What is Impact Investing?
Do you care about where your money is going?
Does your investment portfolio align with your interests?
Balance the risk of investing by spreading your resources across a number of different opportunities. It’s called asset class allocation. For example, you might invest capital as cash, into real estate or an etf. This strategy is one way to protect your hard-earned cash against market disruptions or corrections.
However, some investors take it a step further with impact investing. In fact, 75% of investors reported wanted to incorporate sustainable investing into their strategy during a 2020 survey.
It might be time to think about the effects of your investment decisions, whether you are using a fund manager or manage the financial returns yourself. Let’s consider environmental, social and governance projects.
Products or services which have a direct, positive impact on the environment is known as eco or green investing. But supporting environmentally-focused opportunities doesn’t just mean evaluating companies and brands on their potential financial returns. Impact on the local or global ecosystem also matters!
There is a huge movement towards environmental and sustainable investment among the millennial population, with over 100% increase in this investment strategy between 2012 and 2016.
The challenge is that there is no standardisation or regulations to distinguish truly ‘green’ companies from those who are using the ESG label as a marketing ploy to appeal to investors.
Therefore, those who wish to invest in environmental projects should have a set criteria in place. You are likely to have a good understanding of various environmental issues that already exist, but it can be easy for brands to greenwash their activities.
The other issue for ESG investing is that many of the companies with the best environmental impact underperformed financially. So, finding a balance between a value-based investment strategy and a financially-sound approach is important.
In saying that, it is not impossible to create returns from a totally environmental portfolio.
Examples of environmental investment options include:
- water filtration systems,
- green energy businesses,
- electric transportation,
- waste reduction.
Specifically, your portfolio might include projects relating to agriculture, sustainable fishing, solar power or the harvesting of geothermal energy, for example.
Investing in these types of projects are likely to result in measuring impacts, such as the increased generation and access to green energy sources, resulting in lower gas emissions and the slowing of global warming.
Social investments are not quite as clear-cut as their environmental counterparts. Typically, businesses receive funding as a repayable loan in order to achieve a positive social impact. This means that this type of funding is limited to charities, NGOs and other social enterprises.
But what exactly is a social enterprise?
Well, while they are still businesses aiming to make a profit, these corporations also have a social mission in mind. They consider interpersonal relationships, and aim to tackle problems such as
- civil unrest,
- medical problems
- or poverty
Similar to other types of socially responsible investing (SRI), it has its challenges. There is often a lack of clarity among the deliverables on projects, for example. It means that projects can be wrongly deemed successful or unsuccessful due to the mudding of data and wrong performance indicators.
Examples of social investment options include Toms shoes, who began by providing one free pair of shoes for every pair bought. Alternatively, Brewdog is a beer company with registered B Corp status working towards reduced inequality through the living wage scheme.
One unique benefit of investment into social enterprises is the cyclical nature of the investment loop. Where projects succeed, the profits can be recycled to grow these organisations, leading to scaled social impact.
Governance investment opportunities are focused on the legal, regulatory and compliant impacts of your financial decisions. As financial planner Lisa Footes says:
“Responsible investing is about ‘doing the right thing’, encouraging sustainability and contributing to positive, lasting change”.
Governance is exactly this: it delves into the decision-making process behind actions at a company and encourages investors to consider which are more fair or just than others. Asset allocation might depend on the governance budget of a company, alongside it’s transparency in the marketplace, for example.
Since governance relates to the people and processes behind companies and organizations, many of the issues and challenges behind investing with this strategy also pertain to the employers and employees. For example, bad governance practice includes tax avoidance, bribery or corruption and the executive pay gap.
One example of a ‘poor’ governance investment decision would be to buy stocks from Amazon, for example. Firstly, there is a stark contrast between the income of company director Jeff Bezos (net worth $200 billion) and his lowest paid German workers (just €12 per hour). Furthermore, the company is reported to have avoided paying corporation tax entirely in 2020 despite sales of $44 billion in Europe, widely considered unethical.
Community Impact Investing
One of our core values here at Financial Independence Europe is about community, and more specifically, community altruism. This refers to a group of people with a collective goal to help and give to others.
ESG investing supports community altruism by validating the cause and generating real change for climate, social and governance issues. It also allows investors to bask in the ‘feel good effect’, resting in the knowledge that their investment decisions are leading to positive change.
Impact investing can also contribute to a change in the standards and practices that companies use to operate effectively. In order to meet the demand of investors who value ESG; brands must prove their ethics against a stringent exclusionary criteria. It means that new rules and regulations may be implemented to better protect employees, the environment or the community against fraudulent practices.
If this is the encouragement it takes for companies to update their ethics profiles, we think the altruism community is doing its job!
Finding ESG Investments
So, how best to find impact investments?
Firstly, you should head over to the Global Impact Investing Network. This organisation develops impact investing strategies and personally vets companies to identify deal opportunities. You should be able to research here, as well as take part in expert training in order to spot good impact investing opportunities.
Secondly, cultivate your own exclusionary criteria in order to weed out the fakes. Let’s be honest, many brands will go to the lengths of embellishing their achievements in order to attract investors. Having your own ticklist is an important way to avoid being duped.
Lastly, why not join a forum or discuss your investing habits with others in the altruism community?
Here at Financial Independence Europe, we run a Facebook group for like-minded individuals who are interested in networking. We encourage discussion about financial independence, investing, and more- join now!