What You Need to Know About Impact Investing

What You Need to Know About Impact Investing

Although investing your money in various ventures may have a positive impact on your own future, many investors want to make changes in the lives of others, too. Impact investing is the act of making investment choices with the goal of achieving social or environmental advances. It covers a broad range of investments and areas.

Impact investors might support programs designed to improve the lives of those in poverty, for example, or fund industries that offer alternatives to environmentally harmful practices.

Impact investing is a growing trend among investors who want to use their money to uphold their values. On the part of the investor, it involves making specific and careful choices as he or she must assess each investment and its potential impact. However, unlike charitable donations, impact investing is designed to generate a return for the investor, financially and otherwise. Effective impact investments combine market and business knowledge with the application of personal values and principles.

Increasing Numbers

With many companies and individual investors seeing returns on their investments, impact investing is no longer limited to those who have a lot of money to spare. Recent estimates place impact investment assets at $502 billion around the world, and many large companies and investment groups have shown interest in increasing their profits even further.

Those from the millennial and Gen X generations now make up a sizeable percentage of individuals seeking to invest. These groups are more likely to consider the environmental and social impact of their investments. This suggests that impact investment may be an ongoing development, rather than a brief trend.

Active Impact

Many investors avoid investing in industries that they determine to be in opposition to their values.

However, it is important to note that investing in ventures that are socially and/or environmentally responsible is not the same as impact investing.

Related Article: Pros and Cons of Investing in a Roth IRA

Simply investing in an environmentally and socially responsible venture means that you look for organizations that employ practices that align with your values, regardless of whether these organizations are actively seeking to make a social or environmental impact.

An impact investor, on the other hand, looks for ventures whose chief goals are to effect social and/or environmental change. Some of the areas in which impact investors may choose to invest include the following:

  • Providing relief for refugees or those in poverty..
  • Resources for low-income families, such as low-cost housing.
  • Expanding access to education and literacy resources.
  • Reducing pollution and carbon emissions.
  • Supporting fair and sustainable agricultural practices.
  • Protecting environmental resources.
  • Increasing funding for arts and culture.

Types of Investments

One way in which many people pursue impact investing is through themed or directed investment portfolios. This may mean asking your financial advisor to seek out key areas in which to invest your funds. Some specialize in providing impact investment services. If you are investing independently, you can research accounts, investment platforms and mutual funds that have been specifically designed to support socially and environmentally beneficial companies and causes.

Some investors perform impact investments on a more individual basis. You may choose to invest directly in a cause or company you feel will help further your social or environmental goals. For smaller investors, this could be in the form of a microfinance loan. These types of loans often benefit those in struggling communities especially those in developing countries. Those with greater funds might invest in a larger project, such as a non-profit organization.

Assessing Your Investment

When performing individual investments, it is important to assess the potential impact of your investments to determine if they will meet your goals. This requires careful consideration and research. Impact investing is not the same as philanthropy because you intend for your investment to yield dividends, unlike donations, which may only grant you tax deductions.

You may find a project that addresses an issue you feel passionately about. However, if the methods used to further that venture are not effective, then you will have wasted your investment. Even a well-intentioned effort to help those in need may have a poor business plan and be unprofitable..

It is also important to be wary of those who use the popularity of impact investments to appeal to those with certain values. For instance, a company may attempt to appear more socially conscious than it truly is in order to garner the interest of impact investors.

Investment Returns

The returns you can see on your impact investments may vary, depending on your goals. The majority of current impact investments appear to meet investors’ expectations and even exceed them in a number of cases..

However, some investors choose to look for returns that are not monetary. If you find a project or business you feel will have significant benefits in an area you wish to support, you may find the reward to be in the impact of the work. Assessing the non-monetary value of an investment is something impact investors must be able to do in order to evaluate the risk and reward of investment.

Broader Impacts

As impact investing becomes more popular –it can begin to shape the way investments are made. Financial advisors, for example, may become accustomed to accepting requests from their clients to ensure their investment choices reflect their values. In turn, these financial professionals may incorporate these considerations into their overall practice. As such, impact investing can have an effect that is much broader than individual projects.

By leveraging the power of their money, impact investors may begin to see effects on the practices of corporate and industry leaders. A company may take additional steps to ensure its practices are environmentally or socially beneficial if they are aware that the alternative is losing clients.

Related Article: Best Investment Strategies for Beginners

By Admin