Five ways to approach impact investing

VaselineAugust 21, 2024

0 4 minutes read

If you’re passionate about social impact and wondering what you can do beyond charitable giving and volunteering, there’s a world of opportunity out there. The capital you invest for positive financial returns can also generate positive social returns, amplifying the mark you can make.

Whether you care about the climate, medical innovation, women’s rights, economic prosperity, or something else, there’s likely an impact investment that will complement and enhance your philanthropy. The number of people making impact investments has grown significantly over the past 10 years, surpassing $1 trillion worldwide, according to GIIN (Global Impact Investing Network).

In simple terms, an impact investment aims to deliver both a positive, measurable social and environmental impact and a financial profit. Increasingly, impact investing opportunities have grown in number and popularity across all asset classes and strategies. What was once a more niche tool has gone fully mainstream, offering opportunities for the “impact curious” as well as experienced impact investors.

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Additionally, you can make these investments from your profit-generating investment accounts or charitable assets—a donor-advised fund (DAF) or a foundation’s corpus—ensuring that all of your assets are working toward positive social impact.

Here are five essential ways to approach impact investing:

1. Seek clarity about risks and rewards.

As with any wise investment, know what you’re getting into. Ask yourself: Is this a sound investment, not only for me, but for all parties involved in the transaction? Can I afford to lose this capital? If the investment fails, what are the consequences? And make sure you’re clear, too, about what kind of social or environmental impact the investment is likely to have.

Ask yourself: How significant is this impact? To what extent might there be a trade-off between social impact and financial returns? How prepared am I to accept this compromise?

Some impact investors may choose to accept some below-market returns in exchange for greater social impact, but most seek market-competitive returns and increasingly see their expectations met.

2. Know what you have.

This is perhaps the most important mantra for investors, especially impact investors. Every investment in a company or fund inherently has an impact – whether through the type of goods a company creates, the practices of its board and management, the nature of its supply chain or the way it treats employees. The question every investor can consider is whether this impact aligns with personal values, aspirations or charitable goals.

If you have a foundation or charity that makes grants to fight climate change, for example, do your investments undermine that operation? Take a close look at your portfolio. You might be surprised by what you find – good or bad.

3. Increase your aperture.

People often confuse impact investing with ESG. While managing a stock portfolio full of publicly traded companies that report positive environmental, social and governance values is one type of impact investing, there are other direct investments with different types of impact profiles, time horizons or liquidity.

You can help a nonprofit or other business that meets your values bridge a cash flow gap by making a loan on mutually reasonable terms. There is a burgeoning field of impact-oriented venture capital that helps fund early-stage social enterprises that focus on a range of impactful issues, from healthy food to remote health care technology to hiring people left out of the traditional labor market.

In addition, some impact investors offer guarantees that essentially involve them co-signing a loan (or group of loans) to reduce the risk of the transaction, thereby reducing the interest rate or allowing the borrower to qualify for the loan.

4. Listen.

Ask the people doing the work what they need and what would be most useful to them. They may have a better understanding of what will generate real impact than investors who are further removed from the problem.

For example, if you care about youth workforce development in low-income neighborhoods, providing loan guarantees for the purchase of a community training center may dramatically accelerate the sustainability and scale of a workforce development organization. This could even have a greater long-term impact than a charitable donation.

5. Don’t set it and forget it.

Being an impact investor means following progress. Financial return is often easier to calculate than social good. What social or environmental impacts are you looking for? What is the mechanism you use to measure progress? The field of impact measurement is still evolving, but starting with even a simple set of impact goals and regularly checking your progress can make all the difference.

For those looking to take their measurement to the next level, the Impact Management Project has established informative guidelines for measurement, using standards including the UN’s Sustainable Development Goals and GIIN’s IRIS+ system to systematically track impact.

As you explore impact investing, there is a wide range of resources to help you deepen your understanding, find peers to share ideas and tackle challenges, or find investment opportunities. If you’re interested in testing the impact investing waters, now is a great time to dive right in.

About Catherine Crystal Foster: Catherine is Vice President of Rockefeller Philanthropy Advisors (RPA). In her role, she provides strategic guidance across program areas for families, foundations and corporations to accelerate social impact. Prior to joining RPA, he was CEO and co-founder of Magnify Community, where he worked with Silicon Valley philanthropists to make bold and catalytic community investments. Catherine has led and advised philanthropic and nonprofit organizations for more than 20 years.

About Patrick Briaud: As a director at RPA, Patrick helps individuals, foundations and corporations use a range of assets to achieve their social impact goals. He works closely with institutional funders to make strategic changes to best manage their resources and confidently deploy capital to achieve their impact goals. As the leader for RPA’s Impact Investment Practice, Patrick supports mission-driven asset owners to build investment strategies aligned with their individual values or organizational mission. This support includes education and consensus building, development of the Investment Policy Statement, implementation of the operational plan, and full outsourcing of program-related investments.

This article was written by and reflects the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records with help dry or with FINRA.

VaselineAugust 21, 2024

0 4 minutes read

Vaseline

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