Are you interested in the responsible investing trend? Looking for a way to get a competitive return on your investment without compromising your values? Impact investing allows you to directly support environmental and social change. Keep reading to learn more about impact investing, how it compares to ESG investments, and whether or not it’s right for you.
What Is Impact Investing?
The concept of impact investing was introduced in 2007 by the Rockefeller Foundation and others. The goal is to marry financial return alongside a measurable social impact. This type of investing is growing rapidly, with estimates in 2022 reaching $1.164 trillion.
Impact investors put their money in funds that consist of businesses driving environmental and social change. This can be in both the emerging and developed markets. Impact investments typically support areas like sustainable agriculture, renewable energy, conservation, microfinance, housing, healthcare, and education.
Who Can Be An Impact Investor?
Impact investing can be pursued at both the individual and institutional levels. For example:
- Fund Managers
- Development finance institutions
- Diversified financial institutions
- Private foundations
- Pension funds and insurance companies
- Family Offices
- Individual investors
- Religious institutions
How Does Impact Investing Differ From ESG Investing?
Some people use “ESG” and “impact investing” as interchangeable terms, but there are some important distinctions.
What is ESG Investing?
- ESG stands for Environment, Social, and Governance.
- ESG investors choose to invest in companies with a high ESG score because they want their investments to align with their values.
- However, ESG-designated companies are not necessarily making a direct impact on environmental, social, or governance issues.
- Instead, ESG investors are supporting companies that are committed to protecting the environment, doing good in the communities where they operate, and meeting high standards for management and corporate governance.
What is Impact Investing?
- Impact investing means using your money to drive the changes you want to see in the world. Impact investors want to get a good return on their investment, but they also want to invest in businesses that are driving change.
Overall, you can think of the difference between impact and ESG investing as a question of how you want your investment funds to count. Do you want to support existing companies that operate in a way that matches your values? Or, do you want to help newer companies make a direct impact in the areas that you care about?
ESG is a framework that helps investors understand the choices an organization makes. Impact investing is a strategy that helps investors make a difference directly from their investments. Both ESG and impact investing seek a return on the investment.
One last distinction: While all impact investment funds are ESG-compliant, not all ESG funds are impact investments.
Four Tenets of Impact Investing
These four characteristics of impact investing define investors’ expectations for what impact investing means and what they can hope to get out of it.
- Intentionality: Perhaps the primary characteristic of impact investing is the investor’s intention to make a positive social or environmental impact through their investment decisions.
- Data-driven: Impact investing may have a lofty goal, but it should still be based on evidence and data, not instinct or hunches.
- Performance-measured: Impact investment funds should measure the actual impact produced to ensure investors are getting the desired results.
- Knowledge sharing: Impact investors should share their experiences, using a shared language, to help grow the industry and help others learn.
Trends In Impact Investing
Interested in becoming an impact investor? Here’s what to watch for in this space:
- More focus on women-owned businesses
- More focus on the climate crisis
- Greater adoption of digital technologies to track and measure impact
- Standardization in the industry to avoid “impact washing”
- Collaboration between investors and NGOs
- A shift from broad, diversified investments to more focused and singular themes
- Partnership between Impact and EGS investments
Is Impact Investing a Good Fit For You?
As with many other questions around money and investing, the answer here will depend on your personal situation, values, and long-term goals. There are a variety of impact investments to choose from, but you should always do your research first and ask questions. Be realistic about the return you can expect on your impact investment. All investments carry risk, so make sure your choice of investment matches your risk tolerance (high, medium, or low). Finally, remember that you can also volunteer your time or make charitable donations to your favorite causes if you decide not to pursue impact investing.
Talk to our Osaic Institutions Financial Advisors for personalized advice!
If you have questions about impact investing, want to know which investments will best support your goals, or just need help developing an investment plan, F&M Financial Services is here for you. Schedule an appointment with an Osaic Institutions Financial Advisor with F&M Financial Services at any of our locations today!
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