What’s not to love about impact investing? It’s good for the planet and society, and there’s no shortage of ESG investing opportunities in today’s market. Yet, I still hear from clients who don’t feel ready to explore impact investing.
I’d say, “I don’t get it,” but really, I do. People are naturally hesitant to make changes with their money. But impact investing is actually simpler than many people realize. It’s just investing according to your values, with the added benefit of helping to accelerate new business models and technologies that can make the world a better place.
So why are some people who already understand the positive impact their money can have still slow to consider impact investing? Here are a few of the things I hear.
5 Excuses Against Impact Investing—And Why It’s Time to Reject Them All
"The options are limited."
Back in the 1990s, investors only had a handful of impact funds to choose from. Today, investors can pick from thousands of mutual funds and exchange-traded funds (ETFs).1
Is your top concern renewable energy? You could consider a low-carbon exchange-traded fund, like CRBN. In fact, you can zero in on just about any cause that you’re passionate about and find a match. Examples from the ETF world include SHE, a gender diversity fund; SUSA, a fund that screens out tobacco companies; TAN, which avoids companies that hold fossil fuel reserves; and the list goes on and on.*
In the world of impact investing, more than 1,720 organizations manage $715 billion in assets.2 Asset managers are set to launch more than 200 new ESG funds in the United States between 2020 and 2023, which would more than double the activity of the previous three years, so there will soon be even more choices.3
"Returns are bad."
Make money and support positive change in the world? I understand why some people might think it’s not possible to do both. But the data shows that impact returns are comparable to traditional investments: One analysis found that 80 percent of reviewed studies showed that sustainable practices have a positive influence on investment performance.4,5 And investors themselves say they are happy with the returns they get. One survey found 68 percent of impact investors reported that their investments met their financial expectations in 2019, while 20 percent said they outperformed.2
So it turns out the potential is there, after all, to do good and achieve growth in your portfolio.
"I don't have millions."
When I started out in the wealth management business, impact investing looked very different from what we see today. Ultra-high-net-worth philanthropists and families with their own foundations dominated the conversation. As more investors seek to make a commitment to positive change, impact investing is being democratized.
There are many more ways to invest with purpose now. The minimum amounts needed to invest have come down to as low as $500 for mutual funds, and can sometimes just a single share for ETFs because they’re traded like stocks.6 ESG investing has never been more accessible.
“The minimum amounts needed for impact investing have come down to as low as $500.”
"Why? Was there an earthquake?"
Some people have a tendency to think their money only has impact when it provides direct, tangible assistance, such as in the aftermath of a natural disaster. Over the past decade, many have discovered that impact investments can help them not only make a difference to the issues closest to their hearts but achieve returns as well.
While one-time donations for disaster relief are critical for immediate aid in a crisis, this is not really what impact investing is about. Purposeful, values-based investing allows you to address systemic problems in our society over the long term. But there can be room for both in a well-designed strategy.
Impact investments aren't thoroughly vetted."
As impact investing has grown in popularity, “greenwashing” has emerged as a real risk as more companies make questionable claims hoping to capitalize on sustainability momentum.
The good news is that there are now several ways to vet impact and ESG investments. Many now use the criteria found in the Impact Reporting and Investment Standards (IRIS), which is a catalog of performance metrics developed by the Global Impact Investing Network. Some investment managers have also developed proprietary impact measuring systems to add an additional layer of due diligence to the research process. When you’re looking to get into this space, be sure to ask your investment manager how they evaluate potential investments from an ESG perspective.
Ready to Make an Impact?
Socially responsible investing has come a long way and is growing rapidly as more of us look to use the power of our capital to create a better future. Don’t let the old excuses hold you back. Get involved and make your money work harder for you, your community, and the planet.
*The above does not constitute an investment recommendation. Consult with an investment professional or do your own research before investing.
1. Financial Times, “Why Sustainable EFTs are on the Rise” (May 2021)
2. Global Impact Investing Network, “Annual Impact Investor Survey 2020” (June 2020)
3. Deloitte, “Advancing Environmental, Social and Governance Investing” (Feb 2020)
4. Morningstar, “Sustainable Investing Research Suggests No Performance Penalty”
5. Arabesque Asset Management, “From the Stockholder to the Stakeholder” (Feb 2020)
6. NerdWallet, “Mutual Funds: How and Why to Invest in Them” (June 2021)
Impact investing focuses on investments in companies that relate to certain sustainable development themes beyond traditional financial factors and demonstrate adherence to environmental, social and governance (ESG) practices. Therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market.
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