Investing in companies that make a positive impact on society and the environment is becoming more popular. Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact. Socially responsible (SRI) and environmental, social, and governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
In the past, mutual funds that invested in socially and environmentally conscious and responsible companies were the main offerings. However, today’s impact investors are going one step further, looking to invest in bonds and other investment vehicles that invest directly in socially-oriented projects. An example of a vehicle used in impact investing is a microfinance loan, which helps people with little or no access to capital start a new business. High-net-worth individuals, in particular, are finding these offerings attractive and are willing to take on some calculated risk to invest in them.
What may have begun as a niche for wealthier investors is starting to get the attention of the larger retail market. The number of organizations offering these products is increasing, such as ImpactAssets, which offers donor-advised funds to individuals and advisors looking to produce positive social and environmental change. Each year, the organization publishes a list of 50 investment managers who specialize in impact investing techniques, called the IA 50.
Big investment banks are also taking note, such as Goldman Sachs, which has jumped on the impact investing bandwagon. In 2014, it rolled out its GS Social Impact Fund, which deploys capital toward the physical, social, and economic revitalization of disadvantaged communities across the U.S. The fund’s investment strategy is to address social challenges and to mobilize new sources of private capital into the social impact arena while also providing its investors with a financial gain.
With investor demand for impact investing products continuing to rise as the idea becomes more mainstream, several financial institutions, such as Morgan Stanley, Merrill, and UBS Group, have also been developing impact-investing platforms that their wealth advisors can tap when clients request impact investment funds geared toward a certain cause. The most recent GIIN study surveyed 294 impact investors and estimates the size of the market today is in excess of $715 billion. The report also found that a majority of respondents reported that their impact investments were meeting or exceeding their financial expectations. Approximately two-thirds said their investments were targeting market-rate returns.
The next generation of investors, millennials, is already exhibiting a desire to put their investment dollars behind projects, companies, and funds that are in line with their own core values. Studies show that these investors are also now turning to financial professionals to help provide them with opportunities to generate a strong financial return while creating a positive social and environmental impact.
Takeaway
Impact investing is a rapidly growing and exciting field that offers investors a unique opportunity to create a positive impact on society and the environment, while also generating solid financial returns. As the world becomes increasingly conscious of the need for sustainable and responsible investment options, the demand for impact investing vehicles is on the rise.
With a wide range of investment options available, including mutual funds, exchange-traded funds, and individual stocks, investors have the flexibility to choose the investment vehicles that best align with their values and investment goals. Moreover, the growth of impact investing has made it more accessible to retail investors, providing them with the chance to make a positive difference with their investments.
As companies and governments around the world continue to prioritize sustainability and social responsibility, the impact investing landscape is likely to continue expanding, creating new opportunities for investors to support companies and initiatives that align with their values. Ultimately, impact investing is a powerful tool for investors who want to make a positive difference in the world while still achieving their financial goals.
