The Beginner's Guide to Impact Investing
found that 78 percent of millennial investors have either put their money into these types of investments, or plan to in the future. That might be because, with
"Impact investing has the unique potential to harness the enormous power of investment capital to address many of the world's most pressing social and environmental challenges," said Hannah Schiff, research manager for the Global Impact Investing Network (GIIN), a nonprofit organization working to increase the scale and effectiveness of impact investing.
What is impact investing?
Before diving further into impact investing, let's first review the umbrella term of "socially responsible investments" (SRI).
SRIs are investments that consider "the nature of the business the company conducts," per Investopedia . It basically means investing with your ethics in mind, whether that's avoiding tobacco or oil companies, or seeking out companies with a social or environmental mission.
Though the definitions of the terms surrounding SRI differ depending on who you talk to-and are often used interchangeably-at a minimum, socially responsible investing generally involves "negative screening," or filtering out industries like tobacco, firearms, gambling, etc.
Then, taking it a step further is "environmental, social, governance" (ESG) investing, which ensures companies pass a set of certain criteria, like fair treatment of employees and environmentally friendly practices.
When it comes to these types of investments, many companies have hopped on the train. Betterment offers a socially responsible investing (SRI) portfolio ; Wealthfront allows you to omit companies in the categories of fossil fuels, deforestation, weapons and tobacco; Stash has a Do the Right Thing ETF; and Wealthsimple offers a selection of socially-responsible ETFs . Even stalwart investment firm Vanguard offers a social index fund that "seeks to track a benchmark of large- and mid-capitalization stocks that have been screened for certain social, human rights, and environmental criteria."
The most scrupulous type of SRI is impact investing, which targets companies working to solve social or environmental challenges. When you make an impact investment, you can pinpoint causes you want to support, and companies that focus on those causes. With an impact fund, for example, you might invest in Tesla, which creates electric vehicles , or Xylem, which designs pumps that conserve both energy and water.
Or, as one impact investing firm explained : "Where socially responsible investing fund managers are generally passive and adopt a 'do no harm' approach, impact investing funds typically not only seek to create positive impact, but measure and report their impact in a transparent way."
The return on impact investments
While many investors fear impact investments will lead to fewer returns, history has shown that's not necessarily the case. In terms of broad SRI investments, some cite the MSCI KLD 400 Social Index , which focuses on companies with high ESG ratings. Launched in 1990, it was one of the first SRI funds, and since 1994, its annualized return has been 9.89 percent. That's comparable to the S&P 500's historical average of 9.8 percent.
When it comes to impact in particular, a 2015 study from GIIN and Cambridge Associates analyzed a "benchmark" of 51 impact investment funds. It found they had a net internal rate of return (IRR) of 6.9 percent, while a "comparative universe" of 705 private investments returned 8.1 percent.
It noted, though, that "much of the performance in more recent years remains unrealized." And when it looked at a small subset of funds launched between 1998 and 2001 (which had, for the most part, been realized), impact investments outperformed the comparative universe at a rate of 15.6 percent to 5.5 percent.
Although the data is promising, it's limited: The 51 funds in the impact benchmark held assets of $6.4 billion, a small fraction of the $293 billion held by the 705 funds in the comparative universe.
How to get started
You can, of course, pick companies yourself, investing individually in ones that support your chosen causes. That said, there are also tools to make the process easier, including ImpactBase , the GIIN's searchable database of more than 400 impact investing vehicles.
To dip your toe in-at no risk-you could put together a virtual portfolio of impact companies with a tool like MarketWatch's Mockfolio to experiment with potential options and watch how they perform over time. Or, for a more automated approach, you can explore platforms such as:
- Motif Investing: Choose an impact portfolio focused on a sustainable planet, fair labor or good corporate behavior. Since their launch in March 2017, the portfolios have seen returns of 5.16 percent, 7.51 percent and 7.13 percent, respectively. The minimum investment is $1,000, and the cost is $9.95 per month.
- OpenInvest: With $3,000, you can invest in values like LGBTQ rights, female leaders or opposition to President Trump. The annual fee is 0.50% of assets. As far as returns, co-founder and chief strategy officer Joshua Levin said, "Our client portfolios are highly individualized, and each one is slightly different. But since we only do passive investing, by design all of our portfolios perform within 1-2 percent of the market. They have performed historically as such."
The lowest barrier to entry is through Swell , which has a minimum investment of $50 and an annual service charge of 0.75 percent. The platform allows you to choose what percentage of money you'd like to allocate across six different portfolios: green technology, renewable energy, zero waste, clean water, healthy living and disease eradication. Each portfolio contains approximately 50-60 companies that derive income from their chosen cause, and have potential to be financially rewarding.
Over the past year, Swell's green tech portfolio has performed the best of the six: It's up more than 30 percent. "It's really coming to light that you can invest with your values in mind," said founder and CEO Dave Fanger.
Even if you're not ready to take the plunge yet, those involved in impact investing urge you to ask questions.
"At a minimum, do a little research into where your money is currently being invested," said Schiff. "Are you happy with the companies your funds are supporting?"