Often, investing is seen as a purely profit-driven activity separate from social concerns handled by charities or government programs.
But there is a long tradition of using investing funds in attempts to change society for what the investor sees as the better. Some have sparked controversy, such as the recent clashes on colleges campuses over divesting endowments of oil and natural gas investments.
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Investing criteria that seek to screen out companies that support war, don’t focus on diversity or that are egregious polluters — or any number of other factors — are known as environmental, social and governance, or ESG, criteria.
The flip side of the cause-conscious investing coin is called impact investing, which is directing funds toward what an investor sees as a particular social good or positive outcome while also making money. A common industry slogan is that impact investing means “doing good while doing well.”
Impact investing has been gaining momentum, with the Global Impact Investing Network estimating the industry to have topped $1 trillion.
Politics as a Catalyst
With the U.S. presidential election less than three months away, energy policy is one of the lightning-rod issues in a divided America. Painting with a broad brush, the right leans toward more support for oil, gas and coal companies, while the left wants more support for renewable energy and recycling initiatives.
This overlaps with one of the key themes impact investors are also often interested in: putting money in companies and initiatives that are fighting climate change. So it’s possible that increased tensions around the election will heighten interest in impact investing.
“Elections can be a catalyst for more impact investment, particularly when a proposition or a candidate is perceived as a threat to the investor’s passion,” says Sam Adams, CEO of Vert Asset Management. “This can spur investors to do the additional research and due diligence often required to find good impact investments.”
While there are a number of drivers of sustainable investing, some investors take it upon themselves to put money into private solutions when they think an administration doesn’t focus on environmental and sustainable initiatives, says Peter Krull, director of sustainable investing at Earth Equity Advisors.
“Certainly, during the Trump years, many investors were galvanized to use every tool they had to invest in the economy they wanted to see and to use their portfolios as a lever for change,” says Kristin Hull, chief investment officer at Nia Impact Capital.
But there are many catalysts other than elections that can pique investor interest in cause-focused investing.
“While a major election can bring these issues to the forefront, impact investors do not necessarily need such a push — many are already focused on a segment of the impact investing ecosystem,” says Peter Klein, chief investment officer at Aline Wealth. “These are, by definition, engaged investors seeking to make a difference in the issues they are concerned about.”
If you’re one of those who are interested in learning more about impact investing, here are five steps to consider:
1. Get focused.
2. Do your homework.
3. Avoid greenwashing.
4. Consider a variety of investing vehicles.
5. Don’t bite off more than you can chew.
[See: 6 Top Impact Investing Firms and Funds]
1. Get Focused
There are many causes in the world that are worth supporting, whether that’s through charity, tax dollars or investment money. But resources are finite, so you’ll need to prioritize what you’re passionate about — whether that’s seeing more companies led by women and people of color or improving the stability of rural farmers.
“The first thing to do is to identify the issues you are most interested in from an impact perspective,” Klein says.
After all, there are 17 U.N. Sustainable Development Goals that range from ending poverty to preserving oceans. “While all these targets are admirable, economics and limited capital are still at play,” says Morningstar equity strategist Kristoffer Inton in a blog post. “As such, any impact investment will naturally align better with one goal over another.”
2. Do Your Homework
Once you’ve found an issue where you want to direct your investment money to make a difference, then research the biggest companies in the sector that are taking measures to enact change, Klein says.
While investing in individual companies is certainly a viable option, investors can also look for mutual funds or exchange-traded funds, or ETFs, that are specific to the area they’re interested in, Klein adds. These funds decrease company-specific risk by holding many stocks and bundling them under a single ticker symbol.
“If someone is starting out, it’s usually a good idea to start with a mutual fund or ETF because of the risk-management effects of diversification versus individual stock picking,” Krull says. “It is imperative to conduct your due diligence to make sure that the fund you choose isn’t just a ‘less bad’ version of a traditionally managed index.”
3. Avoid Greenwashing
One key aspect of your research should focus on the issue of greenwashing — which the Natural Resources Defense Council defines as “the act of making false or misleading statements about the environmental benefits of a product or practice.”
According to Krull, there are more than 600 mutual funds and ETFs labeled as ESG, sustainable, green or some other description indicating they cater to cause-conscious investors, Krull says.
“Unfortunately, there is a lot of greenwashing in the industry, so looking under the hood is imperative,” he says. “If you see that a sustainable fund owns companies like Exxon Mobil, McDonald’s or Meta, you might want to try a different one.”
With so many options, investors might want to consult with a financial advisor who specializes in sustainable and responsible investing, Krull says.
Investing in funds requires doing a little investigative work or consulting with a specialist “to ensure that the underlying portfolio companies are creating positive change,” Hull says.
Fortunately, there are a growing number of tools that can help:
Fund-ranking services like Morningstar and Lipper offer digital fund-ranking platforms that can accommodate some ESG fund research. If you’re working with a financial advisor, it’s likely that he or she has access to advanced impact investing fund research.
Online platforms. Hull points to ValuesAdvisor, an online platform that helps people choose investment advisors based on financial, environmental and social criteria.
Bank choice. She notes that investors can also find out if their bank is aligned with their values “so that you can feel great about where your cash sleeps at night.”
Fund selection. Hull also suggests choosing funds managed by women and people of color, given that people in those demographics make up only a small fraction of managers in the industry.
[What Does Greenwashing Mean in Sustainable Investing?]
4. Consider a Variety of Investing Vehicles
Stocks or funds of stocks aren’t the only way to invest according to your values. Here are some other resources:
Crowdfunding is an option, as is keeping your money with a community development financial institution (CDFI) or credit union.
Municipal bonds can be an option, too, such as the social bonds Chicago launched last year to fund affordable housing, tree planting, electric vehicles and other initiatives.
Impact investing firms can be a source of offerings that support specific societal outcomes. Calvert Impact Capital, for example, offers notes targeting community investment, carbon reduction and more inclusive banking. It also offers several small business recovery funds. Trillium Asset Management provides impact investing certificates of deposit and promissory notes.
5. Don’t Bite Off More Than You Can Chew
If you decide to take the plunge with impact investing, start small. Like any new investment endeavor, it’s usually a good idea to ease into the ESG market and cap your initial investment at 5% to 10% of your total investable assets, or less.
That way you can boost your impact investments gradually, so you learn more about the sustainable investment market, get to know the investments that meet your unique needs, and most of all, avoid any big portfolio losses stemming from rushed and under-researched impact investments.
“Many look to their investment portfolios as the vehicle to effect change on an issue that is important to them — and, consequently, hope to profit from it as well,” Klein says. “‘Doing good and doing well’ is the proverbial win-win.”
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Impact Investing for Beginners originally appeared on usnews.com
