What is Impact Investing? How does it work? Well, if you want to make a difference even as you make that profit, impact investing is the way to go.
As times change, so do how companies and individuals are conducting their business. More and more business entities are heading the call for increased social responsibility and environmental protection.
Investors have also changed their tactics. Instead of running only after profits, many investors now want to make an impact. People want to put their money in companies that can bring positive social change and preserve the environment, while still generating profits.
So, if you are thinking about making a positive change with your money, impact investing is the answer. But exactly what is impact investing? Will it guarantee you financial returns? And, do these companies really work to bring social and environmental benefits to society?
If you are new to impact investing, here is everything you should know.
Table of Contents
What is Impact Investing?
Impact investing definition is quite broad. The whole point of investing is to get a financial return after a set period. However, as the world grows more socially and environmentally conscious, there’s an increasing demand for this to reflect in investing.
All this has resulted in the growth of impact investing. You invest your money expecting a return but only on products with a social and environmental impact on the world.
The good news is you can invest in developed or emerging economies just as long as you adhere to this principle. Though this is a relatively new concept, it’s growing in popularity as many people search for more positive investments.
Industries such as renewable energy and sustainable agribusiness are excellent investment alternatives. This is because their goal is to benefit the planet. They employ ESG practices to ensure they make profits and bring about positive social and environmental impact.
What is ESG Impact Investing?
ESG is a short form for Environmental, Social, and Governance practices. These practices can apply to Impact Investing by influencing the outcome of the investment you make.
Traditional investing relied on technical valuations to determine the outcome of investments. Now, ESG practices can have a similar impact by noting opportunities and risks. However, how the investments perform financially is still the primary plan.
ESG scores are one way to evaluate how a particular product will possibly perform. Those with a higher score might bring you better returns, and those with a lower one limit the outcome.
ESG Impact Investing aligns the two concepts to create products that many eco-conscious people want. These tend to have a more positive impact while giving a financial return on the investment.
What is Social Impact Investing?
When you think about social investing, know its main focus is people. It’s about creating policies that make people better in terms of improving their skills and capabilities.
The investment focuses on primary areas like health care, education, childcare, employment search, among others. As issues such as unemployment and poverty rage on, social impact investing seeks ways to change this.
For instance, you can focus on investing in young people to gain more skills and fill in the widening age gap among the working class. The more opportunities people have, the better the outcome. There are different ways to address such issues other than relying on financial aid.
Through ESG practices, social investors can turn a profit and help tackle the issues. This creates a new way of thinking and diverse opportunities that benefit the planet.
What is a Social Impact Investment?
Social impact investment is a type of investment that channels funds to organizations that are tackling social issues. The expectation is to gain financial returns but also have a positive impact on these matters.
Such investments make it possible to effect positive change and also earn a profit. The outcome is a better life for the people impacted by the social matter.
For instance, you can invest in a company addressing poor education and skills training among the youth. Such a company offers young people opportunities but still turns a profit for its investors. This symbolizes the change that’s happening in the world today.
See related: How to Invest in Electric Car Charging Stations
What is an Impact Investment Fund?
Impact investing funds pool together finances from several impact investors to buy securities. However, every impact investor retains ownership rights over their shares.
The whole purpose of creating an impact investment fund is to have a better chance of picking top investment opportunities.
Additionally, impact investors, in this case, gain from better funds management and are charged a smaller investment fee.
What is Impact Investing Non-profit?
Impact investing non-profit channels its funds to specific non-profit organizations. The aim is to make a return while enacting social change.
The investments end up being purposeful with positive social and environmental impacts. Each non-profit must have social goals and missions that drive it. Investors stay away from companies seen as harming the world.
Impact investing non-profits raise money for different charities in the form of investment. These charities must have social goals and missions and a plan to generate returns for the investors. The returns are recycled by the non-profit to invest in other charities in the future.
What is Impact Investing Strategy?
The impact investing strategy requires risk mitigation, impact maximization, and target returns achievement. The only way the strategy will work is to adhere to all three and do them correctly.
Impact investors have some level of risk they are comfortable with when an opportunity to earn a return emerges. It’s not a manageable undertaking, but it’s also what attracts many people to impact investing. The outcomes expected have a positive impact on expected financial returns.
However, a strategy is necessary to help strike a balance between risk and financial return. At the same time, the strategy ensures the enterprise reaches the set intent.
How to Start Impact Investing
Once you decide to start on impact investing, there are many impact investing firms you can work with. It can be a great way to make your charitable donations work and earn a financial return from the investment.
