With the market so complex and opaque, it can be hard to know exactly what you’re investing in. When you invest in a mutual fund, for instance, you might not know where your money actually goes. Maybe it’s helping a business you boycott! If you want to invest in a socially conscious way, you might be interested in impact investing.
Impact investing is simply investing with a mind to the ethical consequences of your investments. As an investment strategy, it aims to participate ethically in the economy, earning profit for yourself without supporting harmful industries or practices.
ESG Criteria
There are a few ways to rank socially conscious investment options. One of these is called the ESG criteria. ESG stands for environmental, social, and governance—the three areas in which investments are vetted. Investments which meet these standards are good for the environment, socially responsible, and managed using ethical best practices.
Investment firms which offer ESG investments will set more specific standards and priorities. But they all aim to promote these three standards:
Environment
To qualify, companies should use energy and resources responsibly. Companies that pollute or fail to follow environmental regulations don’t meet this standard.
Social
To meet this standard, companies must foster employee health and safety, give back to the community, and work with suppliers that share its values. A business doesn’t exist in a vacuum. It should be a contributing part of its community.
Corporate Governance
This criterion refers to the way the company is managed. Qualifying companies should have transparent accounting and internal regulations preventing conflict of interest. They should refrain from self-interested lobbying or illegal activity.
Socially Responsible Investing
Another type of impact investing is socially responsible investing (SRI). In SRI, instead of companies being ranked on social consciousness, whole classes of investments are ruled out, such as alcohol or firearms companies.
One type of SRI is community investing, in which the aim is to increase the wellbeing of a community rather than turn a profit. While you can make money doing it, you’ll likely make less than with traditional investments.
Some people take SRI and ESG investing as synonyms, since both are all about finding investments which make a positive difference.
How to Find Impact Investments
Impact investments can help you put your values into practice. In some cases, you sacrifice a little profitability in favor of doing good. But sometimes sustainable, ethical investments turn out to be lower in risk. They’re less likely to end in a legal dispute or expensive environmental cleanup. Surveys have shown the majority of impact investments meet or exceed investors’ expectations. In this way, they can be part of the backbone of your investment strategy.
If you’re convinced of the value of impact investments, it’s time to add them to your portfolio. The easiest way is to buy mutual funds that share your values. For instance, if the environment or religion are important to you, you can find funds focusing on these types of investments. A quick search will turn up many options.
On the other hand, if you’re interested in individual stocks, you can usually find out their impact through their sustainability report or independent ESG ratings. But remember, when buying individual stocks, it’s wise to have a professional help you keep your portfolio balanced. The same advisor who helps you with your portfolio can usually help you find ethical options as well.
Ready to Start?
Whether you’re a beginning investor or hoping to shift your current portfolio into more ethical choices, a financial advisor can help. Contact us today to connect to an advisor who can help you find options that make a difference.
