If you’re at all like me, you’ve got a pitiful savings account and a sad, sad start to a retirement account. I’ll admit this problem is largely of my own making, but I’m guessing you can empathize. So bear with me.
Even with those pennies you’ve been able to save, you’re thinking about how to make the most of every cent you can spare. And you definitely don’t want to work all day at a nonprofit job and turn around and invest all your retirement savings into corporations that are reversing the inclusive economic development that the whole sector is working toward collectively. But luckily you don’t have to invest only in those companies.
New tools in investing are making it easier than ever to maximize the social good your dollars can do, without sacrificing your savings plan.
You may have heard this catchy term “impact investing,” and (probably) you don’t know that much about it. You might guess that it’s pretty much what it sounds like: a way to invest your money for social impact. And you’d be (mostly) right.
Impact investing entered the marketplace as a codified concept around 2008. Through this strategy, instead of investing money in equity shares of a for-profit company or a mutual fund, you can invest your dollars in a social enterprise or green company, which will give you both returns on environmental or social outcomes and financial returns.
What it might include:
- Impact investing can drive money into any aspect of the social sector. Investments can be loans, equity, guarantees, or any number of investment vehicles. Programs that would be good candidates for this type of investment typically have a revenue-generating component as well as a direct, measurable return. Traditional service delivery nonprofit organizations (NPOs) may or may not be a good fit. Examples of strong candidates for impact investing might include: solar or green technology, revolving loan funds to for-profit companies in low resource communities, or even a chocolate company that uses a share of its profits to support endangered species and conservation efforts.
Pretty awesome concept, to be sure. Let’s do a quick back-of-the-envelope SWOT analysis on impact investing as the field exists now:
- Both for good and for profit. As an investor, you can leverage your money for social good without just giving it away. Getting a return or partial return means you can invest in something else soon.
- Measures returns. By tracking outcomes, impact investing focuses on making sure that the social returns are measurable. This means as an investor, you know what you’re getting.
- Generates evidence for future. The outcome evaluation generated by your project will serve future projects by demonstrating the expected social or environmental return from this type of strategy.
- You may have to fund the whole program. Because impact investing is tied to outcomes, the whole program has to get off the ground at once. For this reason, foundations have primarily been the leaders in impact investing.
- Not all worthwhile programs are a good fit for this strategy. Just because something doesn’t have a double bottom line (profit and purpose, as is required for most impact investing) doesn’t mean that it shouldn’t be funded. (I’ll get into this in a future post.)
- There are some emerging opportunities for crowdfunding impact investing. For non-high net worth investors, this could provide an opportunity to engage in impact investment without the hefty price tag.
- Metrics are getting better. The Global Impact Investment Network (GIIN) has invested a great deal in standardizing metrics. This worldwide effort offers an opportunity for the impact investing universe and the social sector more broadly.
- What we know is only as good as the data we have. Without good measurement of outcomes (whether because of lack of data infrastructure or lack of efforts to measure, or for any other reason), we wouldn’t have a good understanding of the social impact our investments have had.
For those of us, like myself, who don’t have the beaucoup bucks to engage in something as expensive as impact investing but want to use our dollars to further a social and green agenda, there are other options. Specifically, I’ll discuss socially responsible investing here.
You may have heard the terms socially responsible investing and impact investing used interchangeably. But the truth is they’re quite different.
Socially responsible investing looks at environmental, social, and/or governance criteria (ESG) to determine which companies to include in a socially-oriented mutual fund. Each company receives a rating based on their impact on the environment, their relationships with other companies and the communities where they work, and the practices that determine a company’s internal operations.
A company that handles waste poorly, works with shady suppliers, or includes board members with conflicts of interest would receive a low rating. Likewise, a solar company with a clean supply chain, and good labor practices with employees would receive a higher rating.
There are obvious upsides and downsides to this approach as an investor as well. Let’s take a look under the hood here.
- You can invest your dollars in companies that share your values (at least to a certain degree).
- Socially responsible investing is widely available. You might even have an option with your company’s retirement options.
- Unless you have the ability to create individually managed portfolios (buy whole stocks instead of buying through a mutual fund), you can’t choose what individual stocks go into your portfolio.
- As with fair trade or other purchasing strategies that look at the labor and supply chain practices of companies, decisions in investment have the potential to shape the industry. By investing in companies whose practices are fair-minded, middle class investors can, en masse, begin to push companies in the direction of fairer market principles through capitalist strategies.
- Screening criteria are often determined by an external partner. You might be surprised what appears on the list. Be sure to do your homework to understand what stocks are in the mutual fund or other investment option that you select.
With either the screen-out-bad-companies approach of socially responsible investing or the screen-in-companies-with-measurable-social-returns approach of impact investing, there are readily apparent upsides and downsides.
Putting socially oriented investment into practice: At the end of the day, you’re the only person who can decide what strategy is right for your investments. And no investment approach is perfect. However, I believe in the power of purchasing and investment strategies to shape the broader economy.
By prioritizing investment in companies that take into account your values in social, environmental, and workplace practices, we can make more dollars available to companies that share those values. If you share my belief that a mass demand for social good investments can reshape our economy, consider reshaping your investment portfolio to include some socially- or environmentally-oriented criteria.
Rebecca TeKolste, visiting research associate, focuses on quantitative research in social impact. She is a proud Returned Peace Corps Volunteer, where she served in public health in Guatemala.