Start by picking organizations that champion the causes dear to your heart. Narrowing down the social impact helps you have a better outlook as you invest. Impact investing requires clarification on personal risk, set goals, and your investment preferences.
Most investors opt to place their money in impact investment funds that spread the risk. You can choose the companies you prefer to trade in with the help of your fund manager. For instance, pick publicly traded companies that strive to protect the environment.
But, before you start engaging in active impact investing, take some time to learn. Ask yourself, ‘what is impact investing?’ Is it the right investment channel for you? Since investing is personal, it’s better to know what you’re getting into.
Some of the funds you can choose include venture capital funds that finance social enterprises, or index funds with set criteria of the companies to invest in. Understanding these different terms is crucial before you start putting in money.
Also, take time to speak with funds managers. They have ample knowledge that can help shed more light on impact investing. Talk more about the options available to you as an impact investor. The more you ask, the clearer the matter becomes.
Impact investment offers investors returns. Just because you choose the moral high ground doesn’t mean you won’t get financial returns. The key is to understand what it is and getting financial advice then you can begin.
Things to Know about Impact Investing
Impact Investing is Big
While you might be hearing about impact investing for the first time, it’s not tiny at all. Impact investors have about $12 trillion invested in different funds and organizations. The investment is in enterprises that have social and economic benefits to the world.
It’s socially conscious investing that gives you a chance to impact and gain financial returns. Everyone can take part in impact investing, from individuals to big corporations.
Impact Investing Requires a Cause
Impact investment funds share lots of similarities with traditional funds. However, there’s the main difference worth noting. You need to pick funds that are in alignment with causes benefiting society.
For instance, if you’re passionate about affordable health care or renewable energy, invest in companies championing these causes. These can be profitable or non-profit organizations with set goals that are in line with yours.
Expect Financial Returns
When you donate towards a worthy cause like reversing climate change, you don’t expect a return. But, when you start impact investing, expect financial returns.
The money you add to the impact investment funds isn’t a donation. But rather an investment with the potential of bringing you returns. That’s how impact-investing works.
Many investors who venture into impact investing hope their money is going to worthy enterprises. But, the only way to be sure is to be as involved as much as possible.
It’s better to speak with the fund manager and financial advisor rather than follow friends. The fund manager can break down where your funds go, and you can conduct more research about the different non-profits and companies.
Just like traditional investing, impact investments carry risk. There’s no guarantee on a return on your investment so put in money you can afford to lose.
Take time to evaluate your funds and learn as much as you can about impact investing. Only then can you take the next steps to start investing.
Talk to a Financial Advisor
Once you start researching impact investing, talk to a financial advisor. They’re in a better position to shed light on the vocabulary and requirements of impact investing. Ask questions like, ‘what is impact investing?’ ‘Is impact investing worth?’ and learn as much as possible from the answers.
You can also get more information by reading impact investment books available all over the internet. For instance, the Power of Impact Investing by Judith Rodin or Real Impact by Morgan Simon will be an excellent starting point.
What is the Minimum Investment?
While the amount differs between platforms, most have a minimum amount of $1,000.
While some traditional investment funds might offer lesser minimums, impact investing is more than just business, it offers a sense of fulfillment as your money is channeled towards a noble cause.
What Platform Can You Use?
Have you exhaustively answered this question; what is impact investing? Do you know how it exactly works? If so, here are some of the best platforms to start your impact investing journey.
- BlueOrchard Finance S.A.
The platform operates across the world and has its main offices in Switzerland. It provides equity and debt financing to companies that tackle world hunger and poverty.
- Vital Capital Fund
This is an impact investing private equity fund that supports enterprises with a focus on sub-Saharan Africa. The enterprises have projects geared towards improving the quality of life in these regions. They improve health care, offer renewable energy, education among other social causes.
- Community Reinvestment Fund
It partners with private lenders that offer to finance community development programs. The fund began in the US in 1988.
- Triodos Investment Management
This is a subsidiary of the Triodos Bank and manages 12 investment funds that conduct impact investing. It began its operation in 1995 and became interested in renewable energy, education, and health care.
Which is the Lowest Cost Platform?
Today, there are many impacts investing apps that you can download even on your phone. One with the lowest opening balance is WealthSimple. It has a minimum balance of $0, but you get more packs when you have a bigger account balance.
Are Any to Be Avoided?
Not all impact investing firms are trustworthy. It’s better to steer clear of those that choose to withhold certain information. For instance, the causes they support and enterprises that receive the funds.