What is Impact Investing and how does it work?

This article is part of the investing basics series from InvestingHero.ch

Impact investing is an investment approach which aims to contribute toward improving the environment and lives of others.

From clean energy to sustainable forestry projects, you have the ability to build a portfolio which reflects your values, whilst excluding the likes of tobacco, casinos and weapon manufacturers from receiving your investment capital.

Impact investing is also commonly referred to as ‘ethical investing’, ‘environmental, social & government investing (ESG)’ and ‘socially responsible investing (SRI)’ which all essentially fall under the same impact investing umbrella.

When did impact investing start?

Impact investing is really nothing new. It has been around in various forms for hundreds of years, with roots in methodism values.

Through the 1960’s & 70’s the civil rights movements and rise of social activism spurred the awareness for increasingly eco-friendly and socially beneficial programs, such as community led banks and housing projects for poor neighbourhoods.

We’ll save the history lesson and fast track to today — where impact investing is becoming increasingly mainstream.

From the US SIF trend reports to bank forecasts, impact investing is growing at a healthy pace, up 38% from 2016 to 2018 in the US.

Impact Investing is an investment approach particularly favoured and growing momentum by millennials and women, more insightful data from BlackRock and ASI on those trends.

Compared to previous generations this is a trend which is set to snowball as more wealth is transferred to the new decision makers in the coming years.

How does impact investing differ to traditional investing?

Quite simply, an impact investment portfolio will exclude ‘the bad guys’ and only include companies which meet a set criteria.

Socially responsible investing (SRI) means you wouldn’t have any companies from the following industries:

  • Alcohol
  • Gambling
  • Tobacco
  • Military weaponry
  • Civilian firearms
  • Adult entertainment
  • Genetically modified organisms

Much like ‘normal’ investing, you can buy an index fund tailored to just SRI qualified companies, which exclude the above industries. There’s a huge list of them you can browse through here.

These funds, which exclude the ‘sin’ categories above, have been shown to perform just as well as the traditional index funds, although in some cases carry extra price premiums vs the traditional index fund — so be sure to check the factsheet for fees.

» Related reading:8 Common Investing Mistakes to Avoid‘ (no.5 re. Index Funds)

However, SRI funds are only one part of the puzzle.

Depending on your objectives with impact investing they might not be enough for you — SRI funds still include oil companies, pharma and many large corporations which also have business and interests in ‘not so eco-friendly’ places -which might not align with your values.

Continue reading this article at InvestingHero.ch

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