Impact investing can take many forms, from buying stock in cause-based companies to investing resources other than money to create a meaningful impact. For instance, a conscious investor interested in combating climate change might invest in green real estate, pioneering clean energy technology, solar panels, and sustainable forestry through debt or equity.
Approaches to impact investing will vary based on a person’s goals, values, and means, making it difficult to define broadly. However, there are two key differentiators between impact investing and its philanthropic counterparts:
- Impact investing is intended to generate returns for the investor.
- Impact investing has a greater potential for scale because the practice focuses on backing sustainable businesses that create solutions as a force for good. Business has a greater potential because it can act on so many levels and influence so many different stakeholders—not only customers and employees but also suppliers, the environment, communities in which it operates, and even government if the business is involved in policy
Impact investing is not just isolated to one asset class. It can be represented across many different asset classes, such as stocks, bonds, and real estate. There are some guidelines as to what does or does not qualify as an impact investment. For instance, some of the tools and language utilized around impact investing include:
- Environmental, social, and corporate governance (ESG): Investments screened for these three factors offer a lens through which investments, company operations, and risk factors are viewed. If companies do not meet specific ESG requirements, they can be excluded from an ESG portfolio.
- Sustainable Development Goals (SDGs): Leaders at the United Nations unveiled this set of seventeen goals in 2015 in the hopes of creating a more equitable and sustainable world by 2030. These goals are focused on ending poverty, fighting inequality, and addressing climate change. The Sustainable Development Goals serve as reference categories around which investors can design their intended social and environmental impact and envision what is possible.
- Impact washing: Impact washing is a term used when a company or organization portrays itself as being purpose-driven or environmentally friendly, but in reality, their efforts are inconsistent at best and disingenuous at worst.
- B Corporations: This organizational designation is designed around a concept known as stakeholder capitalism. B Corporations pursue a triple-bottom-line strategy, meaning that in addition to pursuing profits, they also pursue benefits for people and for the planet as well.
Ultimately, the key principle of impact investing is investing in a cause or practice that matters to you and that you see as a force for good.
Impact investing is meant to change the typical approach to investments so that conscious investors can come to greater meaning and purpose. If you are not sure yet what that approach might look like, do not worry. As you begin to shape a new mindset around your impact, you will find more opportunities to invest your resources with greater purpose, including not only finances but time, effort, and connections as well.
Capitalism From Many Dimensions
Jessica Droste Yagan, CEO of Impact Engine, an investment firm that manages funds to invest in for-profit, positive-impact businesses, has shaped my understanding of the need for impact investing within our current financial system.
“To me, capitalism has been amazing for a beautiful, elegant system, and [it has] helped align resources,” Yagan says. In that way, capitalism has had a positive impact. However, “We haven’t demanded enough of it.” But, as Yagan says, “The heart of capitalism can work for many different dimensions.”
To explain her point, Yagan uses the example of coffee. It used to be that consumers just wanted their coffee to be affordable and to taste good, which is exactly what coffee shops and restaurants provided. Today, however, consumers want to know more.
They want to know how their coffee was grown, whether the farmers were paid well, and whether the production of that coffee harmed the environment in any way. When consumers demand it, they often get it. With impact investing, “There is this opportunity to take this beautiful, efficient system of capitalism and demand more of it,” Yagan says. “So, as investors we can say, ‘Yes, I want to make money, but also, I demand that you do it in a way that is aligned with my values or that is solving an important problem.’”
Impact investing is not about tearing down or replacing the current financial system. It is about engaging that system to do more—to not only create financial returns but also to create a positive impact in the process. This can include all of the tools available to us, such as starting with making sure your bank is lending your savings account in a way that resonates with you and moving on to your investment portfolio or retirement savings.
Impact Does Not Preclude Profit
While the woman seated next to me at the lunch meeting was enamored right away, I often encounter pushback, especially from asset managers. They might acknowledge that the next generation is open to impact investing, but at the end of the day, they or their clients do not want to give up returns in favor of impact.
These fears stem from a common misconception that impact investing is, in fact, philanthropy by another name.
Once, I sat stunned in an impact investment meeting as someone stood up to talk about his experience. He said, “One day, I wanted to become an impact investor. And I called up my broker and I said, ‘Sell everything. I do not care what the markets are doing.’ I took a loss on my portfolio, and now, I want to move forward with a clean slate.”
I admired this man’s intentions, but his actions revealed a lack of strategic thinking. It was not necessarily bad that he sold at a loss. In fact, he probably thought he was justified in doing so. On the whole, the prevailing thought in the asset management industry is that a market downturn (such as during the wild market fluctuations caused by the COVID-19 pandemic in 2020) represents a good opportunity for people to move their portfolios into investments screened for ESG factors. This belief stems from the desire to not pay capital gains taxes for assets sold at a gain, and it is one reason why so many avoided selling their stocks during the 2010s in order to become more active in impact investing.
Overall, this is a sound strategic approach—wait for the markets to drop, sell what you own, and invest in something more impactful.
However, that is not what this person was doing. He sold at a loss purely because he was eager to become an impact investor, and he was less concerned with the financial consequences of that choice.
