Impact investing is a strategy that aims to create a positive social or environmental impact while also providing competitive financial returns. Impact investors may buy shares of a company that promotes women more frequently than other firms or avoid purchasing bonds issued by a weapons manufacturer. Unlike philanthropy, which seeks to advance a social or other agenda by donating money without hope of financial gain, impact investing requires a financial return comparable to other investments. Impact investors also often require some sort of measurement of the effect of their investments on their social or environmental goals.
For help with your impact investing decisions, consider working with a financial advisor.
Basics of Impact Investing
Impact investing is one of the thematic investing styles. Other thematic investing approaches may focus on a particular industry such as healthcare or a social trend, such as the shift to e-commercial, where it is hoped superior financial returns can be found. Impact investing is distinguished from other themes by the investor’s desire to accomplish or encourage a specific change in the world in addition to earning a strong return on the investment.
Philanthropic giving similarly aims to advance social causes such as gender equity or environmental concerns such as global warming. However, impact investing is different because it seeks to earn competitive financial returns in addition to promoting positive change. Philanthropy’s objective is never to return financial benefits to the giver.
Impact investing also resembles environmental, social and governance (ESG) investing. ESG investors and impact investors often invest in the same companies, such as those developing carbon-free energy technologies or providing access to financial services for chronically unbanked communities. However, ESG investing is driven by the idea that companies that do good will do better financially than those that exploit the environment or manufacture products that harm people. It is more about generating superior returns than creating desirable change.
Impact investing is not a specific asset class and may involve a broad range of asset types. Impact investors may put their money into stocks, bonds, mutual funds or ETFs. They may loan money to microfinance initiatives or other organizations that aim to help people with inadequate resources.
Impact investors are often individuals, but may also be organizations that have social or environmental influence as a goal. Foundations, governments, nonprofits, pension funds, religious institutions, banks, family offices and mutual funds are among those that may act as impact investors.
How Impact Investing Impacts Investment Choices
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