How To Get Into Impact Investing

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 10 minute read

Today, social and environmental issues are hot themes in the United States. Two of the most pressing concerns confronting the country today are racial and socioeconomic injustice, as well as the environmental impact of burning fossil fuels to provide the power required to sustain a sophisticated civilization.

Consumers all throughout the country are making significant adjustments. Many homeowners are opting to install solar panels on their roofs, while windmills providing sustainable energy are rapidly dotting the rolling hills of the Midwest.

At the same time, racial injustice rallies are sparking a huge debate in Washington, D.C., where the country’s first Black female vice president, Kamala Harris, is collaborating with President Joe Biden to find answers.

People naturally desire to get engaged and have a positive social influence. However, many people struggle with determining how to promote social and environmental reforms. The good news is that you can assist change by investing in a technique known as social impact investment.

About Social Impact Investing

One common reason to invest is to earn a profit. The goal is to make a profit by purchasing stocks and other assets at a cheap price and selling them at a higher price in the future.

The end aim of most impact investors is similar. The ultimate goal of any investor is to make money. When you invest, you’re doing more than simply letting your money grow through market gains; you’re also showing your support for the firm (or companies) you’re backing.

An impact investment is one made with the dual intention of achieving financial returns and bolstering the operations of a company engaged in socially or environmentally responsible practices.

Stocks’ financial performance is only one factor considered by investors who want to make a difference with their money. When deciding where to put their money, these investors consider not just the financial returns on offer, but also the social and environmental impacts of the firms in question.

As more people become concerned about social and environmental concerns, the impact investing industry is expected to grow rapidly. Several exchange-traded funds (ETFs) have formed with the mission of investing in firms that are making a difference in at least one area of social impact, and many individual companies are consciously engaging in the betterment of their communities.

Investing for Racial Impact

Recent tragic encounters between unarmed Black males and police in the United States have shifted the spotlight onto systemic racial inequalities in the country. The problem has been around since the time of slavery, as reported by USA Today.

This downward spiral has unfortunately not stopped. At least 135 unarmed Black men and women have been shot and killed by police officers in the United States since 2015, reports NPR.

Although police brutality is certainly a problem, the discussion of racial justice has expanded much beyond that. Statistics show that minorities’ access to economic possibilities is significantly lower than that of white Americans.

According to the numbers, white Americans have a significantly better probability of becoming highly educated, successful company owners, and earners than their minority counterparts, which include blacks, Hispanics, and other ethnic groups.

Investing ethically may give you the power to back a cause and make a difference.
You may accomplish this by actively seeking out investment opportunities that benefit underrepresented groups. You might, for instance, put your money into Nike or Walmart, both of which have donated large sums to organizations that help people of color.

Also, there are minority-owned businesses in which you can invest. Investing in the many publicly listed firms that are owned by minorities like Blacks and Hispanics helps to support businesses that are recognized for providing minorities with opportunities to run organizations and produce substantial salaries.

Investing in Environmental Impact

The environmental damage caused by using fossil fuels is another hot subject in the United States. Wildfires are lasting longer and becoming more difficult to control as the planet warms and storms are getting more common and powerful.

To protect Earth and its inhabitants, radical measures are required.

The production and use of renewable energy is rapidly increasing. NextEra Energy, along with other large utilities, is moving its focus away from traditional coal and nuclear power in favor of investing heavily in renewable energy projects like solar and wind power farms that will have a positive impact on the environment.

If you want your grandkids and their families to live in a healthy, safe world, investing in green energy and environmentally aware firms is a good way to do it.

Green investing, or investing with a focus on environmental effect, has gained popularity in recent years. Many exchange-traded funds (ETFs) are dedicated to making investments in businesses that either protect or enhance the natural environment, or that develop and use renewable energy sources.

Educational Impact Investing

The vast majority of people believe that all children, regardless of their background, should have access to a high-quality education. Too frequently, the reality falls well short of the ideal.
In the United States, your prospects of getting a good education are disproportionately affected by the color of your skin. Schools serving low-income neighborhoods, where minorities are overrepresented, frequently operate on a shoestring budget.

If they don’t get a good foundation in elementary school, minorities in the United States will have a harder time getting into competitive universities.

Fortunately, some businesses are developing solutions to this issue. It is the mission of many new urban learning centers to provide students with the skills they’ll need to succeed.
Many corporations furthermore give to organizations that work to better public schools in metropolitan regions. For instance, through its AmazonSmile initiative, gives money to several organizations working to better schools.

A wonderful method to have an effect on the campaign to enhance education for all is to invest in firms that aim to increase educational possibilities in urban populations or in corporations that support education via contributions.

Investing in Health Care Impact

The American healthcare system is another big institution that badly needs updating. The skyrocketing expense of healthcare is a global crisis.

Unfortunately, racial differences have a role in health care inequalities. Two key difficulties are highlighted by the fact that Black people are disproportionately affected by COVID-19 deaths:

  1. Access. The majority white population in the United States has easier access to high-quality medical services than minorities.
  2. Possibilities for Profession. Jobs in customer service tend to pay little, and minorities are disproportionately represented in these positions. Many people from underrepresented groups in the workforce were unable to stay home and avoid spreading the disease because of the nature of their occupations.

