WTF (What the Finance) is…Impact Investing?
Impact investing has been around for a while. The idea is to direct your money to causes that are important to you and away from companies with products you dislike.
In a December 2017 I gave examples of mutual funds and ETFs that focus on the environment, certain religious beliefs, and gender equality. I also gave examples of the opposite of impact investing – ETFs and mutual funds that focus on guns, gambling, alcohol, and tobacco sales. We like to be fair and balanced here at Sullivan Financial Planning.
Those December blogs may have been putting the cart before the horse. Here are some definitions of various kinds of impact investing.*
Socially Responsible Investing
Socially Responsible Investing (SRI) is the avoidance of harm in your investments. Harm to whom? The environment, employees, public health are some examples.
Impact Investing is a subset of SRI, requires investors to consider a company’s commitment to corporate social responsibility (CSR), or the sense of duty to positively serve society as a whole. Some examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices.
Gender Lens Investing
Gender Lens Investing has investors concentrate on finding companies whose policies benefit women and girls. Often, there are scores given to companies based on hiring practices, promotions, and the executive presence of women in the organization.
In the old days when I first started in the investment business, Socially Responsible Investing was considered a nice concept, but one in which returns were compromised by the philosophy. These days, SRI is gaining steam both from a philosophical standpoint and a good showing for risk and return. The idea is that by doing good, these companies can be sustainable and profitable for the long haul. For example, a company that isn’t polluting the oceans is less likely to face government fines or class action lawsuits. Same for companies where the products don’t cause cancer or other public health problems.
There are more options than ever in the realm of Socially Responsible Investing. However, it may be tough to create a complete diversified portfolio using only these funds. Small and Mid-Cap funds, bond funds, and international funds are not too plentiful yet. Stay tuned, though. There is bound to be growth in this area.