Impact investing is an essential tool for high-net-worth investors who want to make a positive impact in the world while also driving toward their financial goals.
Groups and individuals have long seen the importance of taking industry into account when tackling ethical issues. From Pope Clement V’s ban on usury income at the 1311 Council of Vienne to the ongoing fossil fuel divestment movement, investors have used capital to affect the world.
As investing has become increasingly sophisticated and customizable, the number of opportunities available for effecting change through investment have grown. Impact investors have more tools at their disposal than ever before. Fiscally sound and progress-pushing portfolios run the gamut from hyper-focused to broad. For example, a pacifist investor can assiduously avoid investing in armaments while an investor more generally interested in climate change can select carbon-conscious businesses in diverse industries.
The Positive Difference
Impact investing can go further by actively channeling investments to companies that align with an investor’s values. The market for this has grown dramatically in recent years. According to a survey of 61 organizations by the Global Impact Investing Network (GIIN), assets devoted to this kind of investing have surged from $25.4 billion in 2013 to $35.5 billion in 2015.
While the most common practitioners of this kind of investing include pension and philanthropic fund managers, the combination of positive social change and healthy financial returns has made it more attractive to high-net-worth investors and family offices.
At the same time, opportunities for investors have become more diverse, including impact-targeted private equity, venture capital, and mutual funds weighted according to their positive impact on the environment, society, and corporate governance—factors known collectively as ESG.
One of the newest innovations is the social impact bond, also known as pay-for-success financing, a fixed income security that uses private capital to fund social services like job retraining, low-cost housing, and programs for people transitioning out of incarceration. Social impact bonds are increasingly crucial as municipal, state, and federal budgets continue to shrink, reducing the public money available for social services.
Positive for Portfolios
Making a positive impact may also be good for portfolios. For example, the ETHO Climate Leadership U.S. ETF, which selects companies based on carbon footprint while excluding fossil fuel companies, has beaten the one-year return of the SPDR S&P 500 ETF Trust by a full 0.5%.
Impact investing offers a wide range of opportunities, from sustainable agriculture and the equity funding of drug rehabilitation programs to encouraging greater diversity and inclusion within large organizations.
Until recently, no industry standards existed for rating companies on impact performance, which made evaluating possible investments difficult. GIIN has generated the Impact Investing Benchmark, allowing investors to assess their ESG impact and returns more easily. With the growth in opportunity and greater certainty that companies truly are making an impact, now is an excellent moment to begin investing.
Today’s impact investor joins a long and rich tradition of affecting change through capital. It’s important to be aware of the many challenges and diverse opportunities on the horizon. Climate change alone has pushed advances in industries like solar technology, electric vehicles, water conservation, and more efficient farming. With income inequality rising globally and social issues such as racial equity, women’s empowerment, and mass incarceration at the forefront, there’s no shortage of areas to combine the greater good with financial performance to fund a better world.