Impact Investing for Individual Investors
Many investors are becoming more conscious of where they allocate their money and want to ensure that they are investing their dollars in a way that won’t be a detriment to society.1 Some common ways investors can align their portfolio with their values is by investing in Socially Responsible Investments (SRI) and Environmental, Social, and Governance (ESG) mutual funds and exchange-traded funds. However, one of the lesser-known types of sustainable and responsible investing is known as impact investing. Impact investing has the potential for direct social influence because it is made with the intention of generating a positive and measurable social and environmental impact along with a financial return.2
There are unique differences between each of these three types of investing styles. SRI is a broad term that covers an investment strategy that actively includes or excludes investments based on ethical guidelines. A good example would be a fossil-fuel free portfolio that excludes companies that produce any amount of fossil fuels. ESG investing is a strategy that looks at the Environmental, Social, and Governance characteristics of a company as part of the investment analysis process. This type of strategy may look to invest in companies that have higher ESG scores than their peers or look to exclude companies based on lower ESG scores.
While investors can access an SRI or ESG portfolio, they are constrained in the type of impact they have since they typically own stocks or bonds of publicly traded companies. Impact investing is an investment approach that has a defined societal impact along with financial return. The Global Impact Investing Network (GIIN) cites four characteristics of impact investing:3
- Investment with return expectations
- Range of return expectations and asset classes
- Impact measurement
Individual investors can find impact investment opportunities if they know where to look. One example is by being more intentional about where you allocate your cash. Community Development Financial Institutions (CDFIs) are banks that share a common goal of expanding economic opportunity in underserved communities. When you open a savings account or CD at a local CDFI, that institution can recycle your deposit back into the community in which it operates. There are also investment platforms that give investors the opportunity to diversify their deposits across multiple CDFI’s, allowing for broader impact.
These two ideas only scratch the surface of all the impact investments that are available to investors. Allodium recently gave a presentation on how investors can use the bucket strategy framework to accelerate their impact investing. To learn more about impact investing, you can access a replay of that presentation along with slides on our website here: How to Use the Bucket Strategy to Accelerate Impact Investing.
1. Napoletano, E. & Curry, B. (March 1, 2021). Environmental, social and governance: what is ESG investing? Forbes Advisor. https://www.forbes.com/advisor/investing/esg-investing/
2. GIIN. (2020). What you need to know about impact investing. https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing
The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.