How individuals can have a positive impact while earning a good return investing. What are some examples of socially responsible and impact investments and platforms.
In this episode you’ll learn:
- What is the difference between impact investing, ESG and SRI?
- What are examples of socially responsible exchange traded funds.
- What are green bonds.
- What are some examples of impact investments and platforms.
- What are three ways we can have a positive impact as individuals.
Your investments can go beyond providing you with a good return and helping you finance your life—they can be intentional impact investments that benefit society and the environment and help make the world a better place. In this episode of Money For the Rest of Us, David unpacks what makes a truly impactful investment, and how you can make a difference through intentional decision making within the market and throughout your daily life.
Making impactful individual choices that benefit the social and environmental fabric
Impact investing goes beyond choosing a stock or bond that excludes or includes certain institutions or businesses. It seeks to create positive change and progress in an area or cause that an individual cares about, such as diminishing their carbon footprint, lessening the negative impact of weapons manufacturing, and so forth. It is different from a grant, in that there is a return on investment—money isn’t just being given to a good cause or to a non-profit. Impact investments don’t always provide the highest rate of return, but they should be providing you with some level of return, while also benefiting society and/or the environment.
The three criteria for an impact investment are explained by author Tim O’Donnell. An impact investment must be 1) intentional, 2) have a specific goal of societal improvement, and 3) must include a repayment of investment plus a return on investment. But how is this different from socially responsible investing (SRI)? SRI is value-based investing that seeks to exclude holdings from a portfolio fall that don’t align with an investor’s values. SRI managers rely on ESG (Environment, Social, Government) data that evaluates how companies conduct their business. ESG data is used to screen portfolios. SRI portfolios are focused on stock and bond holdings that trade in the secondary market. In other words, not owning a particular holding doesn’t harm the company because the company has already raised investment capital. SRI managers simply buy and sell securities from other traders. Consequently, SRI portfolio are often used as reputational protection, not because the buyer actually desires to make an intentional impact on society and the environment, but that is certainly not always the case. Listen to the full episode for ideas on easy ways to invest using SRIs, including ETFs and bonds.
How the decisions of just one individual can make a difference
David explains that SRIs, while they can make a difference, usually focus on simply excluding controversial companies and industries. That, however, doesn’t change consumers’ behavior, and a controversial company could still outperform because of buyers’ support. Each individual’s decision contributes to the overall impact of a movement. David uses the example of hikers choosing to blaze through grass instead of staying on the designated trail. It only took the individual decisions of multiple persons to create a new dirt path up a mountain. The same goes for investment decisions. Each individual can make the decision to invest based upon how their money will go towards positively affecting the society and the environment, while also generating a return; they can choose to make purchases and live in a way that promotes sustainability and greater well-being, and they can encourage those around them to do the same.
Three ways to be intentional with your impact investments
David lays out three practical ways that you can go beyond SRIs and make a difference through impact investing. First, is to be mindful of how we spend our money and who/what we support with our purchases. Second, is to not cause negative change with our investments. Not only should we be trying to promote positive change, but we need to make sure that our other investments and spending habits aren’t negatively impacting the world socially or environmentally. Research where your investments are going, what they are being spent on, etc. Third, make sure that there is a positive benefit—both for the company you invest in and for yourself. Make sure there is a positive ROI. David gives the example of Wunder Capital—an investment that helps finance solar panel installation while also paying an interest rate to investors of about 6%. There are many other ways that you can intentionally invest for positive impact, so be sure to listen to the entire episode!
Analyzing what to invest in and why for greater impact
David explains that while impact investing is a newer player in the market, the same analysis strategies used to identify any good investment should apply to finding the right impact investment. You should ask questions and research the investment before you make a decision. Can you explain what the investment is? Do you know what the expected return is? What are the downsides? You need to understand the investment and be mindful of the impact.
Impact investments often have a lower return rate, but that shouldn’t keep you from including them within your portfolio. David explores opportunities for impact investing in the secondary market, including Green Bonds, ETFs, Yield-cos, and the impact investing platform Swell.
Green bonds, though they are an established bond historically, have a very low yield and include a lot of interest rate risk. Yield cos deal with sustainable stocks that include solar farms, wind farms, and such. While they have a higher yield rate, they do rely on the success and growth of the parent company. Swell is a platform that filters through stocks and finds the ones that meet certain criteria. They don’t just exclude certain companies—as with SRIs—they endeavor to find companies with stocks that are actually making the world a better place. Listen to the entire episode for the pros and cons of each of these and for more insight into how you can generate positive impact through intentional investments.
- [0:18] What is impact investing?
- [5:25] How impact investing is different from socially responsible investing.
- [8:50] Different opportunities to invest in a socially responsible way.
- [10:49] The impact that just one individual can have.
- [16:08] Keeping from negatively affecting the social and environmental fabric.
- [18:53] Generating positive impact with our investments.
- [20:01] Analyzing opportunities for truly impactful investments.
- [21:06] Impact Investing in the secondary market.
- [24:55] We each have to decide in what ways we will intentionally invest.
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