More than $700 billion is now invested in impact funds, according to the Global Impact Investing Network. That number is over five times higher than it was in 2017, showing just how quickly impact investing is growing. Broadly, impact investments have outperformed the broader stock market in recent years, so it makes sense that investors are paying more attention to the space.
As well as making money, many investors want their investments to have a positive impact on the world – or at the very least, not a negative one. That’s where impact investing comes in. While ESG focuses on how companies conduct themselves, impact investing is about outcomes.
An impact investor wants their money to contribute to positive change in the world while it increases in value. There are several ways to analyze whether an investment will have a positive impact, and we’ll discuss them here. We’ll also look at some of the big myths around impact investing, and show you how to get started.
By the end of this guide, you’ll know:
There’s more than one way to make an impact with your investments. Here, we’ll focus on impact investing as it relates to the stock market: that’s buying shares of publicly listed companies.
Based on the UN’s Sustainable Development Goals, there are two key aspects that your investment in a company can affect: people and the planet. Work conditions, wages, and social security are things that will affect people. As for the planet, it’s more to do with use of natural resources, the environment, and so on.
But assessing the impact of any investment on those two aspects isn’t necessarily straightforward. Take an airport, for example: given it enables planes to fly, and they’re major global pollutants, you might argue an airport has a negative impact on the planet. You could say it’s therefore a bad fit for an impact portfolio. But this particular airport is a huge local employer – one that pays its workers a living wage, makes generous pension contributions, and has great benefits. In other words, its impact on people is positive.
This trade-off between the positive people impact and the negative planet impact is something you’ll come across a lot in impact investing, and it isn’t easy. But platforms like The Big Exchange can help you make these assessments – and even flag when the conclusion might be controversial.
You're probably wondering how everybody else measures and assesses impact investments to navigate the trade-off. Unfortunately, that’s done with great difficulty: there are no global standards, and a lot of competing definitions.
One leading measure is IRIS, which considers what an investment will do, how many people it’ll help, and by how much. But quantifying these things is tricky. Some governments try to put an “economic value” on a human life (it’s around $10 million for US citizens). But measuring the relative impact of activity in different parts of the world is no mean feat. It’s worth looking at the criteria different firms use to measure impact though, and seeing how much you agree: there is no answer that’s right 100% of the time.
Ultimately, this means that there are many investment funds seemingly doing the same thing – but exactly what’s going on is calculated differently at every turn. The sheer range of definitions, categories, and methodologies might suit institutional investors just fine – some of them are partly to blame, after all – but retail investors are often left confused. So let’s dive in to the myths and misconceptions to straighten some things out.
Impact investing is not ESG investing: they aim to do different things. Impact investing is all about positive outcomes, while ESG is an investing framework that takes into account risks to the financial value of an investment from environmental, social, and governance factors. Taking ESG into account doesn’t guarantee an investment is making a positive impact, but it can help move things in the right direction.
Unfortunately, that’s not the case – which has led to companies and funds being incorrectly labeled impact-friendly. Transparency issues are partly to blame: investors looking at Boohoo, for instance, may have focused on the details the online fashion company disclosed around its social and environmental targets. But they might’ve missed the ones it didn’t disclose about its supply chain, including workers’ conditions. The practice of “greenwashing” reflects another transparency problem – that’s making investments sound environmentally or impact friendly to attract capital.
Sure, one way to ensure your investments have a positive impact is to avoid those that might have a negative one. But it’s not the only option: some of the biggest investors in the world use an “engagement” strategy. That’s where a fund, rather than selling off or avoiding companies that might be poor employers or high polluters, takes a big enough stake in those companies to have an influential seat at the table – and uses that influence to push them toward positive change.
Impact investing today is better aligned between financial returns and positive impacts than ever before. Some funds may intentionally invest for below-market returns if that lines up with their strategic objectives, but two-thirds of them pursue competitive and market-beating returns. Impact investing and poor returns don’t go hand in hand – far from it.
You’re well on your way to becoming a fully-fledged impact investor now. The next step is to consider what you might want to look out for when making impact investment decisions.
Investing in an impact fund could be a smart move: you’d be putting your money into a basket of companies that are making the world a better place all at once. Many of these funds are listed on exchanges just like stocks.
Different funds have different criteria for investment: you might find one that focuses on solar energy firms, while another invests in recycling companies. Of course, it’s up to you to pick funds that invest in areas you care about.
When it comes to selecting impact investment funds, keep the following in mind:
As for exactly where and how to do that, a good place to start is The Big Exchange’s impact fund summaries. You can look at funds ranked by impact or performance. Those ranked top for impact include:
As for performance over the last five years, these funds are on top (just remember that past performance is not indicative of future returns):
And there you have it: you’re now fully equipped to invest with impact. Go out there and make the world a better place. In this guide, you’ve learned:
Now test your knowledge with our short quiz!
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.