What is impact investing?

Yes, you can make money and help the planet at the same time

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Want your investments to make a difference and earn you solid returns at the same time? It’s possible. In fact, a 2022 study by the Global Impact Investing Network showed that over $1 trillion in global investments fund companies that strive to make a positive impact in our world.

Impact investing helps you to choose companies that offer social and environmental benefits as they conduct business. This can be done through specific mutual funds, or through direct investments in companies that adhere to impact investing philosophies.

Key insights

  • Impact investing is choosing to invest in companies or assets that support social or environmental benefits.
  • Impact investing may include picking specific stocks, funds or even private investments that support a cause or approach you believe in.
  • Impact investing can perform just as well as traditional investments, depending on your investments chosen.
  • Impact investing can help improve society and the environment, but there’s no guarantee your investments are making the intended change you are hoping for.

What does impact investing mean?

Impact investing is a strategy of choosing investments that aim to make a positive impact on society or the environment. This may include companies that have specific policies focused on equality within the workplace, or a company that creates products that reduce carbon emissions.

“Impact investing is (in my opinion) where real change happens,” said Michael Reynolds, certified financial planner and principal at Elevation Financial. “Impact investing goes a step further and includes an advocacy component. Funds that follow this path not only divest with an SRI [socially responsible investing] alignment and by applying ESG [environmental, social and governance] screens, but also submit shareholder resolutions and make use of proxy voting and other tools in order to encourage companies to be better global citizens.”

While traditional investing focuses solely on risk and returns, impact investing focuses on how companies are impacting the world and how they approach business — in addition to how these policies can generate strong returns.

Impact investing … includes an advocacy component. … to encourage companies to be better global citizens.”
- Michael Reynolds, Elevation Financial

There are no specific definitions or laws that define what constitutes impact investing, so many companies or investment funds advertise their impacts through company governance policies, sustainability strategies or environmental impact measurements.

Investment funds that are considered impact investing funds curate a list of companies included in the fund, each with a specific impact it's focused on. This might include clean energy, workplace equality or other social or environmental impact measures.

» MORE: What is a good investment?

Types of impact investing

Impact investing encompasses various approaches, including both SRI and ESG investing. The broader approach to impact investing is investing in companies or funds that aim to improve society or the environment.

ESG investing

ESG stands for “environmental, social and governance” and is an investment approach that evaluates a company’s impact on society, the environment and how a company is governed internally. There are ESG ratings agencies that score companies, like S&P Global and Dun & Bradstreet, to help investors know how companies rate in each of the three ESG categories.

ESG investors focus on high-performing ESG companies, though this does not necessarily mean investing in companies that make the biggest impact overall.

Socially responsible investing

Socially responsible investing (SRI) is a values-based investing approach in which investors put their money toward investments that align with their philosophies on social issues. This may include investing in companies that support gun control measures or avoiding investing in companies such as oil or tobacco production companies.

SRI is less regulated than ESG investing, as there are no SRI ratings agency scores. It is a more personal approach to investing that will vary from investor to investor.

Returns on impact investing

While impact investing may limit what companies you choose to invest in, this doesn’t mean you have to sacrifice performance. In fact, a recent study by RBC Global showed that impact investing strategies have mirrored, and even outperformed, traditional investing indexes.

While impact investing approaches can vary widely, one way to measure is to follow industry indexes. For example, the iShares MSCI KLD 400 Social ETF follows the leading 400 companies in the U.S. that promote socially responsible policies and corporate actions. The performance has almost mirrored the S&P 500 over the past 10 years, offering over 11% average annual returns.

Impact investors are also happy with their investments’ performance. The 2020 Impact Investing Study by the Global Impact Investing Network stated that 88% of impact investors reported meeting or exceeding expected returns.

Bottom line: Impact investing does not sacrifice performance.

» MORE: Invest or pay off debt?

How to start impact investing

To get started with impact investing, first research companies that follow ESG standards or SRI approaches. You can manually search through company websites to find more information about the impact they are making, or review ESG ratings through ratings agencies.

