What if you could earn a generous return on your money while contributing to the betterment of society? Well, now you can through social impact investing, and you won’t have to forfeit your earning potential.
You’ll still be afforded the opportunity to invest in assets you find most desirable, whether it be sustainable funds, stocks, bonds, commodities, or real estate, in hopes of turning a profit. But you’ll also be making a difference, which is a win-win for all parties involved. Read on to learn more about how social impact investing works and how to get started.
A Closer Look at How Social Impact Investing Works
In a nutshell, social impact investing aims to accomplish two key objectives for the investor:
- Generate the highest possible return on money invested in income-producing assets
- Contribute to a worthy cause that is impactful and leads to positive societal outcomes
It’s up to the investor to determine which objective holds more significance: earnings or social change. If you have aggressive short-term earnings targets, you may be more inclined to focus on the financial component first. But if you are looking to grow your investment over time and aren’t in a hurry to hit a specific number, the social impact piece may take precedence.
Regardless of the approach, the investor is positioned to boost their bottom line while contributing to a positive cause. Furthermore, there will be ample opportunity to adjust investment strategies over time as needs and financial goals change.
And individual investors aren’t the only ones that choose to participate in social impact investing. It’s also an appealing strategy to a host of other groups and entities, including banks, fund managers, institutional investors, and private foundations, just to name a few.
Impact investing comes in different shapes and forms, with regard to the types of investments made. There are also a host of industries to choose from with companies that impart economic, environmental, or social change, including:
- Clean and Renewable Energy
- Community Development
- Community Lending
- Fair Trade
- Small Business
- Sustainable Products
To get in on the social impact investing wave, you’ll want to scope out companies in these industries that are playing their part in the betterment of society as a whole. For example, companies that provide healthcare services and resources to citizens in impoverished communities might be a good fit. Or you may want to consider investing in a project that is aimed at increasing the literacy rates of underserved children in urban areas.
How Social Impact Investing Differs from Socially Responsible Investing
Up until this point, the focal point has been the benefits of social impact investing and how it allows you to earn a return on your money while contributing to a positive cause. And more often than not, it is thought to be the same as socially responsible investing.
But contrary to popular belief, the two terms don’t quite hold the same meaning. Why so? Social impact investors take a more stringent approach when evaluating companies to invest in than socially responsible investors. Instead of simply classifying a company as “socially responsible” or “socially irresponsible” as socially responsible investors do, impact investors take it up a notch by digging deeper to determine if these companies are positioned to generate outcomes that are quantifiable.
And social impact investors don’t just dole out cash and move on. They actually go the extra mile to confirm their investments are having the desired economic, environmental, or social impact by monitoring IRIS metrics.
How to Get Started with Social Impact Investing
Getting started with social impact investing isn’t rocket science, but it does require a bit more legwork than usual. For starters, you have to confirm that you’ll be in the best possible position to earn a return on your cash while assuming minimal risk. And there are other key factors in the equation: the potential impact your investment will have and if it’s measurable, and if it aligns with your social goals.
Ask yourself the following:
- Which is more important: social impact or potential earnings?
- What are you trying to accomplish, in terms of impact and returns?
- How will you measure anticipated outcomes?
Step 1: Explore Your Investment Options
Before you can pinpoint investment types, you’ll want to set an impact-related goal to determine what types of programs, funds, or entities to invest in. Once you’ve done so, the next step is to explore your investment options.
There are a plethora of social impact investment options to choose from, including:
- Stocks or bonds from companies that are socially responsible with quantifiable impact outcomes
- Social impact investing funds (may have minimum investment requirements)
- Social impact projects, like those that are featured on major crowdfunding platforms (i.e. Kickstarter, Fundable, and Indiegogo)
You can also use ImpactBase, a comprehensive online database that features impact investment products and funds, to identify opportunities. It’s free to use and you can adjust inputs to find funds that meet your goals and best suit your needs.
Step 2: Narrow Down Social Impact Investment Opportunities
When narrowing down your social impact investment opportunities, be mindful of the following:
- Financial data on public companies is accessible, free of charge, in the EDGAR database offered through the Securities and Exchange Commission (SEC). You should use this information to your advantage when analyzing these companies.
- Visit websites for companies of interest and review media information, write-ups, and press releases for additional insight into the social impact they’re making in the communities they serve.
Step 3: Finalize Your Investment Amount
This figure will depend heavily on your current financial situation and your investment goals. Of course, you want to protect your assets by not exposing yourself to a ridiculous amount of risk, but you also want to steer clear of being too conservative. If you’re unsure of how much you can comfortably afford to invest, it’s best to consult with a reputable financial adviser that can assist you with developing an effective social impact investment strategy.
The Bottom Line
With research and consistent monitoring, it’s possible to meet your investment and impact goals through social impact investing. Be sure to review any applicable correspondence and financials to ensure that the results are in line with your expectations.