Impact Investing Can Make Money While Making Change

Joseph W. Chase, CFA® BY: Joseph W. Chase, CFA® 10.23.17

What to Expect if You Decide to Pursue an Impact Investment Strategy

Your investments should strive to meet all your objectives, whether that is solely focused on the bottom line, or also having an impact on the world around you. In addition to securing a financial future, more and more individuals and families are choosing to invest in strategies that are focused on making positive change.

Impact investing is growing in popularity with investors as an opportunity to meet their long-term investment goals, while seeking to make a positive, lasting impact on the world.

What is Impact Investing?

It is difficult to boil impact investing down to a single definition, as its meaning can vary from person to person, depending on the overall impact they wish to make.

Since there is no “one size fits all” method to crafting an impact-oriented portfolio, it’s beneficial to work with a knowledgeable financial advisor who can help you develop a cohesive strategy. Successful impact investing allows you to accomplish impact-oriented goals as well as financial objectives.

Here we explore the 3 strategies related to investing with an impact in detail and explain what you should expect from your advisor.

  1. Exclusionary Impact Investing

Exclusionary investing refers to the practice of restricting certain types of investments from being held in your portfolio. Common restrictions include oil and gas exploration companies, tobacco companies, gambling stocks, and firearms manufacturers. If you are interested in an exclusionary impact investing strategy, you should expect your financial advisor to help you customize a portfolio that eliminates exposures to specific industries. This can be done by removing certain asset classes, or by placing restrictions on separate account managers to exclude certain holdings. You can choose to restrict certain industries and/or specific stocks, all while maintaining exposure to the rest of the market as part of a well-diversified portfolio.

From a broad economic perspective, the practice of exclusionary impact investing could theoretically raise the cost of capital on companies that are not socially responsible or impactful, making it more expensive for these companies to raise capital in the future.

  1. Inclusionary Impact Investing

Unlike exclusionary investing, inclusionary investing seeks out certain types of investments, or investments with certain characteristics, in which to allocate capital. This approach is best suited to active management, often obtained through mutual funds, because evaluating criteria that fits an impact mandate is a qualitative and quantitative endeavor best handled through active management.

Depending on personal preferences, different funds may be suitable for different individuals and families. Some funds use systematic criteria to tilt exposures to companies with better ESG rankings. Other funds are dedicated solely to holding environmentally-friendly companies. Some seek out companies with responsible governance practices such as higher-than-average female representation on their executive teams and boards of directors. If you are interested in an inclusionary impact investing strategy, you should expect your financial advisor to leverage relationships with fund managers to provide recommendations that are best suited to your goals.

The economic rationale for this approach is that companies with a long-term environmental and social record and better corporate governance may deliver better results for their shareholders over the long term.

  1. Direct Funding of Impactful Companies

Directly investing in impactful companies can be done both in public and private companies. Stock picking in public companies can be a time-consuming endeavor, and for even the most experienced individual investors the results may be disappointing. Working with an advisor to identify long-term opportunities may yield better results.

You may be presented with opportunities to make early-stage investments in private start-up companies with impactful products or services. Direct funding in start-up companies can have high return potential; however, they also come with commensurate risk. If you are interested in a private direct investment strategy, your advisor should help evaluate the investment’s merits, potential risks/rewards, and help to size investments appropriately to be part of a well-diversified portfolio.

An Allocation to Impact Investing Can Make Money and Make Change

Impact investing as part of a diversified portfolio can make a difference for both society and your wealth. If you wish to make a positive change in the world around you, you should work with a financial advisor who can help you do it in a way that’s balanced for your cause and for your financial future.

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