A Beginner’s Guide to Impact Investing

Photo features a small glass filled with small change with a green plant growing out of it. Today, impact investing is for everyone, even beginners.

Just as consumers vote with their wallet, so too can investors. With the rise of impact investing—supporting businesses or organizations focused on creating social and environmental change—more people are realizing that investing doesn’t have to be only about returns. And with more accessible, free stock trading options such as Robinhood and Webull available, anyone can put their money where their values are—and make it grow.

This past year, the pandemic and the urgency of equal rights helped bring about more awareness about how companies treat their workers and the role individuals can play in changing or supporting such behavior.  

“I think that people are realizing that they can actually impact the climate with their money. There’s this increased level of empowerment that people are feeling,” said Ashley Knight, a senior associate at Mercer and fellow at the World Economic Forum researching sustainable investment. 

Money is power, and nowadays, more and more investors want to make sure their investments are aligned with their values. Here’s the beginners guide to impact investing.

Image breaks down the abbreviation ESG into its component parts: Environment, social, and governance.
Impact investing overlaps with ESG investing, which stands for Environment, Social, and Governance. | Getty Images

What is impact investing? 

In the broadest sense, impact investing is “investments made into companies or funds with the intent to have measurable impact,” said Knight. Some examples might be investments in wastewater recycling or a tech company that helps restaurants minimize waste that would end up in landfills. It could also include putting money in a mutual fund that invests with the aim to impact environmental or social issues. 

There are variations within impact investing. Some emphasize impact over profit while others expect both. There’s also some overlap with ESG investing, sustainable investing, and responsible investing. ESG investing, for instance, can incorporate themes such as climate change or sustainable development.

It may also include active ownership or stewardship. Investors – usually institutional investors with a lot of shares in a company – engage with the company and push them to meet targets, whether decreasing plastics or reaching a net-zero carbon target by 2050. 

The technical details are not so important as the overall intention – to make a difference using investment dollars. 

Can impact investing help save the planet? 

Traditionally, investing was seen as something separate from social or environmental causes. But more people realize that companies and economies don’t operate in a vacuum. Consumers and investors play an important role in shaping company behavior. 

Younger investors are embracing that role. A 2019 survey by Morgan Stanley found that 85 percent of investors are interested in sustainable investing. Among millennials, that figure is 95 percent. The survey also found that 71 percent of people – and 85 percent of millennials — believe their investment decisions can influence climate change. 

Another survey by U.S. Trust found that millennials are the most interested in investing for impact, with 52 percent saying they are interested compared to 37 percent of Gen X and 29 percent of Baby Boomers. More than half of those surveyed said they invest based on impact because “it’s the right thing to do” and believe companies should be held accountable for their actions. 

Photo of a sign that reads: irrigated with recycled water.
At its best, impact investing combines social and environmental causes with profits, even for beginners. | Getty Images

Is impact investing profitable? 

In the past, people thought impact investing meant sacrificing profit. But a growing body of research shows that this is not the case. Over the last 40 years, there have been more than 2,000 academic studies showing a clear link between ESG and financial performance. 

“Many previously thought ESG and financial returns were mutually exclusive things and doing ESG was charity,” said Knight. It makes sense on many levels – companies that pay attention to environmental impact can end up reducing energy costs or avoid an expensive lawsuit about polluted land or water. 

Another factor that’s helped bring impact investing to the mainstream is more data. Organizations such as FASB and MSCI are creating frameworks and metrics to score companies on various ESG factors. A textile manufacturer, for instance, would need to look at very different factors compared to an architectural firm or a social media startup. 

How to get involved

The good news is that investment firms are getting the message that investors are interested in impact investing. There are many ways to get involved in impact investing, even for beginners.

The most traditional method of impact investing directly into companies that are making an impact is more like angel or venture capital investing – something out of reach for most investors. But there are more and more funds for regular investors too. These can include mutual funds and exchange-traded funds. 

Peter Krull, chief executive of Earth Equity Advisors, an investment advisor with a focus on sustainability, likes mutual funds because there’s a fund manager analyzing the individual investments. Exchange-traded funds typically follow an index – there’s no fund manager keeping tabs on individual companies and what they’re doing. 

Greenwashing is an issue, so Krull suggests taking a look “under the hood and see what kind of holdings the fund has.” The findings can be surprising, he said, citing one supposedly green ETF that includes holdings in McDonald’s and ExxonMobile. 

Doing the research to find out how green an investment is “can be tough,” Krull admits. His firm launched a robo advisor that helps investors with at least $5,000 to invest in a portfolio of pre-screened stocks. The platform lets people screen out or focus on specific sectors such as alternative energy vs. fossil fuels or animal welfare.  

“Nothing is ever going to be perfect, but we want to get as close to that as possible,” said Krull.

To learn about vegan investing from Suresh Seneviratne, read on here.