What You Need to Know About Impact Investing

We all want our money to matter. As consumers, we have the power to spend where we want. We can support our cousin’s homemade cat food business or our mom’s knitted potholder Etsy store.

The same goes for investing. Impact investing comes in a variety of flavors, but the overarching theme is putting your dollars where your heart is. The causes you believe in, that you want to succeed, that you think will make the world a better place? You can give them your money and make some return in the process.

Different Types of Impact Investing

Impact investing first became a thing in 2007 by The Rockefeller Foundation, a non-profit organization started by the Rockefeller family. It later developed into a term with some pretty clear guidelines. The Global Impact Investing Network says all impact investments should:

  • Intend to have a positive social or environmental impact
  • Make a positive return on the investment, or at the very least, break-even
  • Variety of asset classes (types of investments) and return expectations
    • This means that for an equity impact investment, the return might be below what investors typically expect from an equity investment. So, if the impact investment makes 2% return on their money, that’s below the typical 7%* investors usually expect from non-impact equity investments (*the typical equity return varies by investor and type of investing)
  • Positive impacts are measured and reported back to investors

Although that’s the “strict” definition of impact investing, the term gets thrown around a lot towards other investments that might not exactly match the definition. Another term used to label positive impact investments or companies is ESG-friendly: environmental, social, and governance friendly. Companies that are ESG-friendly should do things like care about planet earth, promote diversity, and treat their employees and customers well.

elephant_impact_investing
I would like to invest in the elephants.

Show Me the Goods

Let’s get to the fun stuff. What are some real investment opportunities that also have good companies behind them? Here are some ETFs that can also give your money the good feels:

ORG: The organics ETF

An ETF that holds shares in 25 different organic food companies. Its largest holding is Chr Hansen, a Danish bioscience company that wants the world to use au naturale ingredients over synthetic as much as possible.

CGW: S&P Global Water ETF

CGW tracks the S&P Global Water Index, which is made up of 50 global companies involved in the water biz. Includes utility, infrastructure, water equipment, and material companies.

CRBN: Low Carbon Target ETF

Tracks the MSCI ACWI Low Carbon Target Index (that’s a mouthful), which copies the MSCI ACWI Index – an index of 1,653 companies from all over the world – and gives greater weight (more importance) to companies with lower carbon emissions and fewer fossil fuel reserves. Although you’re getting less exposure to big-footed carbon companies, this index still exposes you to them in small doses.

You Can’t Sit with Us – Excluding industries from the portfolio

Some investors don’t want to support guns, tobacco, alcohol, weapon producers, or other industries that aren’t really giving out hugs to the world. There are some ETF funds that track major companies but exclude the less desirable ones from their holdings.

DSI: Diversified Social Index Fund

This ETF is only for the good guys, aka the companies deemed to have ESG (environmental, social, and governance) friendly policies. Some members: Facebook, Alphabet, and Intel.

ESG: Diversified ESG-friendly Companies

Provides exposure to high-ranking ESG companies. What got them there: low emissions, diverse board of directors (including a higher percentage of women), saying no to child labor, not supporting controversial weapons, and being anti-coal. Some members: Apple, Pfizer, and Goldman Sachs.

Warning: Not all Do-Gooder ETFs are Equal

There are some ETFs and mutual funds advertising their fund as an impact investment, but holding companies that might not fit your definition of making a positive social impact.

Take a second to investigate the holdings of funds advertising themselves as socially impactful ETFs and make sure you personally align with the list before you buy it.

RECAP

Impact investing: Strict definition created by GIIN (Global Impact Investors Network). Demands positive return, positive impact, and measuring that impact. Often used to describe general investing in “good” companies, aka businesses that respect the Earth, human rights, ethical business, and gender equality.

There are lots of ways your dollars can matter. Watch out for advertising trying to convince you some investments are purer than others, though. At the end of the day, ESG-friendly ETFs still want to make a profit.