Diving into impact investing might just be one of the best choices you’ll make. Merging your values and your plans to grow your wealth can be a fruitful and clean way to reach your goals. Understandably, impact investments can be intimidating at first but lucky for you, we’re here to help out.
One of the basics you need to know is that there are various types of impact investments out there. Knowing each one can help you better decide what types of investments there are can help you make better-informed buys in the future. Here’s a quick guide on what your options are.
ESG stands for environmental, social, and governance. It’s a set of criteria that helps define a company’s stand when it comes to whether or not they’re providing good things to the world aside from what they offer. Institutional investors, retail investors, and investment firms can have ESG criteria of their own. It’s usually a point system so it’s easy to compare one company’s ESG performance to the other.
This refers to projects or steps that a company makes to ensure that they aren’t causing a huge negative impact on the environment. It can also refer to projects that help improve the condition of the environment as well. This pillar includes addressing various issues such as global warming, carbon emissions, waste disposal, energy and water conservation, and much more.
Companies that have high environmental ratings are typically those that take extra steps to reduce their emissions. Many of today’s big brands have made it a goal to achieve net zero emissions around a decade or two from now. Additionally, many companies also try to shift towards 100% reliance on renewable energy.
This refers to how a company or an organization treats people and communities around them. Social-related projects and matters have grown in popularity over the last couple of years. Most particularly, people are calling for better or equal treatment inside the workplace for minorities and such.
The most common example of social-related matters is how minorities and those from the LGBTQ+ are treated by the company. Organizations are expected to have zero tolerance towards discrimination and they’re expected to provide equal opportunities for everyone as well.
Aside from this, social also involves how companies treat the people and communities that they serve. For instance, an organization that conducts projects to help the poor or minorities in certain communities is typically given high ratings.
Last but not the least, governance refers to how a company policies itself with regard to employee treatment as well as how it manages its board of directors and leadership. Governance also focuses on transparency and how well a company responds to decisions made by shareholders.
Most governance matters are related to leadership. An organization should keep a diversified board of directors and provide equal opportunities for everyone. The organization should also be transparent about its projects, audits, and such to the public to ensure that no form of corruption happens from within.
As we’ve said before, each financial institution has its own ESG criteria. Some firms put more focus on certain pillars than others. If you’re planning on putting extra focus on ESG investments, you can even create your own set of criteria as well.
Bear in mind that companies in varying industries should be rated differently. For instance, those that are in mining are typically given higher standards to reach for environmental due to the nature of their business.
SRI means socially responsible investment. This is seen as a step above ESG as it goes above and beyond the set of criteria for ESG scores. SRI can include personal considerations such as your religious and political beliefs and even your personal values. It requires more personal input and it often leads to a smaller pool of potential investments to choose from.
The socially responsible investment approach could have begun with Quakers, who were members of religious associations in the 17th century. At that time, this group refused to engage in the slave trade. For them, the business of buying and selling people was unethical, and rightfully so.
Another prominent proponent of what we now call the SRI strategy was John Wesley. Substantial Wesley declared that it was a sin to make money at the expense of the well-being of others. He also asked members of the community not to participate in gambling or supporting industries that use toxic substances.
For quite a considerable amount of time, socially responsible investors have avoided supporting what’s so-called “sin industries” such as tobacco, alcohol and gambling. However, an investment trend developed in the 1960s when investors began placing funds in projects that also promoted civil rights.
The sale of protests in South Africa during the 80s is a good example. During this period, private investors and companies concluded to pull out their investments from South Africa, citing racially discriminatory apartheid policies.
Socially responsible investing started simply as a small activity associated with religious groups, but has evolved so much that it is now an established practice. In fact, it’s a concept that’s gaining popularity as it’s embraced by both individuals and businesses.
Lastly, another type of impact investing is supporting companies that are considered a part of EMs or emerging markets. These are companies that can impact a wider selection of industries such as healthcare, education, agriculture, and more. Unlike SRI and ESG investing, EMs are typically focused on supporting smaller names.
The hard truth is that supporting EMs doesn’t always result in considerable gains. In fact, EMs are seen as small investments that can provide substantial returns after a considerable amount of time. EMs can include startups who are creating products that can radically change the world as well.
Ready To Start Impact Investing?
Starting impact investing is pretty straightforward. It’s like regular investing but there are a few steps involved that you need to consider. Here’s how you can get started.
- Start Doing Research
Experts advise researching acronyms and terms you’re likely to encounter in the impact investing space. As you know, there is more than one way to participate in impact investing, from index funds that rate companies based on certain criteria, to capital funds that focus on funding social enterprises. A basic idea of the terms used to discuss your future ventures can help you evaluate your decisions and understand what makes sense to you. Many impact investors I started with asking things like: what does this term mean? What is the US Sustainable Index?” Finding the answers to basic questions is a good start.
- Start Growing Your Network
Others might be a part of your investment decisions, such as wealth managers, financial advisors, spouses, and other family members. If so, it’s better to discuss with them the process of impact investing instead of waiting on them. Start a conversation yourself. Let them know that you care about exploring impact investing opportunities and making sure your investment portfolio is well-aligned with your beliefs and values. If you’re married, make sure you’re both are aligned on the most important criteria when creating a value-focused portfolio, or involving others in your risk tolerance. Money managers can help identify the best leverage options. right foot.
- Start Small
It’s a fallacy that investing in assets means a lower return. As studies have shown, investing responsibly, typically matches, and sometimes even exceeds, that of traditional investments. The truth is that the investments are typically long-term but that doesn’t mean that they are bad in any way. Remember, it’s not a quick race to wealth. It’s going to be a long journey and yours is going to benefit the world at the same time.
As with other forms of investing, don’t go all out into impact investing just yet. Stay calm and manage your assets well. There are lots of opportunities for growth so take your time.
- Expect Returns
With so many options for impact investing today, it’s easy to get lost in your analysis and start to be overwhelmed. Start small, but start now. Impact investing can be likened to trying out a new car — get out, try, and enjoy the ride. It’s fun to invest a lot of money and see how it works and gives good results.”
For example, you can start by investing a small portion of your money in index funds screened on ESG criteria.
Don’t go out there thinking that impact investing is not profitable. In fact, it might just be one of the best things that you can do with your money. It takes a lot of time and effort to dive into new investment ventures but lucky for you, there are lots of sources that can make impact investing a lot simpler.
Impact investing can be one of the most intimidating investment activities that you can dive yourself into. However, it’s very fruitful and it can eventually lead to big things not just for you, but for yourself as well. With the help of the Decent Investor, you’ll soon find the right funds to invest in.