Understanding impact investing
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Impact investing is gaining more attention
among investors today, especially
with the Millennials and Generation Z.
The growing popularity of impact investing
is not anecdotal, as a rising number of asset owners and managers have turned
to impact investing in pursuit of meaningful financial and social gains.
In a nutshell, impact investing focuses on
generating positive returns for investors and society in general.
What is Impact Investing?
Impact investing is a strategy where you
put your money to work not only to acquire solid returns, but also for positive
environmental and social reasons. With impact investing, you can be more
proactive with your investment money and help facilitate real change around the
world.
Investing in organizations supporting the
United Nation’s (UN) Sustainable Development Goals (SDGs) is one popular form
of impact investing.
Keep in mind that impact investing is not charity,
as impact investors are always expecting to make excellent profits and
outperform the market. They just have goals that involve more than achieving
max income on an investment.
What Assets are Considered Impact Investments?
Impact investments consist of various
assets and investment strategies. They can be any investment that is both
trying to turn a solid profit and create a positive impact on the environment
and society.
For example, you can invest in the stock of
a solar company because of its positive contribution to the environment, or you
can buy mortgage-supported securities that aim to back affordable housing for
low-income communities.
Those investments aim to make the world a
better place, but they also have the potential to generate your expected
returns.
Impact Investing is Not the Only Way
There are other ways for you to invest in
pursuit of making a positive environmental and social impact. That includes
investing strategies such as SRI investing and ESG investing.
SRI Investing
Social responsible investing or SRI
involves investing in companies compatible with your moral standards or
investor values while avoiding those that do not.
This approach is more focused on investing
in assets that cause no harm and doesn’t usually include companies that
proactively try to be positive contributors to society.
For example, an SRI strategy may not target
companies in the oil, tobacco, or gun industry, depending on the investor’s
principles or ethical guidelines.
ESG Investing
ESG investing stands for environmental,
social, and governance investing. This approach aims to find investments based
on impacts organizations have on the environment, society, and how the business
is managed on the inside.
The goal here is to make investments that
ESG rating agencies labeled as high performers in each of the three criteria
while avoiding those that performed poorly. Simply put, ESG investing focuses
on avoiding investments that scored low in performance.
Are There Fewer Returns in Impact Investing?
Research has found that impact investing
has not negatively affected investors’ returns. A few studies showed that
impact/ESG investing can beat standard investment portfolios, which is
something that SRI/ESG portfolio managers would like to promote.
Still, as with all investments, your choice of
assets will ultimately help determine
your returns.
