Impact investing growth is accelerating in recent years as more impact investing firms offer related products to keep up with the demand from investors. As social impact investing becomes more mainstream, the offerings and impact funds are becoming more diverse. Now, whether you are a novice investor or a risk-tolerant, seasoned trader, there is an impact investing opportunity for everyone.
Recent research has placed assets under management for social impact investing to be more than $700 billion. These assets are managed via an impact fund by many financial services companies like private equity firms and large brokerage houses.
Social impact investing is the idea of investing in companies that are doing measurable good for the environment and having a positive impact on society, along with providing a good financial return.
The term “impact investing” was first used in 2008 by the Rockefeller Foundation, however the idea of impact investing has been around much longer.
Impact investors have of course always demanded good financial returns for the businesses they invest in via dividends and stock price appreciation. But investing in socially responsible companies really started to pick up momentum in the 1960s when Vietnam war protestors demanded that university endowments not invest in defense contractors that were benefiting from the war.
Impact investing has many synonymous names such as conscious capitalism, socially responsible investing, and sustainable investing. And the theme that runs through these similar ideas is so simple and powerful.
If you can invest in businesses that have a positive social impact AND produces a good investment return, isn’t that better then investing in a company that just provides a good investment return? In other words, environmental sustainability is important to investors.
Impact investing growth is one of the reasons over the years that stock prices in tobacco and fossil fuel companies have taken a hit and companies that are socially responsible like renewable energy companies have done quite well. Social impact investing is a real and growing investment theme, whether done through individual stock selection or through an impact fund. Understanding the theme and how to invest in it could go a long way to boosting your financial returns and making the world a better place to live.
A novice impact investing might simply start off by making a list of the type of businesses that they do not want to invest in because of their negative social and environmental impacts.
For instance, this type of investor might decide to avoid investing in businesses in industries such as fossil fuel, tobacco and gaming, all of which without question are harmful to society. To keep it simple the novice impact investor might not require a business to prove that it is having a positive impact on society, but simple show that it is not obviously doing societal harm.
If you fall into this novice impact investor category you might prefer to invest in a impact fund in the form of a mutual fund that follows these guidelines.
A good impact fund recommendation for novices would be the Vanguard Social Index Fund (ticker VFTAX).
With the Vanguard Social Index Fund, you get a large fund with over $7 billion in assets under management.
The Vanguard Social Index Fund looks to exclude investing in “firms with significant ties to tobacco, alcohol, nuclear power, adult entertainment, gambling and fossil fuels”. It also refuses to invest in companies with “human rights, labor, corruption or environmental controversies”.
But other than the above exclusions, VFTAX is still left with many very safe large companies to make up its top holdings like Apple, Amazon and Microsoft. This allowed the fund to earn approximately 22% in 2020, which shows that you can get good financial performance while avoiding businesses that are not helping society.
As an intermediate impact investor, you want to not only make a list of the types business to avoid (like tobacco and fossil fuels discussed above), but you also want definitive proof from the companies that you invest in that they are having a positive societal impact.
Needing this verified definitive proof of positive impact takes time and energy for the businesses being scrutinized. It would likely lead you to invest in companies like Home Depot and Microsoft that are industry leading with their reductions in carbon emissions. Demanding definitive proof of positive societal impact would likely lead you away from popular and well-known companies like Apple and Nike that are well known for some of their poor third world labor practices.
The experienced impact investor’s primary goal is to seek out game changing companies that are trying to change the world in a positive way by solving large social and environmental challenges. These challenges may include racism, hunger, community development of low-income housing and diversity.
To meet the goal of investing in these kinds of game changing companies an experienced investor may need to invest in businesses that are not publicly owned through a private equity fund.
One fund that fits the above description is The Builders Fund, whose goal is “to make meaningful investments into responsibly run businesses that improve the world”.
Remember we recommend this type of private equity investment for only the most experienced impact investors. Unlike investing in publicly held businesses, monies investment in private equity tends to be illiquid for a period of time, so read any prospectus carefully before you invest.
Summary
Impact investing is a mega trend that is here to stay. And the impact investing market is big and growing.
The ability to earn a good financial return while investing in businesses that are doing good things for society is a great combination.
But know what kind of impact investor you are before you invest your hard-earned money.
Use the three categories discussed above as a guide as you start your investment journey in this area.
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