically perform impact investing in the form of socially responsible financial services, including banks, pension funds, and hedge funds. Small-scale investors can participate in impact investing through socially conscious financial service providers. For example, microfinance loans in developing nations provide startup capital to women-run businesses.
Returns
When it comes to investing money for social and environmental good, impact investing can be both financially rewarding and beneficial. This type of investing is typically reserved for the wealthy, but more average investors are looking into this kind of investment. Impact ETFs and other types of impact investing can be made with as little as $100. Whether impact investing is right for you depends on your investment objectives and your desire to get returns. In addition to social benefits, it can be fun to make an impact with your money.
Some investors seek a market rate return on impact investments, but this is not always possible. Instead, some investors seek concessionary returns to offset the cost of doing business with a social enterprise. While it is essential to aim for market rates, many investors report receiving returns lower than market rates. In many cases, impact investing portfolios have been able to meet investor expectations. These results are also applicable to the entire market. However, many investors do not report significant events, such as a market crash or a stock market crash.
Criteria for selecting an impact fund
To make a successful impact on investment, investors must select a fund with the right financial and social return targets. Funds can come in several forms, including equity, debt, or guarantees. In addition, depending on their purpose, impact investments can be structured to meet either Program-Related Investments (PRIs) or Mission-Related Investments (MRIs).
Before investing in a specific fund, analyze its investor base. How well does it match your values and principles? Investing in a fund that targets foundations and philanthropists may not be as good as investing in a purely impactful fund. For instance, the Acumen Fund targets foundations and philanthropists. Bridges Ventures targets institutional investors, but you can also choose a fund whose primary investor is a wealthy individual who covers most of the operational expenses. Consider whether their opinion is more important than your own.
The social impact of an impact fund can be measured, but the financial returns must be reasonable. Sustainable investment funds can provide competitive performance and appropriate levels of risk. However, they are typically better suited to mainstream investors due to their low correlation to financial performance. Ultimately, investing in an impact fund should be driven by values and goals.
