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Investing with a purpose sounds attractive. Who wouldn’t want to invest in a business that mitigates climate change, provides safe working conditions in otherwise dangerous regions of the world, and/or makes profits through noble causes?
I like the idea of investing in what inspires me and improves the community. So I’ve engaged in socially responsible investing through mutual fund purchases and individual stock investments. What I’ve learned is 1) I can make money this way and 2) just like nobody’s perfect, no company’s perfect in every way, all the time. Still, impact investing is a principle and practice worth pursuing.
Here are four key things to know about impact investing before you buy:
Impact investing goes by many names
The term “impact investing” is relatively new but the concept of investing with your heart has been around for decades, if not longer. Phrases that describe aligning personal values with investments include:
- socially conscious investing
- ESG (environmental, social, and governance) investing
- sustainable investing
- socially responsible investing
- triple bottom line (TBL) investing (social, environmental, and financial)
In recent years, proponents of impact investing have focused on meshing passion with the possibility of market-beating returns. In this way, you can (possibly) grow your net worth while funding the pursuit of social justice, positive environmental impact, and responsible corporate activity.
Everyone has a different idea about what’s important in impact investing
When I started investigating socially responsible investing (SRI) for my own investment decisions, I noticed that one investor’s elixir could be another investor’s poison. That is, a company that pays fair wages and offers excellent benefits may also make and market products that harm consumers and the environment.
So, if you’re choosing ETFs, mutual funds, etc. because they’re touted as socially responsible, impactful, etc., you’ll want to review the approach of the fund manager or index to verify that its aligned with your values.
Here are some of the topics associated with impact investing:
Products/Causes (generally, to pursue)
- renewable energy
- sustainable agriculture
- affordable housing
Products/Industries (generally, to avoid):
- adult entertainment
- defense industry
- fossil fuels
- nuclear power
- predatory lending
Corporate Practices (generally, to pursue)
- diversity criteria
- gender equality criteria
- environmentally friendly
- exceptional employee relations
- UN Global Compact Principles
- data privacy
In general, there are two main strategies that an investor may take to become a socially responsible, TBL, impact investor: integrated and exclusionary. The first seeks to invest in companies that pursue certain ideals and the other seeks to exclude products or practices that are offensive. Again, though what’s ideal and what’s offensive varies among investors.
There are many ways to implement impact investing
Just as there are many approaches to impact investing, there are many ways to implement the philosophy of investing according to your values. Here are a few methods:
- buy from fund companies such as Calvert that focus on responsible investing
- find mutual fund companies that offer sustainable funds such as Pax World Funds
- use screening tools to locate socially responsible mutual funds (some brokerage firms allow you to screen for socially conscious or ESG funds)
Managed Portfolios/Portfolio Services
- ask your financial advisor or wealth manager to create a socially responsible portfolio for you or exclude certain objectionable investments from your portfolio
- select a responsible investing “expert pie” from M1 Finance comprised of socially responsible ETFs (go to Research > Expert Pies > Responsible Investing)
- choose a socially aware portfolio among TD Ameritrade’s managed portfolios, consisting of ETFs based on ESG practices
- opt for Betterment SRI, the firm’s socially responsible portfolio strategy, which currently substitutes two socially responsible ETFs for more traditional ETFs in its portfolios (here’s an article on this approach)
- invest in Motif Impact Portfolios that focus on fair labor, sustainable environmental practices, or corporate governance, consisting of stocks that pursue these ideals
- use stock screeners that allow you to screen for socially responsible stocks; for example, Yahoo! Finance allows you to screen stocks (equities) for ESG scores (scale of 0 to 100) by adding filters in these categories
- review holdings in socially responsible mutual funds and ETFs to identify individual stocks that may be candidates for your portfolio
- identify individual stocks in specific industries that match your goals; for example, if you’re interested in renewable energy, look at stocks within this theme at Fidelity or use stock screeners that allow you to screen by industry/sector and types of companies (for example, select utility companies, then renewable energy)
Again, your impact investing criteria may differ slightly (or significantly) from the guidelines in a specific mutual fund, ETF, or managed portfolio. You may find a company that has excellent labor relations but falls short in other areas. If you want to pursue socially responsible investing, you’ll want to clarify what’s most important to you.
Impact investing isn’t a clever way to make more money
Investing in companies that do good doesn’t guarantee a good return on your investment.
Yes, in an ideal world, for example, I’d invest in companies that advance renewable energy in some way (sell renewable energy products to consumers, harness sources of renewable energy for utilities, etc.). And then because this type of energy becomes the dominant force globally, I’d benefit from a cleaner and longer-lasting planet, plus reap dividends and gains on my investments. But just because a company pursues an ideal doesn’t mean it’s profitable, well run, or priced right. So, I could lose money on my investment.
On the other hand, I don’t think investing with a social conscious is foolish or stupid or pointless. It’s just that impact investing isn’t a clever way of appeasing the investment gods or good karmic method of beating the market. Instead, it’s a way to invest with your values and influence commerce in your community and the world. On a positive note, this approach may inspire you to invest more because you’re excited about and engaged in your investment activity.
Have you ever invested in a socially conscious fund and then discovered that companies violated some of your ethical beliefs?
Are you interested in knowing how to evaluate a company’s financials so that you can determine whether an impactful company may also be a good investment? Check out my Stock Valuation and Sanity Check Spreadsheet.