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.
FEG Insight: Investing with the Head and the Heart by Timothy P. O’Donnell
The most effective individual steps to tackle climate change aren’t being discussed by the Institute of Physics
The climate mitigation gap: education and government recommendations miss the most effective individual actions by Seth Wynes and Kimberly A Nicholas
The Ship Breakers by Peter Gwin—National Geographic
Recycling of ships—International Maritime Organization
Green Finance: the Next Driver of Real Growth? by Dmitri Sedov and Dr. Richard Mattison—S&P Global
Become a Better Investor With Our Investing Checklist
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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 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 was a platform that filtered through stocks and found the ones that met certain criteria. They didn’t just exclude certain companies—as with SRIs—they endeavored to find companies with stocks that were 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.
77: Does Ethical Investing Outperform the Market?
118: Are Renewable Energy ETFs A Good Investment?
140: How Climate Change Could Impact Your Investments and Your Life
262: Better Not Bigger, Circular Not Linear – How the Global Economy Is Changing
340: Climate Change, ESG, and What Should Investors Do?
351: How to Profit From Carbon Investing While Combatting Climate Change
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 251. It’s titled, “Impact Investing and Intentionality.”
A month or so ago, I received an email from Rhada. She wrote, “I have listened to your podcast for the past three years, ever since I was pressure washing and painting a hotel on an island in Thailand. I appreciate all the various subjects you touch on, and particularly your podcasts that discuss climate change and how that will impact financial portfolios. I was wondering if you would consider a podcast that discusses how to choose socially responsible stocks and bonds that steer away from adding CO2 into the atmosphere, and also are not aiding the weapons manufacturers. I’m trying to make every individual choice I make reduce the suffering on our planet, and maybe even add to the overall benefit of the social and environmental fabric. Is there a way to partake in the market with all this in mind?”
I love how she put that. She wants to make individual choices that add to the overall benefit of the social and environmental fabric, and do so by partaking in the market. What she’s describing is really what is known as impact investing. This goes beyond socially responsible investing, which typically is associated with buying stocks and bonds that meet certain criteria or exclude certain criteria. I’ll talk about that in a minute.
What is impact investing?
Impact of investing. This was a new concept to me back in early 2015. The former executive director of a community foundation that I had worked with, who I was their investment advisor, he approached me about being on the board of a not-for-profit he was starting. It was called Inner Mountain Impact Investing. He explained what it was. It was a little confusing to me. He mentioned that when you give a grant, which is what a lot of foundations do, it is effectively, from an investment standpoint, a 100% loss. You just give the money away. There is no return. Whereas impact investing, you earn a return. The money is recycled and then you can deploy that capital in another cause.
One of my former associates at my old investment advisory firm, Fund Evaluation Group, recently wrote a paper on impact investing, and I’ll link to it in the show notes. His name’s Tim O’Donnell. The paper’s “Investing with the Head and the Heart.” He writes, “An impact investment is not a grant, which assures 100% loss of capital. Unlike a grant, there’s an expectation of a return of capital in a range of possible returns on capital with impact investing. On the other side of the spectrum are traditional investments that seek to maximize return.” Sometimes with an impact investment, you’re willing to take a lower return than you might otherwise because of the social good that it causes.
O’Donnell continues. “In between these two extremes are the infinite shades of impact investing. Investments can range from relatively low-risk opportunities, like local loan guarantees or microfinance, to higher returning strategies such as for-profit venture fund. An impact investment stands in both worlds and acts as a bridge between making money and spending money.” Then he has three criteria for identifying impact investments.
The first is intentionality. Intentionality, he describes, “An investor should have the explicit intention of having a positive impact that aligns with an organization’s goals.” Wanting to have a positive impact. The second criterion is a specific goal of societal improvement. So, having an impact that aligns with your goals and wanting to improve society. The third thing is a repayment of the investment plus a return on the investment. That’s how this is different from a grant.
So, we’re going to look at ways that as individuals we can participate in impact investing. A lot of what’s going on there is with institutions, like this not-for-profit I was working with, which ultimately didn’t work out. But the idea is you have pools of capital that want to invest with impact investing, but they have trouble finding those opportunities, and sourcing those opportunities continues to be a challenge for institutions, as well as individuals. Another resource on impact investing was shared with me by Sarah. Her firm is a PR firm called Women Online. The website was Invest For Better. What Invest For Better is, it’s a non-profit campaign whose mission it is to help women demystify impact investing, and take control of their capital and mobilize their money for good. There’s resources there to understand impact investing.
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