For example, Just Capital is a nonprofit ESG research firm that ranks companies annually. You can review the top 100 ESG companies based on their rating, and then perform further research on your own.

Once you’ve found companies or funds you’d like to invest in, you can find them through most major online brokers and investing apps. You can invest in individual company stock, exchange-traded funds (ETFs) or mutual funds, depending on your favored investment approach.

Reynolds recommends seeking out funds that go beyond just ESG ratings. “In my opinion, if you want your money to go toward real change, you need to seek out the impact component,” he said.

“It's fine to make a statement by investing in ESG-themed funds but divesting from fossil fuel companies (for example) can seem more nebulous when it comes to true impact — these companies don't ‘feel’ it as immediately or directly. The true impact funds work toward improving the behavior of these companies with real advocacy work, which truly has a direct impact.”

Impact investing examples

Impact investing doesn’t have set guidelines or benchmarks to follow, and you can invest in both public and private investments, depending on your strategy. Here are a few examples of impact investing:

  • Investing in a public company with a high ESG score
  • Investing in a fund that only holds highly rated ESG companies
  • Making private investments in a small business that has a positive impact in your local community
  • Peer-to-peer lending (or “micro loans”) to small business owners in impoverished communities

Remember that it’s important to create a diversified investment portfolio to spread your risk across various investments, even within the impact investing approach. This may mean finding a mutual fund or index fund that owns hundreds of stocks, or simply choosing investments across different asset classes.

As with any investment approach, it’s always a good idea to consult with a licensed financial advisor to help you put together a plan.

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Is impact investing better than donating?

Both are a great approach to using your money. Impact investing is choosing to invest in companies that have a broad positive impact on society and the environment. Donating has a more direct impact, and the money is typically used for a specific purpose. Donating is better than impact investing for specific help, while impact investing can have a larger impact on society and the environment as a whole.

Is impact investing profitable?

Impact investing has proven to be profitable and can even keep pace with industry investing benchmarks. According to a study by RBC Global, certain SRI-focused index funds (such as the iShares MSCI KLD 400 Social ETF) have nearly mirrored, or even exceeded, the performance of the S&P 500 over the past 10 years.

What are the risks of impact investing?

While impact investing can help you put your money toward causes and companies you believe in, there is a risk of underperformance. If you choose companies to invest in yourself, you risk concentrating your investments and may see more volatility and potential risk of loss than buying a mutual fund. And while impact investing is meant to cause positive social or environmental change, it’s hard to measure whether your investment is making the intended change.

What is venture philanthropy?

Venture philanthropy is an investing strategy to direct venture capital funds toward philanthropic causes or businesses. These may include funding startups that focus on charitable causes, funding companies that are considered “green” and provide positive environmental impact, or funding B corporations that are certified to provide positive social or environmental impacts.

Bottom line

Impact investing is a great way to put your money where your passion is, and you can earn a solid return while helping society and the environment at the same time.

As a relatively new concept, there are very few regulations or definitions around what constitutes impact investing, so it’s important to do your own research before choosing any investments. But impact investing doesn’t always sacrifice investment performance, and in some instances, it can outperform industry benchmarks.

Article sources

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

  1. Global Impact Investing Network, "GIINsight: Sizing the Impact Investing Market 2022." Accessed Nov. 29, 2023.
  2. S&P Global, "ESG Scores." Accessed Nov. 29, 2023.
  3. Dun & Bradstreet, "Try Out our Free ESG Rankings Analysis." Accessed Nov. 29, 2023.
  4. RBC Global Asset Management, "Does Socially Responsible Investing Hurt Investment Returns?" Accessed Nov. 29, 2023.
  5. iShares, "iShares MSCI KLD 400 Social ETF." Accessed Nov. 29, 2023.
  6. Global Impact Investing Network, "GIIN Annual Impact Investor Survey 2020 Executive Summary." Accessed Nov. 29, 2023.
  7. Just Capital, "2023 Overall Rankings." Accessed Nov. 29, 2023.
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