The first Earth Day was held nearly 50 years ago, on April 22, 1970, as an outpouring of support for environmental reform. It was the rallying cry of a movement that would see, in the following months and years, the establishment of the Environmental Protection Agency and the passage of legislation like the Clean Air Act, Clean Water Act and Endangered Species Act.
For investors — and ultimately, for businesses themselves that want to tap the public markets for funds — impact investing may be just as groundbreaking.
But first, what is impact investing?
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A developing segment. Impact investing is such a new area of demand that it seems as if the terminology around it is still developing. While some people may use impact investing interchangeably with other labels, what’s clear is that at its foundation it’s investing with a purpose — directing your capital to companies that are actively engaging in behaviors you agree with.
Andrei Cherny is the CEO of Aspiration, an online financial firm that offers the Aspiration Redwood Fund, (ticker: REDWX), which engages in sustainable investing.
Cherny says sustainable investing is the broadest category. Within that, there’s socially responsible investing, which screens out companies doing things you don’t like. Perhaps you’re not a big fan of big oil — Exxon Mobil Corp. ( XOM) is a no-go, then. Not into weaponry? Lockheed Martin Corp. ( LMT) and Sturm Ruger & Co. ( RGR) are off the list.
“Impact investing has a little bit of a different flavor where it’s really driven first and foremost by making an impact — by what you can do to use your dollars to solve problems in the world,” Cherny says.
What does Earth Day have to do with impact investing? Perhaps a bit like Earth Day in 1970, impact investing is in its infancy. In February, The Economist hosted the inaugural Impact Investing conference in New York. Deborah Winshel, global head of impact investing at BlackRock, was a speaker at the event.
“As Earth Day approaches, for investors who are focused on protecting the environment or investing in companies that are using low-carbon strategies, the question is: ‘How can I direct my dollars in a way that expresses that?'” Winshel says.
It’s a pretty profound question. That’s because as more sustainability-focused money flows into the stock market, those investors will see their larger ownership stakes reflected through their amplified voices and voting power.
Much like the environmental movement gave way to Earth Day and a string of government measures to protect the planet, the rise of impact investing will change the status quo ESG (environmental, social and governance) practices of corporate America.
So, where can investors find these investment opportunities?
You can invest alongside your values. Thankfully, there are plenty of places to stow your hard-earned cash if you’d like to invest alongside your values. Many of these take the form of customizable automated portfolios or ETFs. BlackRock alone has two ETFs offered through its iShares fund family that make impact investing easy.
“[The iShares MSCI ACWI Low Carbon Target ETF] CRBN is our low-carbon ETF that invests in companies that have lower carbon emissions than the index,” Winshel says. “We also have [iShares MSCI Global Impact] MPCT, which invests in companies that derive revenues that are aligned with SDGs, the UN’s sustainable development goals.”
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There are 17 SDGs spanning many fields; eliminating poverty and hunger, improving education, reducing inequalities and taking climate action all make cameos on the list.
The Aspiration Redwood Fund ( REDWX) is another option, and many other mutual fund providers are starting to offer funds for the purpose-driven investor.
So your options aren’t limited. But there is one nagging question that always springs up in this discussion, and it’s an important one.
Do you have to sacrifice financial returns for morality? This may be the biggest question of the average American interested in getting started in impact investing. The old concept that the nice guy finishes last is still pervasive in the business world. And it’s true, there are some investments with this dynamic.
“Some impact investments generate a positive impact because they sacrifice return. Low-interest community development loans, for instance, are sometimes made to spur small business development or incentivize the construction of affordable housing,” says Jeff Finkelman, research associate for impact investments at Athena Capital Advisors, based in Lincoln, Massachusetts.
But other investments simply don’t have that trade-off. “Renewable energy is a clear example of this type of win-win investment opportunity,” Finkelman says.
When Cherny, Aspiration’s CEO, is asked about whether market-rate-or-better returns are impossible for impact investors, he scoffs.
“The answer is a resounding ‘no,'” Cherny says. “If you’re looking at companies who are making not just moral decisions but the smart business decision, those are companies that will thrive over time.”
The early results of Aspiration’s young mutual fund, which just lowered its minimum investment amount to $100, are encouraging.
“We launched it about a year and a half ago and in that time it the Redwood Fund has consistently been in the top 1 percent of all large-cap funds,” when it comes to performance, Cherny says.
[See: 7 of the Best Socially Responsible Funds.]
Dip your toe before jumping in. It’s great that as the 48th celebration of Earth Day rolls around, a new form of conscious action is emerging in one of the last places you’d look for it: on Wall Street. But don’t simply dive into the first impact, sustainable, or ESG fund you see; take the time to consider a few things first.
To start with, this is a very young industry. Few funds in the arena have three-year performance records, much less five-year records, so keep that in mind.
Secondly, check out the expenses and fees associated with whatever you’re thinking about getting into — high expense ratios don’t care how noble your cause is.
And finally, look under the hood at how these investments are measuring their impact. After all, you don’t want that amplified voice of yours to be distorted.
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Nearly 50 Years After the Inaugural Earth Day, Impact Investing Arrives originally appeared on usnews.com