Let us be clear: financial detriment is not a noble thing to do to yourself. You are not a martyr. Know that aligning your values does not happen overnight, and take your time. Keeping all returns in mind, including financial returns, can yield positive results.
Impact investing is simply investing that asks you to factor in other criteria than financial returns. While there are some exceptions, it generally does not require a sacrifice of profit or return. However, experts acknowledge that there are specific social and environmental needs that require subsidy, including specific types of renewable energy generation. These experts largely advocate that the rules of the game need to be changed with regard to how our economy works.
There are certain areas where different types of investing and different stakeholders can contribute in specific ways to solve a social or environmental problem. But in general, there are solutions that can offer financial return and impact, hand in hand. Impact investing is not a risky, fringe approach to investing. In fact, as the economy shifts away from profit and toward purpose, one in every three dollars under professional management is already invested using socially responsible strategies. Assets held in funds that have been screened for ESG factors have risen by an astounding 142 percent since 2012.
This shift can be seen not only in how people invest but in how they make their purchase decisions as well. Globally, the market of ESG investments is estimated to be $30.7 trillion—and it is growing. As I write this near the end of 2020, emerging research suggests that many variations of impact investing will perform better after the COVID-19 pandemic as investors shift priorities. However, evidence of ESG outperformance was emerging long before the pandemic hit.
In 2019, for instance, one study of 2,800 global stocks by the BlackRock Investment Institute found that ESG portfolios can be more resilient in downturn scenarios—suggesting that factors such as good governance, resilient supply chains, and environmentally sustainable business practices tend to do well in downturns. Humanity’s eyes are now being turned to the notion that more than just shareholders are impacted by investments.
Another study, by State Street Global Advisors, found that almost 70 percent of ESG investors stated that these investments helped them manage volatility. ESG practices are also being viewed as risk mitigators in business. Therefore, avoiding companies that do not have good governance, do not have sustainable supply chains, or do not have sound environmental policies will help investment portfolios navigate the future and the risks that could arise in the coming decades. Responsible companies do not just perform the same.
In fact, some research suggests they perform better—especially during volatile times. To the conscious investor, this means returns do not have to be sacrificed and that, in fact, their ESG compliant investment holdings may provide opportunities for better, more sustainable returns.
Impact investing is not about tearing down or replacing the current financial system. It is about engaging that system to do more—to not only create financial returns but also to create a positive impact in the process.
This is not just speculation. Already, investors, who factor in ESG criteria into their investment decision-making, have consistently found their investment has paid off. For instance, 80 percent of impact investors report financial and social returns that are in line with their expectations. Further, 15 percent of impact investors report that their impact investments are actually outperforming their expectations.
The majority of impact investors are exceeding what they hope to earn with their impact investments—and they are benefitting from the upside of social and environmental performance at the same time. Finally, a Harvard Business School study across thirty years and forty-eight industries found that businesses integrating social and environmental impact outperform their competitors and make higher-return investments. I wonder if that is because they care about all stakeholders?
Socially and environmentally conscious companies that have produced double-bottom-line returns for decades, like Seventh Generation, are inculcating a new generation of companies—the B Corporation, which is operating in ways that are better for workers, community, customers, and the environment. The company pursues this double-bottom-line strategy in ways both large and small.
For instance, Seventh Generation uses only plant-based ingredients, the company does not use any synthetic fragrances or dyes that would harm the environment, and all packaging is recycled. In these and other ways, Seventh Generation works to minimize their impact on people and the planet in making and designing their products. The company also exhibits transparency in its processes and advocates for what the company stands for. The success of companies like Seventh Generation not only makes them a safe investment but a good investment.
B Corporations and other entities are examples of a broader movement of the purpose-driven business. The purpose-driven business—sometimes referred to as a social enterprise—stands for and takes action on something bigger than just its products and services. It acts for all stakeholders, rather than just shareholders.
The purpose-driven business is closely aligned with the concept of conscious capitalism. In practice, conscious capitalism is dedicated to elevating humanity through business. According to the Conscious Capitalism organization, business leaders that view themselves as part of the conscious capitalism movement focus on having a purpose beyond profit, cultivating their conscious leadership and culture throughout their business. In other words, they prioritize stakeholder orientation as opposed to shareholder primacy.
The purpose-driven business practicing conscious capitalism is focused both on creating positive impact and generating profit. And to the latter point, they have largely succeeded. Many examples exist in the Beyond Capital investment portfolio. By targeting and investing in other purpose-driven businesses, Beyond Capital has created positive financial return while improving the livelihoods of over seven million people (and counting!) as of 2020.
Once you accept that impact and financial return are not mutually exclusive, be careful not to slip back into a solely “finance-first mentality.” After all, returns are important but so is impact. The ability to generate strong returns is a feature of impact investing but not the panacea. Making money with no regard for positive social, environmental, tech, and governance outcomes will never be fulfilling and, as many of us have experienced, can never be “enough.”
The Good Your Money Can Do
In The Good Your Money Can Do, Eva Yazhari introduces her concept of impact investing and shares the story of her own mindset shift toward investing with awareness. At times philosophical and other times instructional, Yazhari shows you that your money has more potential than you ever thought possible.