Given the foregoing, it’s clear that minority groups require far better access to high-quality medical services. There are hospitals whose sole mission is to help medically underprivileged areas.

You may help effect change by purchasing stock in those firms. Further, there are a number of diseases for which there are now no effective treatments. However, a large number of businesses are dedicated to discovering treatments for these diseases by recruiting the best minds in the world’s scientific community.

You may rest easy knowing your money is going toward improving the lives of people in your community and throughout the world by investing in these firms engaged in medical research.

Global Impact Investing Network (GIIN)

The mission of the non-profit organization known as the Global Impact Investing Network (GIIN) is to increase the volume and quality of social and environmental benefits made via investments.

When looking to invest in ways that promote positive social and environmental change, the GIIN website is an irresistible resource for knowledge, education, and statistics.

The firm provides a meeting place for those whose financial strategies are geared toward social impact. The organization has also created IRIS+, a set of measures used to evaluate businesses on their social, environmental, and financial impacts on the world at large.

The GIIN website’s research section is particularly helpful. Investors may have a greater grasp of the breadth and depth of investing for impact with the data provided in this area, which includes market performance and trends.

Finally, the GIIN provides training for first-time investors to provide them with the skills they need to make a difference in the social sector.

How to Begin as an Impact Investor

You’ll be happy to know that, as a private investor with a desire to make a difference, you won’t have a hard time getting going. The trick, like with any investment strategy, is to choose high-quality businesses that fit well with your objectives.

Okay, so what’s the procedure for achieving that? Follow these guidelines to get started in the correct direction:

  1. Begin with industries you are familiar with.

It’s crucial to seek possibilities in industries you understand whether you want to invest traditionally or want to create a social or environmental effect with your investments.

The key to generating money in the stock market, as many a successful investor will tell you, is research. So, you’ll have an advantage if you have a solid grounding in a specific field. Furthermore, there is a high probability that you have an interest in the industry in which you have expertise.

You can make money investing in any industry, but if you find the industry intriguing, you’re more likely to learn as much as possible about it before investing. In the end, it will probably be worth you to dig more into the topic.

Get started with what you know: research familiar sectors and identify three to five equities that represent companies whose products you already know and use.

  1. Examine the Investment’s ESG Criteria

Investigate the ESG metrics of each stock on your list once you have compiled them. The Yahoo! Finance ESG Risk tool is one convenient method for doing so. You may get this information on the quotation page of any stock ticker by clicking the Sustainability tab.

Enter in your browser’s URL bar to get sustainability information for Apple, or visit the company’s stock quotation page and search for the Sustainability banner.

The SustainAnalytics ESG criterion risk assessment system is the basis for this tool, which analyzes ESG factors and presents risk in a simple numerical format.

If you use Yahoo! Finance’s service, you may get a comprehensive assessment of your level of risk. You can see from the score if the stock is low, medium, or high risk in terms of its potential effect on your portfolio.

If the level of risk is modest, it’s likely that this investment will have a significant positive influence on your life if you pursue it. If the stock’s risk level is too high, you should cross it off your list.

You may now cross some names off your list. It’s time to do some serious investigation, guided by the change you wish to bring about. Learn more about the company’s efforts to reduce its carbon footprint and its support for environmental organizations by reading up on its philanthropic giving.

Check out the organization’s efforts to better urban areas and its charity contributions to topics you care about if you want to make a difference in the world. If you find that the firm you’re looking into is having a significant effect on issues that are important to you, then you’re on the correct route. If the firm you’re considering isn’t changing the world in any significant way, you may cross it off your list.

  1. Traditional Due Diligence is used to evaluate the investment.

Your investment dollars should have a positive social or environmental impact, but you should also aim to generate a profit. The company’s influence on your favorite causes is meaningless if your investment is losing money.

Therefore, before investing in a stock, you should do the standard checks to make sure it fits with your overall investment plan.

Investigate the company’s past stock performance, the caliber of its management, the size of the market it hopes to capture, and its marketing and distribution efforts. The company’s potential to lead in its field and its economic moat are also something you should look into. You should exclude the stock from consideration if your research reveals any warning signs.

  1. Invest in the Stocks That Are Still on Your List

The stocks that remain on your list should be those of firms that are doing meaningful work in the social and environmental sectors that matter to you, and that also provide solid investment prospects in line with your investment strategy.

Once you’ve decided how much to invest in each company on your watch list, you may start buying. The 5% rule is a good allocation approach for those just starting out in the investment world.

  1. Repeat as necessary.

There is a good chance that you have bought at least one stock by now. However, a diverse portfolio of investments should include many more securities than just one or two. If you want to build a portfolio of securities that can make you money while also improving the world, you need to return to Step 1 and pick another three to five stocks to investigate.

Bottom Line

Investing has always been and always will be about amassing money. But things are changing as more and more people realize that their investment portfolios may improve lives and economies on a local and global scale.

The best investments, as always, are those that are preceded by extensive study. Do your homework and have a solid grasp of what you’re putting your money into, whether your goal is pure wealth accumulation or a combination of impact and wealth creation.

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