Impact Investing – you may think it’s a new buzzword, but it’s nothing new. It has been around here in the U.S. since the 1700’s and there are many examples of specific investment mandates by many religions for millennia.
Many investors want to be sure their investments are aligned with their values. In recent years, these strategies have become more prevalent. It’s always important to keep the core principles of investing (like diversification, risk management, and fee management) at the center of portfolio construction, and thanks to more options in the last several years, that’s more possible than ever before.
Here are some common impact investing strategies:
Most people would choose to use mutual funds and/or ETFs to achieve broader diversification than what most investors could achieve by using individual stock or bond holdings, so we’ll focus on mutual funds and/or ETFs for now.
Impact Investing is a broad term that is a bit of a catch-all for the category. Within it, you can have any number of screens to determine the right investment strategy to have the impact you’re looking for.
Impact investing may be as simple as choosing to shop locally, or purchase items from businesses that support or advocate for causes that are near and dear to you. It can also mean choosing to invest in companies that share these values and put them to work in their own business practices.
Socially Responsible Investing
The most common form of this kind of investment uses a negative screen to pull out industries associated with alcohol, tobacco, and gambling. Some may also screen out firearms or companies involved with the production of weapons. There are others that may use a positive screen to invest in companies that have certain worker policies, or show dedication to human rights.
For example, if you’re interested in learning whether a certain fund invests in firearms, there’s a site that will tell you: https://goodbyegunstocks.com/
Many investors are interested in choosing businesses that promote environmentally friendly business practices, promote preservation, or have governance practices that are aligned with sustainability. These goals may be accomplished through a variety of means, depending on the industry or business involved. It could be a company that offers carbon offset credits, or purchases them for their own activities. It could be a paper company with strong practices tied to the sustainable harvesting practices of timber. There are companies that are focused on developing new advances in solar, wind, or water energy. There are a number of ways to invest in sustainable businesses.
Today there are more choices than ever before, which can be both good and bad. Good, because more specific screens can be applied to reveal investments that are aligned with specific values. Bad, because it can be difficult to decode all the language different investment companies use to develop those screens.
Each fund manager can choose how they develop the appropriate screens for their fund, so it’s important as an investor to understand the differences of philosophy on how companies are included or excluded. For example, one fund has decided to base their screens on percentage of revenue derived from the exclusion list parameters. So, if a company still sells the offending item, but derives less than 10% of revenue from it, the company may still pass the test and be included in the fund.
We work with our clients to determine the best portfolio for them. It may not always include any of these options, but when it does, we’ll help guide the process to be sure there’s a good match!